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Sempra Energy; SDG&E; Southern California Gas Company 09/30/2013 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

September 30, 2013

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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

1-03779

SAN DIEGO GAS & ELECTRIC COMPANY

California

95-1184800

No change

8326 Century Park Court

San Diego, California 92123

(619)696-2000

1-01402

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

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 registrant was required to submit and post such files).

Sempra Energy

Yes

San Diego Gas & Electric Company

Yes

Southern California Gas Company

Yes

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

San Diego Gas & Electric Company

Yes

Southern California Gas Company

Yes

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 November 1, 2013:

Sempra Energy

244,399,914 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	77
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	119
Item 4.	Controls and Procedures	120

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	121
Item 1A.	Risk Factors	121
Item 6.	Exhibits	123

Signatures		125

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,” “forecasts,” “contemplates,” “intends,” “depends,” “should,” “could,” “would,” “will,” “may,” “potential,” “target,” “pursue,” “goals,” “outlook,” “maintain,” or similar expressions, or when we discuss our guidance, strategy, plans, goals, opportunities, projections, initiatives, objectives or intentions, we are making forward-looking statements.

Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include

§	local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;

actions and the timing of actions by the California Public Utilities Commission, California State Legislature, U.S. Department of Energy, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, Atomic Safety and Licensing Board, 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;

§	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;

§	inflation, interest and exchange rates;

§	the impact of benchmark interest rates, generally Moody’s A-rated utility bond yields, on our California Utilities’ cost of capital;

§	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, equipment failures and the decommissioning of San Onofre Nuclear Generating Station (SONGS);

§	weather conditions, natural disasters, catastrophic accidents, and conservation efforts;

risks inherent with nuclear power facilities and radioactive materials storage, including the catastrophic release of such materials, the disallowance of the recovery of the investment in, or operating costs of, the nuclear facility due to an extended outage and facility closure, and increased regulatory oversight;

§	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 impact on reliability of San Diego Gas & Electric Company’s electric transmission and distribution system due to increased power supply from renewable energy sources;

§	the impact on competitive customer rates of the growth in distributed and local power generation and the corresponding decrease in demand for power delivered through our electric transmission and distribution system;

§	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 most recent Annual Report on Form 10-K filed 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 September 30,					Nine months ended September 30,
	2013		2012			2013		2012
	(unaudited)
REVENUES
Utilities	$	2,223	$	2,170	$	6,889	$	6,099
Energy-related businesses		328		337		963		880
Total revenues		2,551		2,507		7,852		6,979
EXPENSES AND OTHER INCOME
Utilities:
Cost of natural gas		(261)		(212)		(1,182)		(864)
Cost of electric fuel and purchased power		(537)		(515)		(1,461)		(1,252)
Energy-related businesses:
Cost of natural gas, electric fuel and purchased power		(120)		(136)		(325)		(346)
Other cost of sales		(47)		(43)		(144)		(117)
Operation and maintenance		(698)		(732)		(2,162)		(2,130)
Depreciation and amortization		(286)		(280)		(828)		(803)
Franchise fees and other taxes		(96)		(89)		(283)		(264)
Loss from plant closure		―		―		(200)		―
Gain on sale of assets		39		―		113		7
Equity earnings (losses), before income tax		3		(94)		21		(375)
Other income, net		16		44		79		137
Interest income		5		5		15		14
Interest expense		(137)		(126)		(413)		(352)
Income before income taxes and equity earnings
of certain unconsolidated subsidiaries		432		329		1,082		634
Income tax expense		(117)		(49)		(327)		(48)
Equity earnings, net of income tax		8		10		13		29
Net income		323		290		768		615
Earnings attributable to noncontrolling interests		(22)		(20)		(41)		(44)
Call premium on preferred stock of subsidiary		(3)		―		(3)		―
Preferred dividends of subsidiaries		(2)		(2)		(5)		(5)
Earnings	$	296	$	268	$	719	$	566

Basic earnings per common share	$	1.21	$	1.11	$	2.95	$	2.35
Weighted-average number of shares outstanding, basic (thousands)		244,140		241,689		243,682		241,133

Diluted earnings per common share	$	1.19	$	1.09	$	2.89	$	2.31
Weighted-average number of shares outstanding, diluted (thousands)		249,259		245,802		248,723		245,013
Dividends declared per share of common stock	$	0.63	$	0.60	$	1.89	$	1.80
See Notes to Condensed Consolidated Financial Statements.

