Sempra Energy/SDG&E/SoCalGas 03/31/2012 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, 2012
   
 
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
     
         
1-1402
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
X
 
No
 
Southern California Gas Company
Yes
X
 
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  ]
[      ]
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
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 April 30, 2012:
         
           
Sempra Energy
240,991,088 shares
San Diego Gas & Electric Company
Wholly owned by Enova Corporation, which is 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
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
92
Item 4.
Controls and Procedures
93
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
94
Item 1A.
Risk Factors
94
Item 6.
Exhibits
94
     
Signatures
96
     

This combined Form 10-Q is separately filed by Sempra Energy, San Diego Gas & Electric Company 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 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,” “contemplates,” “intends,” “depends,” “should,” “could,” “would,” “will,” “may,” “potential,” “target,” “pursue,” “goals,” or similar expressions, or when we discuss our guidance, strategy, plans, goals, 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
 
§  
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, U.S. Department of Energy, 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, including the availability of credit and the liquidity of our investments;
 
§  
inflation, interest and exchange rates;
 
§  
the impact of benchmark interest rates, generally U.S. Treasury bond and Moody’s A-rated utility bond yields, on our California Utilities’ cost of capital;
 
§  
the timing and success of business development efforts and construction, maintenance and capital projects, including risks inherent in the ability to obtain, and the timing of granting of, permits, licenses, certificates and other authorizations;
 
§  
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, including disruptions caused by failures in the North American transmission grid, pipeline explosions and equipment failures;
 
§  
weather conditions, natural disasters, catastrophic accidents, and conservation efforts;
 
§  
risks inherent in nuclear power generation and radioactive materials storage, including the catastrophic release of such materials;
 
§  
risks posed by decisions and actions of third parties who control the operations of investments in which we do not have a controlling interest;
 
§  
wars, terrorist attacks and cybersecurity threats;
 
§  
business, regulatory, environmental and legal decisions and requirements;
 
§  
expropriation of assets by foreign governments and title and other property disputes;
 
§  
the status of deregulation of retail natural gas and electricity delivery;
 
§  
the inability or determination not to enter into long-term supply and sales agreements or long-term firm capacity agreements;
 
§  
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,
     
 
 
2012 
2011(1)
     
 
 
(unaudited)
     
REVENUES
 
 
 
 
     
Utilities
$
 2,091 
$
 1,946 
     
Energy-related businesses
 
 292 
 
 488 
     
    Total revenues
 
 2,383 
 
 2,434 
     
EXPENSES AND OTHER INCOME
 
 
 
 
     
Utilities:
 
 
 
 
     
    Cost of natural gas
 
 (431)
 
 (642)
     
    Cost of electric fuel and purchased power
 
 (388)
 
 (171)
     
Energy-related businesses:
 
 
 
 
     
    Cost of natural gas, electric fuel and purchased power
 
 (129)
 
 (230)
     
    Other cost of sales
 
 (33)
 
 (23)
     
Operation and maintenance
 
 (671)
 
 (639)
     
Depreciation and amortization
 
 (257)
 
 (230)
     
Franchise fees and other taxes
 
 (96)
 
 (95)
     
Equity earnings, before income tax
 
 12 
 
 1 
     
Other income, net
 
 75 
 
 43 
     
Interest income
 
 5 
 
 3 
     
Interest expense
 
 (113)
 
 (108)
     
Income before income taxes and equity earnings
 
 
 
 
     
    of certain unconsolidated subsidiaries
 
 357 
 
 343 
     
Income tax expense
 
 (117)
 
 (114)
     
Equity earnings, net of income tax
 
 11 
 
 31 
     
Net income
 
 251 
 
 260 
     
Earnings attributable to noncontrolling interests
 
 (13)
 
 (4)
     
Preferred dividends of subsidiaries
 
 (2)
 
 (2)
     
Earnings
$
 236 
$
 254 
     
 
 
 
 
 
 
     
Basic earnings per common share
$
 0.98 
$
 1.06 
     
Weighted-average number of shares outstanding, basic (thousands)
 
 240,566 
 
 240,128 
     
 
 
 
 
 
 
     
Diluted earnings per common share
$
 0.97 
$
 1.05 
     
Weighted-average number of shares outstanding, diluted (thousands)
 
 243,761 
 
 241,903 
     
Dividends declared per share of common stock
$
 0.60 
$
 0.48 
     
(1)
As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.
     
