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
   
 
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
     
         
1-03779
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
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 registrant was 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 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)