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
	Three months ended September 30,
	2013						2012
	(unaudited)
			Non-						Non-
	Sempra		controlling				Sempra		controlling
	Energy		Interests		Total		Energy		Interests		Total
Net income	$	301	$	22	$	323	$	270	$	20	$	290
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments		5		―		5		80		8		88
Net actuarial gain (loss)		3		―		3		(10)		―		(10)
Financial instruments		(4)		(2)		(6)		(3)		(4)		(7)
Total other comprehensive income (loss)		4		(2)		2		67		4		71
Total comprehensive income		305		20		325		337		24		361
Preferred dividends of subsidiaries		(2)		―		(2)		(2)		―		(2)
Total comprehensive income, after preferred
dividends of subsidiaries	$	303	$	20	$	323	$	335	$	24	$	359
	Nine months ended September 30,
	2013						2012
	(unaudited)
			Non-						Non-
	Sempra		controlling				Sempra		controlling
	Energy		Interests		Total		Energy		Interests		Total
Net income	$	727	$	41	$	768	$	571	$	44	$	615
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments		149		(24)		125		114		11		125
Net actuarial gain (loss)		7		―		7		(5)		―		(5)
Financial instruments		5		16		21		(9)		(13)		(22)
Total other comprehensive income (loss)		161		(8)		153		100		(2)		98
Total comprehensive income		888		33		921		671		42		713
Preferred dividends of subsidiaries		(5)		―		(5)		(5)		―		(5)
Total comprehensive income, after preferred
dividends of subsidiaries	$	883	$	33	$	916	$	666	$	42	$	708
See Notes to Condensed Consolidated Financial Statements.

SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,061	$	475
Restricted cash			28		46
Trade accounts receivable, net			982		1,146
Other accounts and notes receivable, net			194		153
Income taxes receivable			132		56
Deferred income taxes			119		148
Inventories			463		408
Regulatory balancing accounts – undercollected			346		395
Regulatory assets			100		62
Fixed-price contracts and other derivatives			76		95
U.S. Treasury grants receivable			―		258
Asset held for sale, power plant			―		296
Other			211		157
Total current assets			3,712		3,695

Investments and other assets:
Restricted cash			21		22
Regulatory assets arising from pension and other postretirement
benefit obligations			1,173		1,151
Regulatory assets arising from wildfire litigation costs			339		364
Other regulatory assets			1,947		1,227
Nuclear decommissioning trusts			981		908
Investments			1,564		1,516
Goodwill			1,045		1,111
Other intangible assets			428		436
Sundry			928		878
Total investments and other assets			8,426		7,613

Property, plant and equipment:
Property, plant and equipment			33,573		33,528
Less accumulated depreciation and amortization			(8,810)		(8,337)
Property, plant and equipment, net ($445 and $466 at September 30, 2013 and December 31, 2012, respectively, related to VIE)			24,763		25,191
Total assets		$	36,901	$	36,499
(1)	Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt		$	522	$	546
Accounts payable – trade			859		976
Accounts payable – other			131		134
Dividends and interest payable			314		266
Accrued compensation and benefits			286		337
Regulatory balancing accounts – overcollected			82		141
Current portion of long-term debt			1,441		725
Fixed-price contracts and other derivatives			64		77
Customer deposits			155		143
Reserve for wildfire litigation			127		305
Other			549		608
Total current liabilities			4,530		4,258
Long-term debt ($327 and $335 at September 30, 2013 and December 31, 2012, respectively, related to VIE)			10,478		11,621

Deferred credits and other liabilities:
Customer advances for construction			145		144
Pension and other postretirement benefit obligations, net of plan assets			1,472		1,456
Deferred income taxes			2,543		2,100
Deferred investment tax credits			43		46
Regulatory liabilities arising from removal obligations			2,541		2,720
Asset retirement obligations			2,111		2,033
Fixed-price contracts and other derivatives			239		252
Deferred credits and other			1,045		1,107
Total deferred credits and other liabilities			10,139		9,858
Contingently redeemable preferred stock of subsidiary			―		79

Commitments and contingencies (Note 10)

Equity:
Preferred stock (50 million shares authorized; none issued)			―		―
Common stock (750 million shares authorized; 244 million and 242 million shares
outstanding at September 30, 2013 and December 31, 2012, respectively; no par value)			2,424		2,217
Retained earnings			8,700		8,441
Accumulated other comprehensive income (loss)			(215)		(376)
Total Sempra Energy shareholders’ equity			10,909		10,282
Preferred stock of subsidiary			20		20
Other noncontrolling interests			825		381
Total equity			11,754		10,683
Total liabilities and equity		$	36,901	$	36,499
(1)	Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
	Nine months ended September 30,
	2013		2012
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	768	$	615
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		828		803
Deferred income taxes and investment tax credits		327		(45)
Gain on sale of assets		(113)		(7)
Loss from plant closure		200		―
Equity (earnings) losses		(34)		346
Fixed-price contracts and other derivatives		(25)		1
Other		23		(1)
Net change in other working capital components		(454)		(373)
Changes in other assets		(203)		202
Changes in other liabilities		13		147
Net cash provided by operating activities		1,330		1,688

CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment		(1,785)		(2,241)
Expenditures for investments and acquisition of businesses, net of cash acquired		(21)		(359)
Proceeds from sale of assets and investment		566		9
Proceeds from U.S. Treasury grants		238		―
Distributions from investments		141		43
Purchases of nuclear decommissioning and other trust assets		(514)		(534)
Proceeds from sales by nuclear decommissioning and other trusts		510		534
Decrease in restricted cash		285		89
Increase in restricted cash		(311)		(105)
Other		(10)		(12)
Net cash used in investing activities		(901)		(2,576)

CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid		(452)		(405)
Preferred dividends paid by subsidiaries		(5)		(5)
Issuances of common stock		57		50
Repurchases of common stock		(45)		(16)
Issuances of debt (maturities greater than 90 days)		1,404		2,294
Payments on debt (maturities greater than 90 days)		(1,444)		(563)
Proceeds from sale of noncontrolling interests, net of $25 in offering costs		574		―
Increase (decrease) in short-term debt, net		81		(142)
Distributions to noncontrolling interests		(28)		(36)
Other		15		(20)
Net cash provided by financing activities		157		1,157

Effect of exchange rate changes on cash and cash equivalents		―		9

Increase in cash and cash equivalents		586		278
Cash and cash equivalents, January 1		475		252
Cash and cash equivalents, September 30	$	1,061	$	530
See Notes to Condensed Consolidated Financial Statements.

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
		Nine months ended September 30,
		2013		2012
		(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized		$	359	$	278
Income tax payments, net of refunds			106		99

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Acquisition of businesses:
	Assets acquired	$	13	$	29
	Cash paid, net of cash acquired		(11)		(19)
	Liabilities assumed	$	2	$	10

Nuclear facility plant reclassified to regulatory asset, net of depreciation and amortization		$	512	$	―
Accrued capital expenditures			285		315
Capital expenditures recoverable by U.S. Treasury grants receivable			3		136
Sequestration of U.S. Treasury grants receivable			(23)		―

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Call premium on preferred stock of subsidiary		$	3	$	―
Dividends declared but not paid			158		149
See Notes to Condensed Consolidated Financial Statements.

SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)

	Three months ended September 30,					Nine months ended September 30,
	2013		2012			2013		2012
	(unaudited)
Operating revenues
Electric	$	970	$	998	$	2,685	$	2,349
Natural gas		93		94		381		357
Total operating revenues		1,063		1,092		3,066		2,706
Operating expenses
Cost of electric fuel and purchased power		315		301		776		604
Cost of natural gas		36		29		157		130
Operation and maintenance		266		309		852		852
Depreciation and amortization		126		128		367		359
Franchise fees and other taxes		57		55		158		144
Loss from plant closure		―		―		200		―
Total operating expenses		800		822		2,510		2,089
Operating income		263		270		556		617
Other income, net		10		5		30		59
Interest income		―		―		1		―
Interest expense		(50)		(49)		(147)		(124)
Income before income taxes		223		226		440		552
Income tax expense		(84)		(38)		(147)		(151)
Net income		139		188		293		401
Earnings attributable to noncontrolling interest		(5)		(12)		(1)		(23)
Earnings		134		176		292		378
Call premium on preferred stock		(3)		―		(3)		―
Preferred dividend requirements		(2)		(2)		(4)		(4)
Earnings attributable to common shares	$	129	$	174	$	285	$	374
See Notes to Condensed Consolidated Financial Statements.

SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
	Three months ended September 30,
	2013						2012
	(unaudited)
			Non-						Non-
			controlling						controlling
	SDG&E		Interest		Total		SDG&E		Interest		Total
Net income	$	134	$	5	$	139	$	176	$	12	$	188
Other comprehensive income (loss), net of income tax:
Net actuarial gain		1		―		1		―		―		―
Financial instruments		―		(1)		(1)		―		(4)		(4)
Total other comprehensive income (loss)		1		(1)		―		―		(4)		(4)
Total comprehensive income	$	135	$	4	$	139	$	176	$	8	$	184
	Nine months ended September 30,
	2013						2012
	(unaudited)
			Non-						Non-
			controlling						controlling
	SDG&E		Interest		Total		SDG&E		Interest		Total
Net income	$	292	$	1	$	293	$	378	$	23	$	401
Other comprehensive income (loss), net of income tax:
Net actuarial gain		2		―		2		―		―		―
Financial instruments		―		14		14		―		(13)		(13)
Total other comprehensive income (loss)		2		14		16		―		(13)		(13)
Total comprehensive income	$	294	$	15	$	309	$	378	$	10	$	388
See Notes to Condensed Consolidated Financial Statements.

SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	167	$	87
Restricted cash			9		10
Accounts receivable – trade, net			335		252
Accounts receivable – other, net			36		21
Due from unconsolidated affiliates			1		39
Income taxes receivable			―		35
Deferred income taxes			53		―
Inventories			78		82
Regulatory balancing accounts, net			346		395
Regulatory assets arising from fixed-price contracts and other derivatives			40		39
Other regulatory assets			48		10
Fixed-price contracts and other derivatives			21		41
Other			82		76
Total current assets			1,216		1,087

Other assets:
Restricted cash			21		22
Deferred taxes recoverable in rates			755		718
Regulatory assets arising from fixed-price contracts and other derivatives			90		110
Regulatory assets arising from pension and other postretirement
benefit obligations			292		303
Regulatory assets arising from wildfire litigation costs			339		364
Other regulatory assets			834		252
Nuclear decommissioning trusts			981		908
Sundry			164		117
Total other assets			3,476		2,794

Property, plant and equipment:
Property, plant and equipment			14,049		14,124
Less accumulated depreciation and amortization			(3,466)		(3,261)
Property, plant and equipment, net ($445 and $466 at September 30, 2013 and December 31, 2012, respectively, related to VIE)			10,583		10,863
Total assets		$	15,275	$	14,744
(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)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	320	$	300
Due to unconsolidated affiliates			13		19
Income taxes payable			30		―
Deferred income taxes			―		26
Dividends and interest payable			53		36
Accrued compensation and benefits			82		129
Current portion of long-term debt			45		16
Fixed-price contracts and other derivatives			45		56
Customer deposits			71		60
Construction deposits			8		51
Reserve for wildfire litigation			127		305
Preferred stock pending redemption			82		―
Other			213		106
Total current liabilities			1,089		1,104
Long-term debt ($327 and $335 at September 30, 2013 and December 31, 2012, respectively, related to VIE)			4,527		4,292

Deferred credits and other liabilities:
Customer advances for construction			24		17
Pension and other postretirement benefit obligations, net of plan assets			328		340
Deferred income taxes			1,872		1,636
Deferred investment tax credits			24		25
Regulatory liabilities arising from removal obligations			1,347		1,603
Asset retirement obligations			901		733
Fixed-price contracts and other derivatives			183		209
Deferred credits and other			392		408
Total deferred credits and other liabilities			5,071		4,971
Contingently redeemable preferred stock			―		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			3,180		2,895
Accumulated other comprehensive income (loss)			(9)		(11)
Total SDG&E shareholder's equity			4,509		4,222
Noncontrolling interest			79		76
Total equity			4,588		4,298
Total liabilities and equity		$	15,275	$	14,744
(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)
	Nine months ended September 30,
	2013		2012
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	293	$	401
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		367		359
Deferred income taxes and investment tax credits		100		262
Loss from plant closure		200		―
Fixed-price contracts and other derivatives		(7)		(9)
Other		(9)		(55)
Net change in other working capital components		(284)		(518)
Changes in other assets		(164)		201
Changes in other liabilities		13		129
Net cash provided by operating activities		509		770

CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment		(679)		(998)
Proceeds from sale of assets		8		―
Purchases of nuclear decommissioning trust assets		(511)		(530)
Proceeds from sales by nuclear decommissioning trusts		507		524
Decrease in restricted cash		54		74
Increase in restricted cash		(52)		(62)
Other		(5)		―
Net cash used in investing activities		(678)		(992)

CASH FLOWS FROM FINANCING ACTIVITIES
Capital distribution at Otay Mesa VIE		(12)		(22)
Preferred dividends paid		(4)		(4)
Issuances of long-term debt		450		249
Payments on long-term debt		(183)		(7)
Increase in short-term debt, net		―		2
Other		(2)		(3)
Net cash provided by financing activities		249		215

Increase (decrease) in cash and cash equivalents		80		(7)
Cash and cash equivalents, January 1		87		29
Cash and cash equivalents, September 30	$	167	$	22

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized	$	127	$	96
Income tax payments (refunds), net		33		(121)

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Nuclear facility plant reclassified to regulatory asset, net of depreciation and amortization	$	512	$	―
Accrued capital expenditures		108		87