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 


 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
 
Three months ended March 31,
 
 
2012
 
2011(1)
 
 
(unaudited)
 
 
 
Non-
 
 
 
Non-
 
 
 
Sempra
controlling
 
 
Sempra
controlling
 
 
 
Energy
Interests
Total
 
Energy
Interests
Total
Net income
$
 238 
$
 13 
$
 251 
 
$
 256 
$
 4 
$
 260 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
 
 67 
 
 4 
 
 71 
 
 
 (6)
 
 ― 
 
 (6)
    Net actuarial gain
 
 1 
 
 ― 
 
 1 
 
 
 2 
 
 ― 
 
 2 
    Financial instruments
 
 3 
 
 ― 
 
 3 
 
 
 2 
 
 1 
 
 3 
Total other comprehensive income (loss)
 
 71 
 
 4 
 
 75 
 
 
 (2)
 
 1 
 
 (1)
Total comprehensive income
 
 309 
 
 17 
 
 326 
 
 
 254 
 
 5 
 
 259 
Preferred dividends of subsidiaries
 
 (2)
 
 ― 
 
 (2)
 
 
 (2)
 
 ― 
 
 (2)
Total comprehensive income, after preferred
 
 
 
 
 
 
 
 
 
 
 
 
 
    dividends of subsidiaries
$
 307 
$
 17 
$
 324 
 
$
 252 
$
 5 
$
 257 
(1)
As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
2012 
2011(1)(2)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 404 
$
 252 
    Restricted cash
 
 23 
 
 24 
    Trade accounts receivable, net
 
 1,062 
 
 1,198 
    Other accounts and notes receivable, net
 
 177 
 
 147 
    Inventories
 
 222 
 
 346 
    Regulatory balancing accounts — undercollected
 
 71 
 
 38 
    Regulatory assets
 
 105 
 
 89 
    Fixed-price contracts and other derivatives
 
 83 
 
 85 
    Settlement receivable related to wildfire litigation
 
 5 
 
 10 
    Other
 
 146 
 
 143 
        Total current assets
 
 2,298 
 
 2,332 
 
 
 
 
 
 
Investments and other assets:
 
 
 
 
    Restricted cash
 
 24 
 
 22 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 1,074 
 
 1,126 
    Regulatory assets arising from wildfire litigation costs
 
 603 
 
 594 
    Other regulatory assets
 
 1,070 
 
 1,060 
    Nuclear decommissioning trusts
 
 865 
 
 804 
    Investments
 
 1,722 
 
 1,671 
    Goodwill
 
 1,071 
 
 1,036 
    Other intangible assets
 
 443 
 
 448 
    Sundry
 
 799 
 
 691 
        Total investments and other assets
 
 7,671 
 
 7,452 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 31,995 
 
 31,192 
    Less accumulated depreciation and amortization
 
 (7,919)
 
 (7,727)
        Property, plant and equipment, net ($488 and $494 at March 31, 2012 and
            December 31, 2011, respectively, related to VIE)
 
 24,076 
 
 23,465 
Total assets
$
 34,045 
$
 33,249 
(1)
As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.
(2)
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,
 
2012 
2011(1)(2)
 
 
(unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Short-term debt
$
 426 
$
 449 
    Accounts payable — trade
 
 901 
 
 983 
    Accounts payable — other
 
 112 
 
 124 
    Income taxes payable
 
 53 
 
 5 
    Deferred income taxes
 
 172 
 
 173 
    Dividends and interest payable
 
 297 
 
 219 
    Accrued compensation and benefits
 
 203 
 
 323 
    Regulatory balancing accounts — overcollected
 
 240 
 
 105 
    Current portion of long-term debt
 
 713 
 
 336 
    Fixed-price contracts and other derivatives
 
 92 
 
 92 
    Customer deposits
 
 148 
 
 142 
    Reserve for wildfire litigation
 
 441 
 
 586 
    Other
 
 682 
 
 615 
        Total current liabilities
 
 4,480 
 
 4,152 
Long-term debt ($342 and $345 at March 31, 2012 and December 31, 2011, respectively,
        related to VIE)
 
 10,180 
 
 10,078 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 143 
 
 142 
    Pension and other postretirement benefit obligations, net of plan assets
 
 1,373 
 
 1,423 
    Deferred income taxes
 
 1,601 
 
 1,520 
    Deferred investment tax credits
 
 48 
 
 49 
    Regulatory liabilities arising from removal obligations
 
 2,621 
 
 2,551 
    Asset retirement obligations
 
 1,927 
 
 1,905 
    Other regulatory liabilities
 
 80 
 
 87 
    Fixed-price contracts and other derivatives
 
 281 
 
 301 
    Deferred credits and other
 
 862 
 
 784 
        Total deferred credits and other liabilities
 
 8,936 
 
 8,762 
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; 241 million and 240 million shares
 
 
 
 
        outstanding at March 31, 2012 and December 31, 2011, respectively; no par value)
 
 2,117 
 
 2,104 
    Retained earnings
 
 8,254 
 
 8,162 
    Deferred compensation
 
 (1)
 
 (2)
    Accumulated other comprehensive income (loss)
 
 (418)
 
 (489)
        Total Sempra Energy shareholders’ equity
 
 9,952 
 
 9,775 
    Preferred stock of subsidiaries
 
 20 
 
 20 
    Other noncontrolling interests
 
 398 
 
 383 
        Total equity
 
 10,370 
 
 10,178 
Total liabilities and equity
$
 34,045 
$
 33,249 
(1)
As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.
(2)
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,
 
