Sempra Energy/SDG&E/SoCalGas 03/31/2014 10-Q


  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2014
   
 
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 April 28, 2014:
         
           
Sempra Energy
245,426,641 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
66
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
96
Item 4.
Controls and Procedures
97
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
98
Item 1A.
Risk Factors
98
Item 6.
Exhibits
99
     
Signatures
101
     

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, including issuances of permits to construct and licenses for operation, 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 in obtaining permits, licenses, certificates and other authorizations on a timely basis and risks in obtaining adequate and competitive financing for such projects;
 
§  
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 and 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 that our partners or counterparties will be unable or unwilling to fulfill their contractual commitments;
 
§  
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 that threaten system operations and critical infrastructure, and cybersecurity threats to the energy grid and the confidentiality of our proprietary information and the personal information of our customers;
 
§  
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 (SDG&E) electric transmission and distribution system due to increased amount and variability of 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 SDG&E’s 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 March 31, 
 
 
2014 
2013 
 
 
(unaudited) 
REVENUES
 
 
 
 
Utilities
 2,485 
 2,334 
Energy-related businesses
 
 310 
 
 316 
    Total revenues
 
 2,795 
 
 2,650 
EXPENSES AND OTHER INCOME
 
 
 
 
Utilities:
 
 
 
 
    Cost of natural gas
 
 (620)
 
 (556)
    Cost of electric fuel and purchased power
 
 (510)
 
 (447)
Energy-related businesses:
 
 
 
 
    Cost of natural gas, electric fuel and purchased power
 
 (138)
 
 (111)
    Other cost of sales
 
 (38)
 
 (48)
Operation and maintenance
 
 (676)
 
 (724)
Depreciation and amortization
 
 (286)
 
 (295)
Franchise fees and other taxes
 
 (105)
 
 (106)
Gain on sale of equity interest and assets
 
 27 
 
 74 
Adjustment to loss from plant closure
 
 13 
 
 ― 
Equity earnings, before income tax
 
 17 
 
 10 
Other income, net
 
 40 
 
 37 
Interest income
 
 4 
 
 6 
Interest expense
 
 (136)
 
 (138)
Income before income taxes and equity earnings
 
 
 
 
    of certain unconsolidated subsidiaries
 
 387 
 
 352 
Income tax expense
 
 (127)
 
 (178)
Equity earnings, net of income tax
 
 6 
 
 4 
Net income
 
 266 
 
 178 
(Earnings) losses attributable to noncontrolling interests
 
 (19)
 
 2 
Preferred dividends of subsidiaries
 
 ― 
 
 (2)
Earnings
 247 
 178 
 
 
 
 
 
 
Basic earnings per common share
 1.01 
 0.73 
Weighted-average number of shares outstanding, basic (thousands)
 
 245,277 
 
 243,294 
 
 
 
 
 
 
Diluted earnings per common share
 0.99 
 0.72 
Weighted-average number of shares outstanding, diluted (thousands)
 
 249,669 
 
 247,534 
Dividends declared per share of common stock 
 0.66 
 0.63 
See Notes to Condensed Consolidated Financial Statements.

 

 

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
 
Three months ended March 31, 2014 and 2013 
 
 
(unaudited)
 
 
Sempra Energy Shareholders' Equity
 
 
 
 
 
 
Pretax 
Income Tax 
Net-of-Tax 
Noncontrolling 
 
 
 
Amount 
(Expense) Benefit 
Amount 
Interests (After-Tax) 
Total 
2014:
 
 
 
 
 
 
 
 
 
 
Net income
 374 
 (127)
 247 
 19 
 266 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
 
 (43)
 
 ― 
 
 (43)
 
 (2)
 
 (45)
    Pension and other postretirement benefits
 
 5 
 
 (2)
 
 3 
 
 ― 
 
 3 
    Financial instruments
 
 (8)
 
 3 
 
 (5)
 
 ― 
 
 (5)
    Total other comprehensive income (loss)
 
 (46)
 
 1 
 
 (45)
 
 (2)
 
 (47)
Comprehensive income
 328 
 (126)
 202 
 17 
 219 
2013:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 358 
 (178)
 180 
 (2)
 178 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
 
