Sempra Energy/SDG&E/SoCalGas 03/31/2015 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, 2015
   
 
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 29, 2015:
          
           
Sempra Energy
247,580,092 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
6
  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
67
  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
98
  
Item 4.
Controls and Procedures
99
  
       
PART II – OTHER INFORMATION
    
Item 1.
Legal Proceedings
100
  
Item 1A.
Risk Factors
100
  
Item 6.
Exhibits
100
  
       
Signatures
103
  
       
 
 
 
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,” “confident,”  “may,” “potential,” “possible,” “proposed,” “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, U.S. Environmental Protection Agency, California Air Resources Board, and other regulatory, governmental and environmental bodies in the United States and other countries in which we operate;
 
§  
the timing and success of business development efforts and construction, maintenance and capital projects, including risks in obtaining, maintaining or extending permits, licenses, certificates and other authorizations on a timely basis and risks in obtaining adequate and competitive financing for such projects;
 
§  
energy markets, including the timing and extent of changes and volatility in commodity prices, and the impact of any protracted reduction in oil prices from historical averages;
 
§  
the impact on the value of our natural gas storage assets from low natural gas prices, low volatility of natural gas prices and the inability to procure favorable long-term contracts for natural gas storage services;
 
§  
delays in the timing of costs incurred and the timing of the regulatory agency authorization to recover such costs in rates from customers;
 
§  
capital markets conditions, including the availability of credit and the liquidity of our investments;
 
§  
inflation, interest and currency exchange rates;
 
§  
the impact of benchmark interest rates, generally Moody’s A-rated utility bond yields, on our California Utilities’ cost of capital;
 
§  
the availability of electric power, natural gas and liquefied natural gas, and natural gas pipeline and storage capacity, 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);
 
§  
cybersecurity threats to the energy grid, natural gas storage and pipeline infrastructure, the information and systems used to operate our businesses and the confidentiality of our proprietary information and the personal information of our customers, terrorist attacks that threaten system operations and critical infrastructure, and wars;
 
§  
the ability to win competitively bid infrastructure projects against a number of strong competitors willing to aggressively bid for these projects;
 
§  
weather conditions, conservation efforts, natural disasters, catastrophic accidents, and other events that may disrupt our operations, damage our facilities and systems, and subject us to third-party liability for property damage or personal injuries;
 
§  
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;
 
§  
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;
 
§  
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 due to insufficient market interest, unattractive pricing or other factors;
 
§  
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 herein 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,
   
2015
2014
   
(unaudited)
REVENUES
        
Utilities
$
2,422
$
2,485
Energy-related businesses
  
260
  
310
    Total revenues
  
2,682
  
2,795
EXPENSES AND OTHER INCOME
        
Utilities:
        
    Cost of natural gas
  
(346)
  
(620)
    Cost of electric fuel and purchased power
  
(481)
  
(510)
Energy-related businesses:
        
    Cost of natural gas, electric fuel and purchased power
  
(98)
  
(138)
    Other cost of sales
  
(35)
  
(38)
Operation and maintenance
  
(658)
  
(676)
Depreciation and amortization
  
(303)
  
(286)
Franchise fees and other taxes
  
(107)
  
(105)
Plant closure adjustment
  
21
  
13
Gain on sale of equity interest
  
―
  
27
Equity earnings, before income tax
  
19
  
17
Other income, net
  
39
  
40
Interest income
  
7
  
4
Interest expense
  
(134)
  
(136)
Income before income taxes and equity earnings
        
    of certain unconsolidated subsidiaries
  
606
  
387
Income tax expense
  
(163)
  
(127)
Equity earnings, net of income tax
  
15
  
6
Net income
  
458
  
266
Earnings attributable to noncontrolling interests
  
(21)
  
(19)
Earnings
$
437
$
247
           
Basic earnings per common share
$
1.76
$
1.01
           
Weighted-average number of shares outstanding, basic (thousands)
  
247,722
  
245,277
           
Diluted earnings per common share
$
1.74
$
0.99
           
Weighted-average number of shares outstanding, diluted (thousands)
  
251,206
  
249,669
           
Dividends declared per share of common stock
$
0.70
$
0.66
See Notes to Condensed Consolidated Financial Statements.



SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
   
Three months ended March 31, 2015 and 2014
   
(unaudited)
   
Sempra Energy shareholders' equity
        
   
Pretax
Income tax
Net-of-tax
Noncontrolling
  
   
amount
(expense) benefit
amount
interests (after-tax)
Total
2015:
                    
Net income
$
600
$
(163)
$
437
$
21
$
458
Other comprehensive income (loss):
                    
    Foreign currency translation adjustments
  
(62)
  
―
  
(62)
  
(8)
  
(70)
    Pension and other postretirement benefits
  
2
  
(1)
  
1
  
―
  
1
    Financial instruments
  
(89)
  
34
  
(55)
  
(5)
  
(60)
    Total other comprehensive income (loss)
  
(149)
  
33
  
(116)
  
(13)
  
(129)
Comprehensive income
$
451
$
(130)
$
321
$
8
$
329
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
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
March 31,
December 31,
 
2015
2014(1)
   
(unaudited)
    
ASSETS
        
Current assets:
        
    Cash and cash equivalents
$
377
$
570
    Restricted cash
  
10
  
11
    Trade accounts receivable, net
  
1,081
  
1,242
    Other accounts and notes receivable, net
  
175
  
152
    Due from unconsolidated affiliates
  
5
  
38
    Income taxes receivable
  
53
  
45
    Deferred income taxes
  
244
  
305
    Inventories
  
255
  
396
    Regulatory balancing accounts – undercollected
  
718
  
746
    Fixed-price contracts and other derivatives
  
89
  
93
    Asset held for sale, power plant
  
295
  
293
    Other
  
354
  
293
        Total current assets
  
3,656
  
4,184
           
Investments and other assets:
        
    Restricted cash
  
23
  
29
    Due from unconsolidated affiliates
  
195
  
188
    Regulatory assets
  
3,046
  
3,031
    Nuclear decommissioning trusts
  
1,150
  
1,131
    Investments
  
2,772
  
2,848
    Goodwill
  
903
  
931
    Other intangible assets
  
412
  
415
    Dedicated assets in support of certain benefit plans
  
476
  
512
    Sundry
  
682
  
561
        Total investments and other assets
  
9,659
  
9,646
           
Property, plant and equipment:
        
    Property, plant and equipment
  
35,901
  
35,407
    Less accumulated depreciation and amortization
  
(9,665)
  
(9,505)
        Property, plant and equipment, net ($403 and $410 at March 31, 2015 and
            December 31, 2014, respectively, related to VIE)
  
26,236
  
25,902
Total assets
$
39,551
$
39,732
(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,
 
2015
2014(1)
   
(unaudited)
    
LIABILITIES AND EQUITY
        
Current liabilities:
        
    Short-term debt
$
795
$
1,733
    Accounts payable – trade
  
907
  
1,198
    Accounts payable – other
  
137
  
155
    Due to unconsolidated affiliate
  
―
  
2
    Dividends and interest payable
  
344
  
282
    Accrued compensation and benefits
  
238
  
373
    Current portion of long-term debt
  
477
  
469
    Fixed-price contracts and other derivatives
  
50
  
55
    Customer deposits
  
155
  
153
    Other
  
667
  
649
        Total current liabilities
  
3,770
  
5,069
Long-term debt ($312 and $315 at March 31, 2015 and December 31, 2014, respectively,
     related to VIE)
  
13,012
  
12,167
           
Deferred credits and other liabilities:
        
    Customer advances for construction
  
144
  
144
    Pension and other postretirement benefit plan obligations, net of plan assets
  
1,077
  
1,064
    Deferred income taxes
  
3,019
  
3,003
    Deferred investment tax credits
  
35
  
37
    Regulatory liabilities arising from removal obligations
  
2,755
  
2,741
    Asset retirement obligations
  
2,066
  
2,048
    Fixed-price contracts and other derivatives
  
274
  
255
    Deferred credits and other
  
1,118
  
1,104
        Total deferred credits and other liabilities
  
10,488
  
10,396
           
Commitments and contingencies (Note 11)
        
           
Equity:
        
    Preferred stock (50 million shares authorized; none issued)
  
―
  
―
    Common stock (750 million shares authorized; 247 million and 246 million shares
        
        outstanding at March 31, 2015 and December 31, 2014, respectively; no par value)
  