 
 
2012 
2011(1)
 
 
 
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
    Net income
$
 251 
$
 260 
 
    Adjustments to reconcile net income to net cash provided
 
 
 
 
 
        by operating activities:
 
 
 
 
 
            Depreciation and amortization
 
 257 
 
 230 
 
            Deferred income taxes and investment tax credits
 
 31 
 
 82 
 
            Equity earnings
 
 (23)
 
 (32)
 
            Fixed-price contracts and other derivatives
 
 (12)
 
 (9)
 
            Other
 
 14 
 
 (13)
 
    Net change in other working capital components
 
 168 
 
 297 
 
    Changes in other assets
 
 12 
 
 (5)
 
    Changes in other liabilities
 
 1 
 
 (5)
 
        Net cash provided by operating activities
 
 699 
 
 805 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
    Expenditures for property, plant and equipment
 
 (811)
 
 (607)
 
    Expenditures for investments
 
 (51)
 
 (4)
 
    Distributions from investments
 
 8 
 
 21 
 
    Purchases of nuclear decommissioning and other trust assets
 
 (134)
 
 (45)
 
    Proceeds from sales by nuclear decommissioning and other trusts
 
 135 
 
 46 
 
    Decrease in restricted cash
 
 39 
 
 160 
 
    Increase in restricted cash
 
 (40)
 
 (320)
 
    Other
 
 (5)
 
 (7)
 
        Net cash used in investing activities
 
 (859)
 
 (756)
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
    Common dividends paid
 
 (115)
 
 (94)
 
    Preferred dividends paid by subsidiaries
 
 (2)
 
 (2)
 
    Issuances of common stock
 
 13 
 
 15 
 
    Repurchases of common stock
 
 (16)
 
 (18)
 
    Issuances of debt (maturities greater than 90 days)
 
 1,008 
 
 803 
 
    Payments on debt (maturities greater than 90 days)
 
 (347)
 
 (260)
 
    Decrease in short-term debt, net
 
 (224)
 
 (192)
 
    Other
 
 (7)
 
 6 
 
        Net cash provided by financing activities
 
 310 
 
 258 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
 2 
 
 ― 
 
 
 
 
 
 
 
 
Increase in cash and cash equivalents
 
 152 
 
 307 
 
Cash and cash equivalents, January 1
 
 252 
 
 912 
 
Cash and cash equivalents, March 31
$
 404 
$
 1,219 
 
(1)
As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
     

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended March 31,
 
2012 
2011 
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 62 
$
 63 
    Income tax payments, net of refunds
 
 38 
 
 37 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 336 
$
 233 
    Dividends declared but not paid
 
 151 
 
 118 
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,
 
2012 
2011 
 
(unaudited)
Operating revenues
 
 
 
 
    Electric
$
 671 
$
 665 
    Natural gas
 
 163 
 
 175 
        Total operating revenues
 
 834 
 
 840 
Operating expenses
 
 
 
 
    Cost of electric fuel and purchased power
 
 163 
 
 171 
    Cost of natural gas
 
 67 
 
 83 
    Operation and maintenance
 
 268 
 
 273 
    Depreciation and amortization
 
 112 
 
 103 
    Franchise fees and other taxes
 
 46 
 
 47 
        Total operating expenses
 
 656 
 
 677 
Operating income
 
 178 
 
 163 
Other income, net
 
 30 
 
 16 
Interest expense
 
 (36)
 
 (36)
Income before income taxes
 
 172 
 
 143 
Income tax expense
 
 (60)
 
 (49)
Net income
 
 112 
 
 94 
Earnings attributable to noncontrolling interest
 
 (6)
 
 (4)
Earnings
 
 106 
 
 90 
Preferred dividend requirements
 
 (1)
 
 (1)
Earnings attributable to common shares
$
 105 
$
 89 
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Three months ended March 31,
 
2012
 
2011
 
(unaudited)
 
 
Non-
 
 
 
Non-
 
 
 
controlling
 
 
 
controlling
 
 
SDG&E
Interest
Total
 
SDG&E
Interest
Total
Net income
$
 106 
$
 6 
$
 112 
 
$
 90 
$
 4 
$
 94 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
    Financial instruments
 
 ― 
 
 ― 
 
 ― 
 
 
 ― 
 
 1 
 
 1 
Total other comprehensive income
 
 ― 
 
 ― 
 
 ― 
 
 
 ― 
 
 1 
 
 1 
Total comprehensive income
$
 106 
$
 6 
$
 112 
 
$
 90 
$
 5 
$
 95 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2012 
2011(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 139 
$
 29 
    Restricted cash
 