 10 
 
 ― 
 
 10 
 
 (4)
 
 6 
    Pension and other postretirement benefits
 
 5 
 
 (2)
 
 3 
 
 ― 
 
 3 
    Financial instruments
 
 (20)
 
 6 
 
 (14)
 
 3 
 
 (11)
    Total other comprehensive income (loss)
 
 (5)
 
 4 
 
 (1)
 
 (1)
 
 (2)
Comprehensive income (loss)
 
 353 
 
 (174)
 
 179 
 
 (3)
 
 176 
Preferred dividends of subsidiaries
 
 (2)
 
 ― 
 
 (2)
 
 ― 
 
 (2)
Comprehensive income (loss), after preferred
 
 
 
 
 
 
 
 
 
 
    dividends of subsidiaries
 351 
 (174)
 177 
 (3)
 174 
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31, 
December 31, 
 
2014 
2013(1)
 
 
(unaudited) 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
 844 
 904 
    Restricted cash
 
 26 
 
 24 
    Trade accounts receivable, net
 
 1,230 
 
 1,308 
    Other accounts and notes receivable, net
 
 175 
 
 214 
    Due from unconsolidated affiliates
 
 2 
 
 4 
    Income taxes receivable
 
 88 
 
 85 
    Deferred income taxes
 
 375 
 
 301 
    Inventories
 
 197 
 
 287 
    Regulatory balancing accounts – undercollected
 
 665 
 
 556 
    Other regulatory assets
 
 35 
 
 38 
    Fixed-price contracts and other derivatives
 
 114 
 
 106 
    Asset held for sale, power plant
 
 293 
 
 ― 
    Other
 
 180 
 
 170 
        Total current assets
 
 4,224 
 
 3,997 
 
 
 
 
 
 
Investments and other assets:
 
 
 
 
    Restricted cash
 
 27 
 
 25 
    Due from unconsolidated affiliate
 
 31 
 
 14 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 454 
 
 435 
    Other regulatory assets
 
 2,039 
 
 2,113 
    Nuclear decommissioning trusts
 
 1,055 
 
 1,034 
    Investments
 
 1,634 
 
 1,575 
    Goodwill
 
 999 
 
 1,024 
    Other intangible assets
 
 423 
 
 426 
    Sundry
 
 1,146 
 
 1,141 
        Total investments and other assets
 
 7,808 
 
 7,787 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 34,463 
 
 34,407 
    Less accumulated depreciation and amortization
 
 (9,011)
 
 (8,947)
        Property, plant and equipment, net ($431 and $438 at March 31, 2014 and
            December 31, 2013, respectively, related to VIE)
 
 25,452 
 
 25,460 
Total assets
 37,484 
 37,244 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
 
 
March 31, 
December 31, 
 
2014 
2013(1)
 
 
(unaudited) 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Short-term debt
 1,084 
 545 
    Accounts payable – trade
 
 1,062 
 
 1,088 
    Accounts payable – other
 
 138 
 
 127 
    Dividends and interest payable
 
 322 
 
 271 
    Accrued compensation and benefits
 
 260 
 
 376 
    Regulatory balancing accounts – overcollected
 
 88 
 
 91 
    Current portion of long-term debt
 
 97 
 
 1,147 
    Fixed-price contracts and other derivatives
 
 54 
 
 55 
    Customer deposits
 
 155 
 
 154 
    Other
 
 615 
 
 515 
        Total current liabilities
 
 3,875 
 
 4,369 
Long-term debt ($322 and $325 at March 31, 2014 and December 31, 2013, respectively,
     related to VIE)
 
 11,700 
 
 11,253 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 158 
 
 155 
    Pension and other postretirement benefit obligations, net of plan assets
 
 679 
 
 667 
    Deferred income taxes
 
 2,958 
 
 2,804 
    Deferred investment tax credits
 
 41 
 
 42 
    Regulatory liabilities arising from removal obligations
 
 2,624 
 
 2,623 
    Asset retirement obligations
 
 2,127 
 
 2,084 
    Fixed-price contracts and other derivatives
 
 238 
 
 228 
    Deferred credits and other
 
 1,195 
 
 1,169 
        Total deferred credits and other liabilities
 
 10,020 
 
 9,772 
 
 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
    Preferred stock (50 million shares authorized; none issued)
 