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Call premium on preferred stock	$	3	$	―
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 September 30,					Nine months ended September 30,
	2013		2012			2013		2012
	(unaudited)

Operating revenues	$	807	$	728	$	2,694	$	2,328
Operating expenses
Cost of natural gas		209		175		966		703
Operation and maintenance		314		316		936		933
Depreciation and amortization		100		91		280		268
Franchise fees and other taxes		29		27		95		91
Total operating expenses		652		609		2,277		1,995
Operating income		155		119		417		333
Other income, net		2		6		9		14
Interest expense		(17)		(17)		(52)		(51)
Income before income taxes		140		108		374		296
Income tax expense		(38)		(37)		(107)		(105)
Net income		102		71		267		191
Preferred dividend requirements		―		―		(1)		(1)
Earnings attributable to common shares	$	102	$	71	$	266	$	190
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 September 30,
	2013		2012
	(unaudited)
Net income	$	102	$	71
Total other comprehensive income, net of income tax		―		―
Total comprehensive income	$	102	$	71
	Nine months ended September 30,
	2013		2012
	(unaudited)
Net income	$	267	$	191
Other comprehensive income, net of income tax:
Financial instruments		1		1
Total other comprehensive income		1		1
Total comprehensive income	$	268	$	192
See Notes to Condensed Consolidated Financial Statements.

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	15	$	83
Accounts receivable – trade, net			314		539
Accounts receivable – other, net			77		51
Due from unconsolidated affiliates			14		24
Income taxes receivable			139		104
Deferred income taxes			―		3
Inventories			177		151
Regulatory assets			4		4
Other			34		35
Total current assets			774		994

Other assets:
Regulatory assets arising from pension and other postretirement
benefit obligations			869		835
Other regulatory assets			267		148
Sundry			125		77
Total other assets			1,261		1,060

Property, plant and equipment:
Property, plant and equipment			11,558		11,187
Less accumulated depreciation and amortization			(4,305)		(4,170)
Property, plant and equipment, net			7,253		7,017
Total assets		$	9,288	$	9,071
(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)
		September 30,		December 31,
		2013		2012(1)
		(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable – trade		$	256	$	383
Accounts payable – other			81		82
Due to unconsolidated affiliate			20		37
Deferred income taxes			32		―
Accrued compensation and benefits			118		116
Regulatory balancing accounts, net			82		141
Current portion of long-term debt			252		4
Customer deposits			76		76
Other			124		124
Total current liabilities			1,041		963
Long-term debt			1,159		1,409
Deferred credits and other liabilities:
Customer advances for construction			107		111
Pension and other postretirement benefit obligations, net of plan assets			888		855
Deferred income taxes			978		881
Deferred investment tax credits			19		20
Regulatory liabilities arising from removal obligations			1,178		1,103
Asset retirement obligations			1,170		1,238
Deferred credits and other			296		256
Total deferred credits and other liabilities			4,636		4,464

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			1,581		1,365
Accumulated other comprehensive income (loss)			(17)		(18)
Total shareholders' equity			2,452		2,235
Total liabilities and shareholders' equity		$	9,288	$	9,071
(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)
	Nine months ended September 30,
	2013		2012
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	267	$	191
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		280		268
Deferred income taxes and investment tax credits		72		39
Other		(6)		(9)
Net change in other working capital components		(56)		240
Changes in other assets		(65)		4
Changes in other liabilities		(5)		13
Net cash provided by operating activities		487		746

CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment		(521)		(462)
Decrease (increase) in loans to affiliates, net		17		(257)
Net cash used in investing activities		(504)		(719)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of long-term debt		―		348
Common dividends paid		(50)		(150)
Preferred dividends paid		(1)		(1)
Debt issuance costs		―		(3)
Net cash (used in) provided by financing activities		(51)		194

(Decrease) increase in cash and cash equivalents		(68)		221
Cash and cash equivalents, January 1		83		36
Cash and cash equivalents, September 30	$	15	$	257

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized	$	44	$	36
Income tax payments, net of refunds		66		46

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Accrued capital expenditures	$	97	$	69
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 energy-services holding company, and its consolidated subsidiaries and variable interest entities (VIEs). Sempra Energy’s principal operating units are

§	San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), which are separate, reportable segments;

§	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.

In the first quarter of 2013, a Sempra Energy subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), completed a private offering in the U.S. and outside of Mexico and a concurrent public offering in Mexico of common stock. The aggregate shares of common stock sold in the offerings represent approximately 18.9 percent of IEnova’s outstanding ownership interest. IEnova is reported within the Sempra Mexico reportable segment. We discuss the offerings and IEnova further in Note 5.