 18 
 
 21 
    Accounts receivable – trade, net
 
 228 
 
 267 
    Accounts receivable – other, net
 
 23 
 
 23 
    Due from unconsolidated affiliates
 
 1 
 
 67 
    Income taxes receivable
 
 109 
 
 102 
    Inventories
 
 77 
 
 82 
    Regulatory balancing accounts, net
 
 71 
 
 38 
    Regulatory assets arising from fixed-price contracts and other derivatives
 
 81 
 
 67 
    Other regulatory assets
 
 11 
 
 11 
    Fixed-price contracts and other derivatives
 
 28 
 
 27 
    Settlement receivable related to wildfire litigation
 
 5 
 
 10 
    Other
 
 37 
 
 51 
        Total current assets
 
 828 
 
 795 
 
 
 
 
 
 
Other assets:
 
 
 
 
    Restricted cash
 
 24 
 
 22 
    Deferred taxes recoverable in rates
 
 585 
 
 570 
    Regulatory assets arising from fixed-price contracts and other derivatives
 
 183 
 
 191 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 314 
 
 309 
    Regulatory assets arising from wildfire litigation costs
 
 603 
 
 594 
    Other regulatory assets
 
 162 
 
 160 
    Nuclear decommissioning trusts
 
 865 
 
 804 
    Income taxes receivable
 
 104 
 
 ― 
    Sundry
 
 73 
 
 70 
        Total other assets
 
 2,913 
 
 2,720 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 13,352 
 
 13,003 
    Less accumulated depreciation and amortization
 
 (3,045)
 
 (2,963)
        Property, plant and equipment, net ($488 and $494 at March 31, 2012 and
            December 31, 2011, respectively, related to VIE)
 
 10,307 
 
 10,040 
Total assets
$
 14,048 
$
 13,555 
(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,
 
 
2012 
2011(1)
 
 
(unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Accounts payable
$
 305 
$
 375 
    Due to unconsolidated affiliates
 
 36 
 
 14 
    Deferred income taxes
 
 59 
 
 62 
    Accrued compensation and benefits
 
 65 
 
 124 
    Current portion of long-term debt
 
 19 
 
 19 
    Fixed-price contracts and other derivatives
 
 59 
 
 55 
    Customer deposits
 
 67 
 
 62 
    Reserve for wildfire litigation
 
 441 
 
 586 
    Other
 
 202 
 
 139 
        Total current liabilities
 
 1,253 
 
 1,436 
Long-term debt ($342 and $345 at March 31, 2012 and December 31, 2011,
    respectively, related to VIE)
 
 4,303 
 
 4,058 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 19 
 
 20 
    Pension and other postretirement benefit obligations, net of plan assets
 
 347 
 
 342 
    Deferred income taxes
 
 1,337 
 
 1,167 
    Deferred investment tax credits
 
 25 
 
 26 
    Regulatory liabilities arising from removal obligations
 
 1,527 
 
 1,462 
    Asset retirement obligations
 
 704 
 
 693 
    Fixed-price contracts and other derivatives
 
 232 
 
 243 
    Deferred credits and other
 
 270 
 
 188 
        Total deferred credits and other liabilities
 
 4,461 
 
 4,141 
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 
 
 1,338 
    Retained earnings
 
 2,516 
 
 2,411 
    Accumulated other comprehensive income (loss)
 
 (10)
 
 (10)
        Total SDG&E shareholder's equity
 
 3,844 
 
 3,739 
    Noncontrolling interest
 
 108 
 
 102 
        Total equity
 
 3,952 
 
 3,841 
Total liabilities and equity
$
 14,048 
$
 13,555 
(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,
 
2012 
2011
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 112 
$
 94 
    Adjustments to reconcile net income to net cash provided by
 
 
 
 
        operating activities:
 
 
 
 
            Depreciation and amortization
 
 112 
 
 103 
            Deferred income taxes and investment tax credits
 
 152 
 
 75 
            Fixed price contracts and other derivatives
 
 (3)
 
 (4)
            Other
 
 (27)
 
 (12)
    Net change in other working capital components
 
 (85)
 
 241 
    Changes in other assets
 
 8 
 
 7 
    Changes in other liabilities
 
 (3)
 
 (3)
        Net cash provided by operating activities
 
 266 
 
 501 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (398)
 
 (348)
    Purchases of nuclear decommissioning trust assets
 
 (133)
 
 (44)
    Proceeds from sales by nuclear decommissioning trusts
 
 131 
 
 42 
    Decrease in restricted cash
 
 37 
 
 109 
    Increase in restricted cash
 
 (36)
 
 (311)
        Net cash used in investing activities
 
 (399)
 
 (552)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Capital contribution
 
 ― 
 
 200 
    Preferred dividends paid
 
 (1)
 
 (1)
    Issuance of long-term debt
 
 249 
 
 ― 
    Payments on long-term debt
 
 (3)
 
 (3)
    Other
 
 (2)
 
 ― 
        Net cash provided by financing activities
 
 243 
 
 196 
 
 
 
 
 
Increase in cash and cash equivalents
 
 110 
 
 145 
Cash and cash equivalents, January 1
 
 29 
 
 127 
Cash and cash equivalents, March 31
$
 139 
$
 272 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 17 
$
 17 
    Income tax (refunds) payments, net
 