 ― 
 
 ― 
    Common stock (750 million shares authorized; 245 million and 244 million shares
 
 
 
 
        outstanding at March 31, 2014 and December 31, 2013, respectively; no par value)
 
 2,401 
 
 2,409 
    Retained earnings
 
 8,912 
 
 8,827 
    Accumulated other comprehensive income (loss)
 
 (273)
 
 (228)
        Total Sempra Energy shareholders’ equity
 
 11,040 
 
 11,008 
    Preferred stock of subsidiary
 
 20 
 
 20 
    Other noncontrolling interests
 
 829 
 
 822 
        Total equity
 
 11,889 
 
 11,850 
Total liabilities and equity
 37,484 
 37,244 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
 
Three months ended March 31, 
 
 
2014 
2013 
 
 
(unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
 266 
 178 
    Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
 286 
 
 295 
        Deferred income taxes and investment tax credits
 
 95 
 
 252 
        Gain on sale of equity interest and assets
 
 (27)
 
 (74)
        Adjustment to loss from plant closure
 
 (13)
 
 ― 
        Equity earnings
 
 (23)
 
 (14)
        Fixed-price contracts and other derivatives
 
 (3)
 
 17 
        Other
 
 (24)
 
 6 
    Net change in other working capital components
 
 234 
 
 149 
    Changes in other assets
 
 94 
 
 17 
    Changes in other liabilities
 
 19 
 
 9 
        Net cash provided by operating activities
 
 904 
 
 835 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (801)
 
 (531)
    Expenditures for investments
 
 (12)
 
 (5)
    Proceeds from sale of equity interest and assets, net of cash sold
 
 66 
 
 371 
    Distributions from investments
 
 3 
 
 15 
    Purchases of nuclear decommissioning and other trust assets
 
 (198)
 
 (136)
    Proceeds from sales by nuclear decommissioning and other trusts
 
 195 
 
 134 
    Decrease in restricted cash
 
 23 
 
 52 
    Increase in restricted cash
 
 (27)
 
 (60)
    Advances to unconsolidated affiliates
 
 (17)
 
 ― 
    Other
 
 (2)
 
 (2)
        Net cash used in investing activities
 
 (770)
 
 (162)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Common dividends paid
 
 (154)
 
 (145)
    Preferred dividends paid by subsidiaries
 
 ― 
 
 (2)
    Issuances of common stock
 
 11 
 
 15 
    Repurchases of common stock
 
 (37)
 
 (45)
    Issuances of debt (maturities greater than 90 days)
 
 1,188 
 
 608 
    Payments on debt (maturities greater than 90 days)
 
 (1,138)
 
 (645)
    Proceeds from sale of noncontrolling interests, net of $25 in offering costs
 
 ― 
 
 574 
    Decrease in short-term debt, net
 
 (69)
 
 (43)
    Other
 
 6 
 
 3 
        Net cash (used in) provided by financing activities
 
 (193)
 
 320 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
 (1)
 
 3 
 
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
 (60)
 
 996 
Cash and cash equivalents, January 1
 
 904 
 
 475 
Cash and cash equivalents, March 31
 844 
 1,471 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
 
 
Three months ended March 31, 
 
2014 
2013 
 
(unaudited) 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
 91 
 87 
    Income tax payments, net of refunds
 
 41 
 
 14 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
 
    Accrued capital expenditures
 249 
 275 
    Increase in capital lease obligations for investment in property, plant and equipment
 
 60 
 
 ― 
    Capital expenditures recoverable by U.S. Treasury grants receivable
 
 ― 
 
 1 
    Sequestration of U.S. Treasury grants receivable
 
 ― 
 
 (23)
    Dividends declared but not paid
 
 168 
 
 160 
   Financing of build-to-suit property
 
 
 ― 
See Notes to Condensed Consolidated Financial Statements.
 