Sempra Energy uses the equity method to account for investments in companies over which we have the ability to exercise significant influence, but not control. We discuss our investments in unconsolidated entities in Note 4 herein and in Note 4 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

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 accounting principles generally accepted in the United States (U.S. 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 September 30, 2013 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, 2012 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2012 consolidated financial statements. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the interim-period-reporting provisions of U.S. 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, 2012 (the Annual Report) and our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2013, which are combined reports for Sempra Energy, SDG&E and SoCalGas.

Sempra South American Utilities has controlling interests in two electric distribution utilities in South America. Sempra Natural Gas owns Mobile Gas Service Corporation (Mobile Gas) in southwest Alabama and Willmut Gas Company (Willmut Gas) in Mississippi, and Sempra Mexico owns Ecogas Mexico, S. de R.L. de C.V. (Ecogas) in Northern Mexico, all natural gas distribution utilities. The California Utilities, Sempra Natural Gas’ Mobile Gas and Willmut Gas, and Sempra Mexico’s Ecogas prepare their financial statements in accordance with U.S. GAAP provisions governing regulated operations, as we discuss in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

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 adoption of new accounting standards as we discuss in Note 2.

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) 2011-11, “Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11) and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (ASU 2013-01): In order to allow for balance sheet comparison between U.S. GAAP and International Financial Reporting Standards (IFRS), ASU 2011-11 requires enhanced disclosures related to financial assets and liabilities eligible for offsetting in the statement of financial position. An entity must 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.

ASU 2013-01 clarifies that the scope of ASU 2011-11 applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions.

We adopted ASU 2011-11 and ASU 2013-01 on January 1, 2013 as required and it did not affect our financial condition, results of operations or cash flows. We provide the additional disclosure in Note 7.

ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02): ASU 2013-02 requires an entity to present, either on the face of the statement of operations or in the notes to financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.

We adopted ASU 2013-02 on January 1, 2013 as required and it did not affect our financial condition, results of operations or cash flows. We provide the additional disclosure in Note 5.

ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (ASU 2013-04): ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in the ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.

We will adopt ASU 2013-04 on January 1, 2014 as required and do not expect it to affect our financial condition, results of operations or cash flows. We will provide the additional disclosure in our 2014 interim financial statements.

ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (ASU 2013-11): ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes, an entity is required to present the unrecognized tax benefit in the financial statements as a liability instead of combined with deferred tax assets.

We will adopt ASU 2013-11 on January 1, 2014 as required and do not expect it to significantly affect our financial condition, results of operations or cash flows.

NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY

SEMPRA RENEWABLES

In July 2013, Sempra Renewables formed a joint venture with Consolidated Edison Development (ConEdison Development), a non-related party, by selling a 50-percent interest in its 150-megawatt (MW) Copper Mountain Solar 2 solar power facility for $71 million in cash, subject to a final purchase price adjustment that we do not expect to be significant. Sempra Renewables recognized a pretax gain on the sale of $4 million ($2 million after-tax), included in Gain on Sale of Assets on our Condensed Consolidated Statements of Operations. Our remaining 50-percent interest in Copper Mountain Solar 2 is now accounted for under the equity method.

In September 2013, Sempra Renewables formed another joint venture with ConEdison Development by selling a 50-percent interest in its 150-MW Mesquite Solar 1 solar power facility for $103 million in cash, subject to a final purchase price adjustment that we do not expect to be significant. Sempra Renewables recognized a pretax gain on the sale of $36 million ($22 million after-tax), included in Gain on Sale of Assets on our Condensed Consolidated Statements of Operations. Our remaining 50-percent interest in Mesquite Solar 1 is now accounted for under the equity method.

Our equity method investments in Copper Mountain Solar 2 and Mesquite Solar 1 were measured at their historical cost and, therefore, no portion of the gains was attributable to a remeasurement of the retained investments to fair value. The following table summarizes the deconsolidation:


(Dollars in millions)		Copper Mountain Solar 2		Mesquite Solar 1
Proceeds from sale, net of transaction costs(1)		$	68	$	100
Property, plant and equipment, net			(266)		(461)
Other assets			(30)		(72)
Long-term debt, including current portion			146		297
Other liabilities			19		31
Gain on sale of assets			(4)		(36)
Equity method investments upon deconsolidation		$	(67)	$	(141)
(1)	Transaction costs were $3 million at both Copper Mountain Solar 2 and Mesquite Solar 1.