 (62)
 
 24 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 134 
$
 145 
    Dividends declared but not paid
 
 1 
 
 1 
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,
 
2012 
2011 
 
(unaudited)
 
 
 
 
 
Operating revenues
$
 880 
$
 1,056 
Operating expenses
 
 
 
 
    Cost of natural gas
 
 349 
 
 531 
    Operation and maintenance
 
 289 
 
 288 
    Depreciation and amortization
 
 87 
 
 81 
    Franchise fees and other taxes
 
 36 
 
 37 
        Total operating expenses
 
 761 
 
 937 
Operating income
 
 119 
 
 119 
Other income, net
 
 4 
 
 3 
Interest expense
 
 (17)
 
 (17)
Income before income taxes
 
 106 
 
 105 
Income tax expense
 
 (40)
 
 (37)
Net income/Earnings attributable to common shares
$
 66 
$
 68 
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Three months ended March 31,
 
2012
 
2011
 
(unaudited)
Net income
$
 66 
 
$
 68 
Total other comprehensive income, net of tax
 
 ― 
 
 
 ― 
Comprehensive income attributable to common and preferred shareholders
$
 66 
 
$
 68 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2012 
2011(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 70 
$
 36 
    Accounts receivable – trade, net
 
 457 
 
 578 
    Accounts receivable – other, net
 
 70 
 
 63 
    Due from unconsolidated affiliates
 
 229 
 
 40 
    Income taxes receivable
 
 ― 
 
 17 
    Inventories
 
 42 
 
 151 
    Regulatory assets
 
 7 
 
 9 
    Temporary LIFO liquidation
 
 32 
 
 ― 
    Other
 
 26 
 
 28 
        Total current assets
 
 933 
 
 922 
 
 
 
 
 
Other assets:
 
 
 
 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 751 
 
 808 
    Other regulatory assets
 
 138 
 
 137 
    Sundry
 
 8 
 
 8 
        Total other assets
 
 897 
 
 953 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 10,679 
 
 10,565 
    Less accumulated depreciation and amortization
 
 (4,017)
 
 (3,965)
        Property, plant and equipment, net
 
 6,662 
 
 6,600 
Total assets
$
 8,492 
$
 8,475 
(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,
 
 
2012 
2011(1)
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Accounts payable – trade
$
 195 
$
 315 
    Accounts payable – other
 
 73 
 
 78 
    Due to unconsolidated affiliate
 
 ― 
 
 2 
    Income taxes payable
 
 5 
 
 ― 
    Deferred income taxes
 
 44 
 
 44 
    Accrued compensation and benefits
 
 82 
 
 99 
    Regulatory balancing accounts, net
 
 240 
 
 105 
    Current portion of long-term debt
 
 256 
 
 257 
    Customer deposits
 
 76 
 
 75 
    Other
 
 197 
 
 172 
        Total current liabilities
 
 1,168 
 
 1,147 
Long-term debt
 
 1,063 
 
 1,064 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 111 
 
 110 
    Pension and other postretirement benefit obligations, net of plan assets
 
 778 
 
 833 
    Deferred income taxes
 
 599 
 
 576 
    Deferred investment tax credits
 
 22 
 
 23 
    Regulatory liabilities arising from removal obligations
 
 1,080 
 
 1,075 
    Asset retirement obligations
 
 1,173 
 
 1,161 
    Deferred taxes refundable in rates
 
 80 
 
 87 
    Deferred credits and other
 
 209 
 
 206 
        Total deferred credits and other liabilities
 
 4,052 
 
 4,071 
 
 
 
 
 
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
 
 1,342 
 
 1,326 
    Accumulated other comprehensive income (loss)
 
 (21)
 
 (21)
        Total shareholders' equity
 
 2,209 
 
 2,193 
Total liabilities and shareholders' equity
$
 8,492 
$
 8,475 
(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,
 
2012 
2011 
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 66 
$
 68 
    Adjustments to reconcile net income to net cash provided by
 
 
 
 
        operating activities:
 
 
 
 
            Depreciation and amortization
 
 87 
 
 81 
            Deferred income taxes and investment tax credits
 
 14 
 
 48 
            Other
 
 (1)
 
 (2)
    Net change in other working capital components
 
 280 
 
 168 
    Changes in other assets
 
 3 
 
 12 
    Changes in other liabilities
 
 ― 
 
 (4)
        Net cash provided by operating activities
 
 449 
 
 371 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (165)
 
 (168)
    Increase in loans to affiliates, net
 
 (200)
 
 (287)
        Net cash used in investing activities
 
 (365)
 
 (455)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Common dividends paid
 
 (50)
 
 (50)
    Payment of long-term debt
 
 ― 
 
 (250)
        Net cash used in financing activities
 
 (50)
 
 (300)
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
 34 
 
 (384)
Cash and cash equivalents, January 1
 
 36 
 
 417 
Cash and cash equivalents, March 31
$
 70 
$
 33 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 5 
$
 8 
    Income tax refunds, net
 