 
 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
Three months ended March 31, 
 
2014 
2013 
 
(unaudited) 
Operating revenues
 
 
 
 
    Electric
$
 811 
$
 772 
    Natural gas
 
 176 
 
 167 
        Total operating revenues
 
 987 
 
 939 
Operating expenses
 
 
 
 
    Cost of electric fuel and purchased power
 
 266 
 
 209 
    Cost of natural gas
 
 75 
 
 76 
    Operation and maintenance
 
 252 
 
 297 
    Depreciation and amortization
 
 130 
 
 134 
    Franchise fees and other taxes
 
 56 
 
 55 
    Adjustment to loss from plant closure
 
 (13)
 
 ― 
        Total operating expenses
 
 766 
 
 771 
Operating income
 
 221 
 
 168 
Other income, net
 
 13 
 
 11 
Interest income
 
 ― 
 
 1 
Interest expense
 
 (50)
 
 (48)
Income before income taxes
 
 184 
 
 132 
Income tax expense
 
 (83)
 
 (51)
Net income
 
 101 
 
 81 
(Earnings) losses attributable to noncontrolling interest
 
 (2)
 
 11 
Earnings
 
 99 
 
 92 
Preferred dividend requirements
 
 ― 
 
 (1)
Earnings attributable to common shares
$
 99 
$
 91 
See Notes to Condensed Consolidated Financial Statements.

 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Three months ended March 31, 2014 and 2013 
 
(unaudited)
 
SDG&E Shareholder's Equity 
 
 
 
Pretax 
Income Tax 
Net-of-Tax 
Noncontrolling 
 
 
Amount 
(Expense) Benefit 
Amount 
Interest (After-Tax) 
Total 
2014:
 
 
 
 
 
 
 
 
 
 
Net income/Comprehensive income
$
182 
$
(83)
$
99 
$
$
101 
2013:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 143 
 (51)
 92 
 (11)
 81 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
    Financial instruments
 
 ― 
 
 ― 
 
 ― 
 
 3 
 
 3 
    Total other comprehensive income
 
 ― 
 
 ― 
 
 ― 
 
 3 
 
 3 
Comprehensive income (loss)
 143 
 (51)
 92 
 (8)
 84 
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31, 
December 31, 
 
 
2014 
2013(1)
 
 
(unaudited) 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
 12 
 27 
    Restricted cash
 
 4 
 
 6 
    Accounts receivable – trade, net
 
 272 
 
 266 
    Accounts receivable – other, net
 
 19 
 
 28 
    Due from unconsolidated affiliates
 
 12 
 
 1 
    Income taxes receivable
 
 6 
 
 32 
    Deferred income taxes
 
 188 
 
 103 
    Inventories
 
 76 
 
 86 
    Regulatory balancing accounts, net
 
 665 
 
 556 
    Other regulatory assets
 
 29 
 
 29 
    Fixed-price contracts and other derivatives
 
 64 
 
 61 
    Other
 
 66 
 
 75 
        Total current assets
 
 1,413 
 
 1,270 
 
 
 
 
 
 
Other assets:
 
 
 
 
    Restricted cash
 
 27 
 
 25 
    Deferred taxes recoverable in rates
 
 749 
 
 788 
    Regulatory assets arising from fixed-price contracts and other derivatives
 
 62 
 
 63 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 111 
 
 106 
    Other regulatory assets
 
 948 
 
 991 
    Nuclear decommissioning trusts
 
 1,055 
 
 1,034 
    Sundry
 
 255 
 
 254 
        Total other assets
 
 3,207 
 
 3,261 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 14,606 
 
 14,346 
    Less accumulated depreciation and amortization
 
 (3,592)
 
 (3,500)
        Property, plant and equipment, net ($431 and $438 at March 31, 2014 and
            December 31, 2013, respectively, related to VIE)
 
 11,014 
 
 10,846 
Total assets
 15,634 
 15,377 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
 
 
March 31, 
December 31, 
 
 
2014 
2013(1)
 
 
(unaudited) 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Short-term debt
$
 90 
$
 59 
    Accounts payable
 