In September 2013, Sempra Renewables acquired the rights to develop the 75-MW Broken Bow 2 Wind project in Custer County, Nebraska. Sempra Renewables will develop the project, which is expected to be operational in late 2014.

SEMPRA NATURAL GAS

Mesquite Power Sale

In February 2013, Sempra Natural Gas sold one 625-MW block of its 1,250-MW Mesquite Power natural gas-fired power plant in Arizona, including a portion related to common plant, for approximately $371 million in cash to the Salt River Project Agricultural Improvement and Power District (SRP). The asset was classified as held for sale at December 31, 2012 and we recognized a pretax gain on the sale of $74 million ($44 million after-tax) in 2013. In connection with the sale, we entered into a 20-year operations and maintenance agreement with SRP on February 28, 2013, whereby SRP assumed plant operations and maintenance of the facility, including our remaining 625-MW block. We provide additional information concerning the operations and maintenance agreement in Note 10.

Willmut Gas Company

In May 2012, Sempra Natural Gas acquired 100 percent of the outstanding common stock of Willmut Gas, a regulated natural gas distribution utility serving approximately 20,000 customers in Hattiesburg, Mississippi, for $19 million in cash and the assumption of $10 million of liabilities. Pro forma impacts on revenues and earnings for Sempra Energy had the acquisition occurred on January 1, 2011 were additional revenues of $7 million and negligible earnings for the nine months ended September 30, 2012.

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 SOUTH AMERICAN UTILITIES

Sempra South American Utilities previously owned 43 percent of two Argentine natural gas utility holding companies, Sodigas Pampeana and Sodigas Sur. In December 2006, we decided to sell our Argentine investments and actively pursued their sale since that time. In the first quarter of 2013, we recorded a noncash impairment charge of $10 million ($7 million after-tax) to reduce the carrying value of our investments to estimated fair value. The net charge is reported in Equity Earnings, Net of Income Tax on the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2013. In June 2013, we completed the sale of our Argentine investments for $13 million in cash. Our results for the nine months ended September 30, 2013 include an additional $7 million loss ($4 million after-tax) on the sale, which is also included in Equity Earnings, Net of Income Tax. We provide additional information concerning our investments in Sodigas Pampeana and Sodigas Sur in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

As a result of the devaluation of the Argentine peso at the end of 2001 and subsequent changes in the value of the peso, Sempra South American Utilities had reduced the carrying value of its investments by a cumulative total of $270 million prior to the sale. These noncash adjustments, based on fluctuations in the value of the Argentine peso, did not affect earnings, but were recorded in Comprehensive Income and Accumulated Other Comprehensive Income (Loss). As a result of the sale of our investments, this cumulative foreign currency translation adjustment was reclassified to Equity Earnings, Net of Income Tax, where it was substantially offset by the elimination of a $250 million accrued liability established in 2006.

Chilquinta Energía has entered into two 50-percent owned joint ventures, Eletrans S.A. and Eletrans II S.A. (collectively, Eletrans), with Sociedad Austral de Electricidad Sociedad Anónima (SAESA) to construct four transmission lines in Chile. In 2013, Eletrans entered into forward exchange contracts to manage the foreign currency exchange rate risk of the Chilean Unidad de Fomento (CLF) relative to the U.S. dollar, related to certain construction commitments that are denominated in CLF. The forward exchange contracts settle based on anticipated payments to vendors, generally monthly, ending in July 2018. We recorded a negligible amount of equity earnings in the three months ended September 30, 2013 and $3 million of equity losses in the nine months ended September 30, 2013 related to these forward contracts in Equity Earnings, Net of Income Tax on the Condensed Consolidated Statements of Operations.

SEMPRA RENEWABLES

Sempra Renewables invested $5 million and $296 million in its wind generation joint ventures in the nine months ended September 30, 2013 and 2012, respectively.

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 the Rocky Mountains region to the upper Midwest and the eastern United States. In November 2012, Kinder Morgan Energy Partners L.P. (KMP) sold its 50-percent interest in Rockies Express, as part of a larger asset group, to Tallgrass Energy Partners, L.P. (Tallgrass). Phillips 66 owns the remaining interest of 25 percent. Our total investment in Rockies Express is accounted for as an equity method investment.