 17 
 
 14 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 64 
$
 76 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 



SEMPRA ENERGY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1. GENERAL
 

 
PRINCIPLES OF CONSOLIDATION
 
 
2012 Business Segment Realignment
 
Effective January 1, 2012, management realigned some of the company’s major subsidiaries to better fit its strategic direction and to enhance the management and integration of our assets. This realignment resulted in a change in reportable segments in 2012. In accordance with accounting principles generally accepted in the United States (GAAP), historical information for Sempra Energy has been restated in its Condensed Consolidated Financial Statements and these Notes to reflect the effect of this change. All discussions of our operating units and reportable segments in these Notes reflect the new segments and operating structure.
 
 
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 operating units are
 
§  
San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas);
 
§  
Sempra International, which includes our Sempra South American Utilities and Sempra Mexico reportable segments; and
 
§  
Sempra U.S. Gas & Power, which includes our Sempra Renewables and Sempra Natural Gas reportable segments.
 
We provide descriptions of each of our segments in Note 11.
 
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our Sempra International and Sempra U.S. Gas & Power operating units. Sempra Global is the holding company for most of our subsidiaries that are not subject to California utility regulation. All references in these Notes to “Sempra International,” “Sempra U.S. Gas & Power” and their respective reportable segments are not intended to refer to any legal entity with the same or similar name.
 
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 herein and Note 4 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
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.
 
 
SoCalGas
 
SoCalGas’ Condensed Consolidated Financial Statements include its subsidiaries, which comprise less than one percent of its consolidated financial position and results of operations. SoCalGas’ common stock is wholly owned by Pacific Enterprises (PE), which is a wholly owned subsidiary of Sempra Energy.
 
 
BASIS OF PRESENTATION
 
This is a combined report of Sempra Energy, SDG&E and SoCalGas. We provide separate information for SDG&E and SoCalGas as required. 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 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, 2012 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.
 
As we discuss in Note 3, in April 2011, Sempra South American Utilities acquired controlling interests in two electric distribution utilities in South America. Sempra Natural Gas owns Mobile Gas Service Corporation (Mobile Gas) in southwest Alabama and Sempra Mexico owns Ecogas Mexico, S de RL de CV (Ecogas) in Northern Mexico, both natural gas distribution utilities. Previous to the quarterly report for the quarter ended June 30, 2011, we provided separate revenue and cost of revenue information on our consolidated statements of operations for the California Utilities only, as the amounts for Mobile Gas and Ecogas were immaterial. Due to the addition of the South American utilities, beginning with the quarterly report for the quarter ended June 30, 2011, we have provided separate revenue and cost of revenue information on the Condensed Consolidated Statements of Operations on a combined basis for all of our utilities. Accordingly, amounts in the quarterly period ended March 31, 2011 have been reclassified to conform with the current year presentation.
 
All December 31, 2011 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2011 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, 2011 (the Annual Report) which is a combined report for Sempra Energy, SDG&E and SoCalGas.
 
We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes, except for the change in accounting principle discussed below and the adoption of new accounting standards as we discuss in Note 2.
 
The California Utilities, Sempra Natural Gas’ Mobile Gas and Sempra Mexico’s Ecogas 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.
 
 
Change in Accounting Principle
 
Effective January 1, 2012, we changed our method of accounting for investment tax credits (ITC) from the flow-through method to the deferral method for Sempra Energy. Under the flow-through method, we reduced our income tax expense by the amount of ITC in the year in which the qualifying assets were placed in service. Under the deferral method, we record ITC in the year when the qualifying assets are placed in service as a reduction to the cost of the asset that generated the ITC. This results in lower book depreciation over the life of the asset. This change has no historical or prospective impact on the California Utilities because ITC is effectively deferred as a result of the application of regulatory accounting required under GAAP.
 
The flow-through method and the deferral method are both acceptable under GAAP, but the deferral method is the preferred method. We believe that the deferral method is preferable for the ITC we receive because it recognizes ITC benefits over the same periods as the associated costs for which the ITC are intended to compensate.
 
We applied this change in accounting principle by retrospectively adjusting the historical financial statement amounts for all periods presented. Upon adopting the deferral method, we recorded an adjustment for the cumulative effect of the change in accounting principle to reduce Sempra Energy Consolidated retained earnings as of January 1, 2011 by $37 million.
 
For certain solar generating assets being placed into service during 2012, we have elected to seek cash grants rather than ITC for which the projects also qualify. Accordingly, cash grant accounting, which is similar to deferral accounting of ITC, is required to be applied. As a result, the impact of our change in accounting policy for ITC on our financial statements for the three months ending March 31, 2012 is insignificant.
 
The following tables summarize the effects of the change in accounting principle on Sempra Energy Consolidated’s condensed financial statements for historical periods presented.
 