 337 
 
 420 
    Due to unconsolidated affiliates
 
 35 
 
 39 
    Dividends and interest payable
 
 51 
 
 39 
    Accrued compensation and benefits
 
 75 
 
 113 
    Current portion of long-term debt
 
 30 
 
 29 
    Fixed-price contracts and other derivatives
 
 38 
 
 38 
    Customer deposits
 
 71 
 
 71 
    Other
 
 310 
 
 271 
        Total current liabilities
 
 1,037 
 
 1,079 
Long-term debt ($322 and $325 at March 31, 2014 and December 31, 2013,
    respectively, related to VIE)
 
 4,580 
 
 4,525 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 37 
 
 34 
    Pension and other postretirement benefit obligations, net of plan assets
 
 138 
 
 132 
    Deferred income taxes
 
 2,107 
 
 2,021 
    Deferred investment tax credits
 
 23 
 
 24 
    Regulatory liabilities arising from removal obligations
 
 1,428 
 
 1,403 
    Asset retirement obligations
 
 872 
 
 861 
    Fixed-price contracts and other derivatives
 
 172 
 
 175 
    Deferred credits and other
 
 426 
 
 404 
        Total deferred credits and other liabilities
 
 5,203 
 
 5,054 
 
 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
    Common stock (255 million shares authorized; 117 million shares outstanding;
 
 
 
 
        no par value)
 
 1,338 
 
 1,338 
    Retained earnings
 
 3,398 
 
 3,299 
    Accumulated other comprehensive income (loss)
 
 (9)
 
 (9)
        Total SDG&E shareholder's equity
 
 4,727 
 
 4,628 
    Noncontrolling interest
 
 87 
 
 91 
        Total equity
 
 4,814 
 
 4,719 
Total liabilities and equity
 15,634 
 15,377 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended
March 31, 
 
2014 
2013
 
(unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
 101 
 81 
    Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
 130 
 
 134 
        Deferred income taxes and investment tax credits
 
 57 
 
 36 
        Adjustment to loss from plant closure
 
 (13)
 
 ― 
        Fixed-price contracts and other derivatives
 
 (2)
 
 (2)
        Other
 
 (9)
 
 5 
    Net change in other working capital components
 
 (76)
 
 (2)
    Changes in other assets
 
 63 
 
 4 
    Changes in other liabilities
 
 10 
 
 8 
        Net cash provided by operating activities
 
 261 
 
 264 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (294)
 
 (237)
    Purchases of nuclear decommissioning trust assets
 
 (198)
 
 (135)
    Proceeds from sales by nuclear decommissioning trusts
 
 195 
 
 134 
    Decrease in restricted cash
 
 10 
 
 17 
    Increase in restricted cash
 
 (10)
 
 (19)
        Net cash used in investing activities
 
 (297)
 
 (240)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Preferred dividends paid
 
 ― 
 
 (1)
    Payments on long-term debt
 
 (3)
 
 (3)
    Increase in short-term debt, net
 
 31 
 
 ― 
    Capital distribution made by Otay Mesa VIE
 
 (7)
 
 (1)
        Net cash provided by (used in) financing activities
 
 21 
 
 (5)
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
 (15)
 
 19 
Cash and cash equivalents, January 1
 
 27 
 
 87 
Cash and cash equivalents, March 31
 12 
 106 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
 36 
 28 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
 
    Accrued capital expenditures
 99 
 102 
    Increase in capital lease obligations for investment in property, plant and equipment
 
 60 
 
 ― 
    Dividends declared but not paid
 
 ― 
 
 1 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
Three months ended March 31, 
 
2014 
2013 
 
(unaudited) 
 
 
 
 
 
Operating revenues
$
 1,085 
$
 983 
Operating expenses
 
 
 
 
    Cost of natural gas
 
 508 
 
 454 
    Operation and maintenance
 
 305 
 
 306 
    Depreciation and amortization
 
 105 
 
 100 
    Franchise fees and other taxes
 
 38 
 
 40 
        Total operating expenses
 
 956 
 
 900 
Operating income
 
 129 
 
 83 
Other income, net
 
 4 
 
 4 
Interest expense
 
 (17)
 
 (17)
Income before income taxes
 
 116 
 
 70 
Income tax expense
 
 (38)
 
 (24)
Net income/Earnings attributable to common shares
 78 
 46 
See Notes to Condensed Consolidated Financial Statements.
 