The general partner of KMP is Kinder Morgan, Inc. (KMI). As a condition of KMI receiving antitrust approval from the Federal Trade Commission (FTC) for its acquisition of El Paso Corporation, KMI agreed to divest certain assets in its natural gas pipeline group. Included in the asset group, as noted above, was KMP’s interest in Rockies Express. KMP recorded remeasurement losses during 2012 associated with these operations (classified as discontinued operations by KMP). We have recorded impairments of our partnership investment in Rockies Express of $300 million ($179 million after-tax) in the quarter ended June 30, 2012 and an additional $100 million ($60 million after-tax) in the quarter ended September 30, 2012, which are included in Equity Earnings (Losses), Before Income Tax on the Condensed Consolidated Statements of Operations. Our remaining carrying value in Rockies Express as of September 30, 2013 is $330 million. We discuss the fair value measurement of our investment in Rockies Express in Note 11 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 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 2010 and early 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. In accordance with the Letter Agreement, we received a distribution of $50 million in May 2013. The investment balance of $76 million at September 30, 2013 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.

We recorded no equity earnings or losses related to the partnership for either the three months or nine months ended September 30, 2013 and 2012.

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

U.S. TREASURY GRANTS RECEIVABLE

At December 31, 2012, we had recognized receivables for U.S. Treasury grants based on eligible costs at our Mesquite Solar 1 and Copper Mountain Solar 2 generating facilities when the projects, or portions of projects, were placed into service. During the first quarter of 2013, the federal government imposed automatic federal budget cuts, known as “sequestration,” as required by The Budget Control Act of 2011. As a result, cash grant payments to eligible taxpayers for renewable energy projects were reduced, and we recorded a reduction to our grants receivable of $23 million and a reversal of income tax benefit of $5 million during the first quarter of 2013. In June 2013, we received $74 million in cash related to the Copper Mountain Solar 2 grant. We received $164 million in cash for the remaining grant receivable for Mesquite Solar 1 in August 2013.

INVENTORIES

The components of inventories by segment are as follows:

INVENTORY BALANCES
(Dollars in millions)
	Natural Gas				Liquefied Natural Gas				Materials and Supplies				Total
	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
SDG&E	$	5	$	3	$	―	$	―	$	73	$	79	$	78	$	82
SoCalGas		150		128		―		―		27		23		177		151
Sempra South American
Utilities		―		―		―		―		43		34		43		34
Sempra Mexico		―		―		3		8		16		8		19		16
Sempra Renewables		―		―		―		―		2		3		2		3
Sempra Natural Gas		133		109		5		8		6		5		144		122
Sempra Energy
Consolidated	$	288	$	240	$	8	$	16	$	167	$	152	$	463	$	408

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

Tolling Agreements

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 impact 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, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE, as we discuss below.

Otay Mesa VIE

SDG&E has an agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-MW generating facility. 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. SDG&E and Sempra Energy have consolidated Otay Mesa VIE since the second quarter of 2007. Otay Mesa VIE’s equity of $79 million at September 30, 2013 and $76 million at December 31, 2012 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 $337 million at September 30, 2013, 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 the respective entities 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 the one relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary as of September 30, 2013. 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. In addition, 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 operating units also enter into arrangements which could include variable interests. We evaluate these arrangements and applicable entities based upon the qualitative and quantitative analyses described above. Certain of these entities are service companies that are VIEs. As the primary beneficiary of these service companies, we consolidate them. In all other cases, we have determined that these contracts are not variable interests in a VIE and therefore are not subject to the U.S. GAAP requirements concerning the consolidation of VIEs.

The Condensed Consolidated Statements of Operations of Sempra Energy and SDG&E include the following amounts associated with Otay Mesa VIE. The amounts are net of eliminations of transactions between SDG&E and Otay Mesa VIE. The financial statements of other consolidated VIEs are not material to the financial statements of Sempra Energy. The captions on the table below generally correspond to SDG&E’s Condensed Consolidated Statements of Operations.

AMOUNTS ASSOCIATED WITH OTAY MESA VIE
(Dollars in millions)
	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012

Operating revenues
Electric	$	(4)	$	―	$	―	$	―
Natural gas		―		―		―		―
Total operating revenues		(4)		―		―		―
Operating expenses
Cost of electric fuel and purchased power		(27)		(26)		(65)		(66)
Operation and maintenance		7		4		33		15
Depreciation and amortization		7		7		20		19
Total operating expenses		(13)		(15)		(12)		(32)
Operating income		9		15		12		32
Other loss, net		―		―		―		(1)
Interest expense		(4)		(3)		(11)		(8)
Income before income taxes/Net income		5		12		1		23
Earnings attributable to noncontrolling interest		(5)		(12)		(1)		(23)
Earnings	$	―	$	―	$	―	$	―

We provide additional information regarding Otay Mesa VIE in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

ASSET RETIREMENT OBLIGATIONS

We discuss asset retirement obligations in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

The changes in asset retirement obligations are as follows:

CHANGES IN ASSET RETIREMENT OBLIGATIONS

(Dollars in millions)