 
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
 
 
 
 
 
 
(Dollars in millions, except per share amounts)
 
 
 
 
 
 
 
 
Three months ended March 31, 2011
 
 
 
As
 
 
 
 
 
 
 
Originally
 
 
 
Retrospectively
Sempra Energy Consolidated
 
Reported
 
Adjustments
 
Adjusted
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 
 
 
 
 
Depreciation and amortization
$
231 
$
(1)
$
230 
Income before income taxes and equity earnings
 
 
 
 
 
 
     of certain unconsolidated subsidiaries
 
342 
 
 
343 
Income tax expense
 
109 
 
 
114 
Net income
 
264 
 
(4)
 
260 
Earnings
 
258 
 
(4)
 
254 
 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.07 
$
(0.01)
$
1.06 
Diluted earnings per common share
$
1.07 
$
(0.02)
$
1.05 
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
 
 
 
 
Net income
$
264 
$
(4)
$
260 
Adjustments to reconcile net income to net cash provided by
 
 
 
 
 
 
     operating activities:
 
 
 
 
 
 
     Depreciation and amortization
 
231 
 
(1)
 
230 
     Deferred income taxes and investment tax credits
 
88 
 
(6)
 
82 
Net change in other working capital components (income taxes)
 
286 
 
11 
 
297 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
 
 
As
 
 
 
 
 
 
 
Originally
 
 
 
Retrospectively
 
 
 
Reported
 
Adjustments
 
Adjusted
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
Property, plant and equipment
$
31,303 
$
(111)
$
31,192 
Less accumulated depreciation and amortization
 
(7,731)
 
 
(7,727)
     Property, plant and equipment, net
$
23,572 
$
(107)
$
23,465 
 
 
 
 
 
 
 
 
Income taxes payable
$
16 
$
(11)
$
Deferred income taxes, noncurrent liability
 
1,554 
 
(34)
 
1,520 
Deferred credits and other
 
783 
 
 
784 
Retained earnings(1)
 
8,225 
 
(63)
 
8,162 
(1)
Adjustment includes the cumulative effect of the change in accounting principle of reductions in net income and earnings of $26 million, $30 million, a negligible amount, and $7 million for the years ended December 31, 2011, 2010, 2009 and 2008, respectively.




 

NOTE 2. NEW ACCOUNTING STANDARDS
 

We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, cash flows or disclosures.
 
 
SEMPRA ENERGY, SDG&E AND SOCALGAS
 
Accounting Standards Update (ASU) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs)” (ASU 2011-04): ASU 2011-04 amends Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, and provides changes in the wording used to describe the requirements for measuring fair value and disclosing information about fair value measurement.  ASU 2011-04 results in common fair value measurement and disclosure requirements under both GAAP and IFRSs.
 
ASU 2011-04 expands fair value measurement disclosures for Level 3 instruments to require
 
§  
quantitative information about the unobservable inputs
 
§  
a description of the valuation process
 
§  
a qualitative discussion about the sensitivity of the measurements
 
We adopted ASU 2011-04 on January 1, 2012 and it did not affect our financial position, results of operations or cash flows.  The required disclosure is provided in Note 8.
 
ASU 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05) and ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (ASU 2011-12): ASU 2011-05 amends ASC Topic 220, Comprehensive Income, and eliminates the option to report other comprehensive income and its components in the statement of changes in equity.  The ASU allows an entity an option to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements.
 
ASU 2011-05 does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or the earnings per share computation.
 
ASU 2011-12 defers the requirement to separately present on the face of the statement of operations or statement of comprehensive income reclassification adjustments for items that are reclassified from other comprehensive income to net income.
 
We adopted ASU 2011-05 on January 1, 2012 and have elected to present the components of net income and other comprehensive income in two separate, but consecutive, statements.
 
ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11): In order to allow for balance sheet comparison between GAAP and IFRSs, ASU 2011-11 requires enhanced disclosures related to financial assets and liabilities eligible for offsetting in the statement of financial position.  An entity will have to disclose both gross and net information about financial instruments and transactions subject to a master netting arrangement and eligible for offset, including cash collateral received and posted.
 
We will adopt ASU 2011-11 on January 1, 2013 as required and do not expect it to affect our financial position, results of operations or cash flows. We will provide the additional disclosure in our 2013 interim financial statements.
 



 

NOTE 3. ACQUISITION AND INVESTMENT ACTIVITY
 

We discuss our investments in unconsolidated entities in Note 4.
 