 

SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Three months ended March 31, 2014 and 2013 
 
(unaudited)
 
 
 
 
 
 
 
 
Pretax 
Income Tax 
Net-of-Tax 
 
Amount
(Expense) Benefit
Amount
2014:
 
 
 
 
 
 
Net income/Comprehensive income
 116 
 (38)
 78 
2013:
 
 
 
 
 
 
Net income/Comprehensive income
 70 
 (24)
 46 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31, 
December 31, 
 
 
2014 
2013(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
 32 
 27 
    Accounts receivable – trade, net
 
 557 
 
 595 
    Accounts receivable – other, net
 
 55 
 
 97 
    Due from unconsolidated affiliates
 
 104 
 
 21 
    Income taxes receivable
 
 41 
 
 25 
    Inventories
 
 45 
 
 69 
    Regulatory assets
 
 6 
 
 5 
    Other
 
 39 
 
 34 
        Total current assets
 
 879 
 
 873 
 
 
 
 
 
Other assets:
 
 
 
 
    Regulatory assets arising from pension obligations
 
 341 
 
 326 
    Other regulatory assets
 
 272 
 
 262 
    Other postretirement benefit plan assets, net of plan liabilities
 
 95 
 
 95 
    Sundry
 
 126 
 
 124 
        Total other assets
 
 834 
 
 807 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 12,041 
 
 11,831 
    Less accumulated depreciation and amortization
 
 (4,423)
 
 (4,364)
        Property, plant and equipment, net
 
 7,618 
 
 7,467 
Total assets
 9,331 
 9,147 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
 
 
March 31, 
December 31, 
 
 
2014 
2013(1)
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Short-term debt
 ― 
 42 
    Accounts payable – trade
 
 410 
 
 346 
    Accounts payable – other
 
 79 
 
 79 
    Due to unconsolidated affiliates
 
 11 
 
 16 
    Deferred income taxes
 
 75 
 
 45 
    Accrued compensation and benefits
 
 107 
 
 141 
    Regulatory balancing accounts, net
 
 88 
 
 91 
    Current portion of long-term debt
 
 1 
 
 252 
    Customer deposits
 
 75 
 
 75 
    Other
 
 175 
 
 125 
        Total current liabilities
 
 1,021 
 
 1,212 
Long-term debt
 
 1,408 
 
 1,159 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 108 
 
 108 
    Pension obligation, net of plan assets
 
 354 
 
 339 
    Regulatory liabilities arising from other postretirement benefit assets
 
 95 
 
 95 
    Deferred income taxes
 
 1,014 
 
 993 
    Deferred investment tax credits
 
 18 
 
 18 
    Regulatory liabilities arising from removal obligations
 
 1,180 
 
 1,205 
    Asset retirement obligations
 
 1,220 
 
 1,182 
    Deferred credits and other
 
 286 
 
 287 
        Total deferred credits and other liabilities
 
 4,275 
 
 4,227 
 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
    Preferred stock
 
 22 
 
 22 
    Common stock (100 million shares authorized; 91 million shares outstanding;
 
 
 
 
        no par value)
 
 866 
 
 866 
    Retained earnings
 
 1,757 
 
 1,679 
    Accumulated other comprehensive income (loss)
 
 (18)
 
 (18)
        Total shareholders' equity
 
 2,627 
 
 2,549 
Total liabilities and shareholders' equity
 9,331 
 9,147 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended March 31, 
 
2014 
2013 
 
(unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
 78 
 46 
    Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
 105 
 
 100 
        Deferred income taxes and investment tax credits
 
 26 
 
 18 
    Net change in other working capital components
 
 197 
 
 250 
    Changes in other assets
 
 18 
 
 3 
    Changes in other liabilities
 
 3 
 
 (6)
        Net cash provided by operating activities
 
 427 
 
 411 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (260)
 
 (179)
    Increase in loans to affiliates, net
 
 (117)
 
 (243)
        Net cash used in investing activities
 
 (377)
 
 (422)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Issuance of long-term debt
 
 248 
 
 ― 
    Repayment of long-term debt
 
 (250)
 
 ― 
    Decrease in short-term debt, net
 
 (42)
 
 ― 
    Other
 
 (1)
 
 ― 
        Net cash used in financing activities
 
 (45)
 
 ― 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
 5 
 
 (11)
Cash and cash equivalents, January 1
 
 27 
 
 83 
Cash and cash equivalents, March 31
 32 
 72 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
 12 
 12 
    Income tax payments, net of refunds
 
 30 
 
 ― 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
 
 
 
 
    Accrued capital expenditures
 111 
 76 
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 12.
 
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.
 
Our Sempra Mexico segment includes the operating companies of our subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), as well as certain holding companies and risk management activity. We discuss IEnova further in Note 5 under “Shareholders’ Equity and Noncontrolling Interests – Sale of Noncontrolling Interests.”
 
Sempra Energy uses the equity method to account for investments in affiliated companies over which we have the ability to exercise significant influence, but not control. We discuss our investments in unconsolidated entities in Note 4 herein and in Notes 3 and 4 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 (the Annual Report), which includes the combined reports for Sempra Energy, SDG&E and SoCalGas.
 
 
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 accounts and the de minimus accounts of inactive subsidiaries. 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 of America (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 March 31, 2014 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, 2013 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2013 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 the Annual Report.
 
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 México, 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) 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 adopted ASU 2013-11 on January 1, 2014 as required, and it did not significantly affect our financial condition, results of operations or cash flows.

 
 

NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY
 

 
SEMPRA RENEWABLES
 
In March 2014, Sempra Renewables formed a joint venture with Consolidated Edison Development (ConEdison Development), a non-related party, by selling a 50-percent interest in its 250-megawatt (MW) Copper Mountain Solar 3 solar power facility for $66 million in cash, net of $2 million cash sold, 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 $27 million ($16 million after-tax), included in Gain on Sale of Equity Interest and Assets on our Condensed Consolidated Statement of Operations for the three months ended March 31, 2014. Our remaining 50-percent interest in Copper Mountain Solar 3 is now accounted for under the equity method. We measured our equity method investment in Copper Mountain Solar 3 at historical cost and, therefore, no portion of the gain was attributable to a remeasurement of the retained investment to fair value.
 
The following table summarizes the deconsolidation:
 

DECONSOLIDATION OF SUBSIDIARY
(Dollars in millions)
 
Copper Mountain Solar 3
Proceeds from sale, net of negligible transaction costs
$
 68 
Cash
 
 (2)
Property, plant and equipment, net
 
 (247)
Other assets
 
 (11)
Accounts payable and accrued expenses
 
 82 
Long-term debt, including current portion
 
 97 
Other long-term liabilities
 
 3 
Accumulated other comprehensive income
 
 (2)
Gain on sale of equity interest and assets
 
 (27)
Equity method investment upon deconsolidation
$
 (39)
 
 
 
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). We recognized a pretax gain on the sale of $74 million ($44 million after-tax), included in Gain on Sale of Equity Interest and Assets on our Condensed Consolidated Statement of Operations for the three months ended March 31, 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 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 
 
Asset Held for Sale, Power Plant
 
In January 2014, management approved a formal plan to market and sell the remaining 625-MW block of the Mesquite Power plant. We expect to complete the sale in 2014.
 
We classify assets as held for sale when management approves and commits to a formal plan to actively market an asset for sale and we expect the sale to close within the next twelve months. Upon classifying an asset as held for sale, we record the asset at the lower of its carrying value or its estimated fair value reduced for selling costs, and we stop recording depreciation expense on the asset.
 
At March 31, 2014, the carrying amount of the major classes of assets and related liability held for sale associated with the plant includes the following:
 

(Dollars in millions)
Property, plant and equipment, net
$
 290 
Inventories
 
 3 
   Total assets held for sale
 
 293 
Liability held for sale - asset retirement obligation(1)
 
 (6)
   Total
$
 287 
(1)
Included in Other Current Liabilities on the Condensed Consolidated Balance Sheet.

The estimated fair value, including estimated costs to sell, exceeds the carrying amount at March 31, 2014.

 
 

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 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 at that time. The net charge is reported in Equity Earnings, Net of Income Tax on the Condensed Consolidated Statement of Operations for the three months ended March 31, 2013.
 