 
SEMPRA SOUTH AMERICAN UTILITIES
 
 
Chilquinta Energía S.A. (Chilquinta Energía) and Luz del Sur S.A.A. (Luz del Sur)
 
On April 6, 2011, Sempra South American Utilities acquired from AEI its interests in Chilquinta Energía in Chile and Luz del Sur in Peru, and their subsidiaries. Prior to the acquisition, Sempra South American Utilities and AEI each owned 50 percent of Chilquinta Energía and approximately 38 percent of Luz del Sur and accounted for the investments under the equity method. Upon completion of the acquisition and a public tender offer to the minority shareholders of Luz del Sur, Sempra South American Utilities owned 100 percent of Chilquinta Energía and approximately 80 percent of Luz del Sur, with the remaining shares of Luz del Sur held by institutional investors and the general public. As part of the transaction, Sempra South American Utilities also acquired AEI’s interests in two energy-services companies, Tecnored S.A. (Tecnored) and Tecsur S.A. (Tecsur). We provide additional information about Sempra South American Utilities’ acquisition of Chilquinta Energía and Luz del Sur and the public tender offer in Note 3 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Our Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 include 100 percent of the acquired companies’ revenues, net income and earnings of $357 million, $49 million and $43 million, respectively.  Net income and earnings include holding companies reported in Parent and Other. For the three months ended March 31, 2011, the acquired companies were accounted for as equity method investments and equity earnings were $12 million for each of Chilquinta Energía and Luz del Sur.
 
Following are pro forma revenues and earnings for Sempra Energy had the acquisition occurred at the beginning of the year prior to the year of acquisition, which primarily reflect the incremental increase to revenues and earnings from our increased ownership and consolidation of the entities acquired. Although some short-term debt borrowings may have resulted from the actual acquisition in 2011, we have not assumed any additional interest expense in the pro forma impact on earnings below, as the amounts would be immaterial due to the low interest rates available to us on commercial paper.  The pro forma amounts do not include the impact of the increased ownership in Luz del Sur resulting from the tender offer completed in September 2011 discussed above and in Note 3 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 
 
Three months ended
(Dollars in millions)
March 31, 2011
Revenues
$
 2,777 
Earnings
 
 279 

 
 
 
 

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.
 
 
SEMPRA RENEWABLES
 
For the three months ended March 31, 2012, Sempra Renewables invested $50 million in its renewable wind generation joint ventures, of which $43 million was invested in the Flat Ridge 2 Wind Farm project.
 
 
SEMPRA NATURAL GAS
 
Sempra Natural Gas owns a 25-percent interest in Rockies Express Pipeline LLC (Rockies Express), a partnership that operates a natural gas pipeline, the Rockies Express Pipeline (REX), that links producing areas in the Rocky Mountains region to the upper Midwest and the eastern United States.  Kinder Morgan Energy Partners L.P. (KMP) and ConocoPhillips (Conoco) own the remaining interests of 50 percent and 25 percent, respectively.  Our total investment in Rockies Express is accounted for as an equity method investment.
 
KMP has announced its intention to sell certain assets, including its interest in REX.  KMP is proposing to divest these assets in order for KMP’s general partner, Kinder Morgan, Inc., to obtain approval for a proposed acquisition.  We believe that this sales process could result in an indication of fair value for KMP’s interest in REX.  If so, we would consider what, if any, impacts this information could have on our recorded value for REX.  If such information indicated an impairment of our investment, we would also need to evaluate whether such impairment, if any, was other than temporary, in accordance with applicable accounting standards for equity method investments.
 
 
RBS SEMPRA COMMODITIES
 
RBS Sempra Commodities LLP (RBS Sempra Commodities) is a United Kingdom limited liability partnership that owned and operated commodities-marketing businesses previously owned by us.  We and our partner in the joint venture, The Royal Bank of Scotland plc (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 account for our investment in RBS Sempra Commodities under the equity method, and report our share of partnership earnings and other associated costs in Parent and Other.
 
In April 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. The investment balance of $126 million at March 31, 2012 reflects remaining distributions expected to be received from the partnership in accordance with the Letter Agreement.  The timing and amount of distributions may be impacted by the matters we discuss related to RBS Sempra Commodities in Note 10 under “Other Litigation.”  In addition, amounts may be retained by the partnership for an extended period of time to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership.
 
In connection with the Letter Agreement described above, we also released RBS from its indemnification obligations with respect to the items for which J.P. Morgan Chase & Co. (JP Morgan), one of the buyers of the partnership’s businesses, has agreed to indemnify us.
 
Pretax equity losses from RBS Sempra Commodities were $8 million for the three months ended March 31, 2011.  We recorded no equity earnings or loss related to the partnership in the first quarter of 2012.  The fair value measurement of our investment in RBS Sempra Commodities was significantly impacted by unobservable inputs (i.e., Level 3 inputs) as defined by the accounting guidance for fair value measurements which we discuss in Note 11 in the Notes to Consolidated Financial Statements in the Annual Report.  The inputs included estimated future cash distributions expected from the partnership.
 
We discuss the RBS Sempra Commodities sales transactions, the Letter Agreement 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;
 
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the nature of the VIE’s risks and the risks we absorb;
 
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the power to direct activities that most significantly impact the economic performance of the VIE; and
 
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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-megawatt (MW) generating facility that began 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, which we refer to as the put option.
 
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 $108 million at March 31, 2012 and $102 million at December 31, 2011 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 $352 million at March 31, 2012, 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 respons