 
SEMPRA RENEWABLES
 
In March 2014, Sempra Renewables and ConEdison Development entered into an agreement to partner in four solar projects in California. The projects include ConEdison Development’s CED California Holdings, LLC portfolio, which consists of the 50-MW Alpaugh 50, the 20-MW Alpaugh North and the 20-MW White River 1 facilities in Tulare County, and the 20-MW Corcoran 1 facility in Kings County (collectively, the California solar partnership). The renewable power from all of the projects has been sold under long-term contracts. The agreement is subject to regulatory approvals. Upon consummation of the transaction under the agreement, Sempra Renewables and ConEdison Development will each own a 50-percent interest in the four solar facilities.
 
Sempra Renewables invested $51 million (which included $39 million that was deconsolidated upon the formation of the Copper Mountain Solar 3 joint venture, as we discuss in Note 3) and $5 million in its solar and wind generation joint ventures in the three months ended March 31, 2014 and 2013, respectively.
 
 
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, if any, in Equity Earnings, Before Income Tax on our Condensed Consolidated Statements of Operations.
 
The investment balance of $73 million at March 31, 2014 reflects remaining distributions expected to be received from the partnership in accordance with provisions of a 2011 agreement between us and RBS that addresses the wind-down of the partnership and the distribution of the partnership’s remaining assets. The timing and amount of distributions may be impacted by the matters we discuss related to RBS Sempra Commodities in Note 11 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.
 
We recorded no equity earnings or losses related to the partnership for the three months ended March 31, 2014 and 2013.
 

 

NOTE 5. OTHER FINANCIAL DATA
 

 
U.S. TREASURY GRANTS
 
At December 31, 2012, we had receivables for U.S. Treasury grants based on eligible costs at certain of our renewable generating facilities. 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, 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. The remaining grants receivable were received in the second and third quarters of 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 
 
 
March 31,
2014
December 31,
2013
March 31,
2014
December 31,
2013
March 31,
2014
December 31,
2013
March 31,
2014
December 31,
2013
SDG&E
$
 4 
$
 3 
$
 ― 
$
 ― 
$
 72 
$
 83 
$
 76 
$
 86 
SoCalGas
 
 17 
 
 42 
 
 ― 
 
 ― 
 
 28 
 
 27 
 
 45 
 
 69 
Sempra South American
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Utilities
 
 ― 
 
 ― 
 
 ― 
 
 ― 
 
 39 
 
 40 
 
 39 
 
 40 
Sempra Mexico
 
 ― 
 
 ― 
 
 4 
 
 3 
 
 9 
 
 9 
 
 13 
 
 12 
Sempra Renewables
 
 ― 
 
 ― 
 
 ― 
 
 ― 
 
 2 
 
 2 
 
 2 
 
 2 
Sempra Natural Gas
 
 16 
 
 68 
 
 5 
 
 5 
 
 1 
 
 5 
 
 22 
 
 78 
Sempra Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Consolidated
$
 37 
$
 113 
$
 9 
$
 8 
$
 151 
$
 166 
$
 197 
$
 287 
 
 
 
 
GOODWILL
 
We discuss goodwill in Notes 1 and 3 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $1.024 billion at December 31, 2013 to $999 million at March 31, 2014 is due to foreign currency translation at Sempra South American Utilities. We record the offset of this fluctuation in Other Comprehensive Income (Loss).
 
 
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 a qualitative approach in which we consider 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 $87 million at March 31, 2014 and $91 million at December 31, 2013 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 $332 million at March 31, 2014, 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 at March 31, 2014. 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 March 31, 
 
2014 
2013 
 
 
 
 
 
Operating revenues
 
 
 
 
    Electric
 ― 
 (1)
    Natural gas
 
 ― 
 
 ― 
        Total operating revenues
 
 ― 
 
 (1)
Operating expenses
 
 
 
 
    Cost of electric fuel and purchased power
 
 (18)
 
 (17)
    Operation and maintenance
 
 5 
 
 17 
    Depreciation and amortization
 
 7 
 
 7 
        Total operating expenses
 
 (6)
 
 7 
Operating income (loss)
 
 6 
 
 (8)
Interest expense
 
 (4)