2,514
  
2,484
    Retained earnings
  
9,603
  
9,339
    Accumulated other comprehensive income (loss)
  
(613)
  
(497)
        Total Sempra Energy shareholders’ equity
  
11,504
  
11,326
    Preferred stock of subsidiary
  
20
  
20
    Other noncontrolling interests
  
757
  
754
        Total equity
  
12,281
  
12,100
Total liabilities and equity
$
39,551
$
39,732
(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,
   
2015
2014
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
        
    Net income
$
458
$
266
    Adjustments to reconcile net income to net cash provided by operating activities:
        
        Depreciation and amortization
  
303
  
286
        Deferred income taxes and investment tax credits
  
131
  
95
        Gain on sale of equity interest
  
―
  
(27)
        Plant closure adjustment
  
(21)
  
(13)
        Equity earnings
  
(34)
  
(23)
        Fixed-price contracts and other derivatives
  
11
  
(3)
        Other
  
(27)
  
(24)
    Net change in other working capital components
  
19
  
234
    Changes in other assets
  
(42)
  
94
    Changes in other liabilities
  
13
  
19
        Net cash provided by operating activities
  
811
  
904
           
CASH FLOWS FROM INVESTING ACTIVITIES
        
    Expenditures for property, plant and equipment
  
(780)
  
(801)
    Expenditures for investments and acquisition of business
  
(34)
  
(12)
    Proceeds from sale of equity interest, net of cash sold
  
―
  
66
    Distributions from investments
  
1
  
3
    Purchases of nuclear decommissioning and other trust assets
  
(95)
  
(198)
    Proceeds from sales by nuclear decommissioning and other trusts
  
94
  
195
    Decrease in restricted cash
  
25
  
23
    Increase in restricted cash
  
(18)
  
(27)
    Advances to unconsolidated affiliates
  
(5)
  
(17)
    Repayments of advances to unconsolidated affiliates
  
33
  
―
    Other
  
9
  
(2)
        Net cash used in investing activities
  
(770)
  
(770)
           
CASH FLOWS FROM FINANCING ACTIVITIES
        
    Common dividends paid
  
(149)
  
(154)
    Issuances of common stock
  
17
  
11
    Repurchases of common stock
  
(65)
  
(37)
    Issuances of debt (maturities greater than 90 days)
  
938
  
1,188
    Payments on debt (maturities greater than 90 days)
  
(654)
  
(1,138)
    Decrease in short-term debt, net
  
(363)
  
(69)
    Other
  
45
  
6
        Net cash used in financing activities
  
(231)
  
(193)
         
Effect of exchange rate changes on cash and cash equivalents
  
(3)
  
(1)
           
Decrease in cash and cash equivalents
  
(193)
  
(60)
Cash and cash equivalents, January 1
  
570
  
904
Cash and cash equivalents, March 31
$
377
$
844
See Notes to Condensed Consolidated Financial Statements.
        
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
   
Three months ended March 31,
 
2015
2014
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
        
    Interest payments, net of amounts capitalized
$
83
$
91
    Income tax payments, net of refunds
  
42
  
41
           
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
        
    Acquisition of business:
        
          Assets acquired
$
10
$
―
          Liabilities assumed
  
(2)
  
―
          Accrued purchase price
  
(6)
  
―
          Cash paid
$
2
$
―
           
    Accrued capital expenditures
$
272
$
249
    Increase in capital lease obligations for investment in property, plant and equipment
  
―
  
60
    Dividends declared but not paid
  
181
  
168
    Financing of build-to-suit property
  
27
  
9
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,
 
2015
2014
 
(unaudited)
Operating revenues
        
    Electric
$
805
$
811
    Natural gas
  
161
  
176
        Total operating revenues
  
966
  
987
Operating expenses
        
    Cost of electric fuel and purchased power
  
228
  
266
    Cost of natural gas
  
54
  
75
    Operation and maintenance
  
217
  
252
    Depreciation
  
145
  
130
    Franchise fees and other taxes
  
61
  
56
    Plant closure adjustment
  
(21)
  
(13)
        Total operating expenses
  
684
  
766
Operating income
  
282
  
221
Other income, net
  
9
  
13
Interest expense
  
(52)
  
(50)
Income before income taxes
  
239
  
184
Income tax expense
  
(88)
  
(83)
Net income
  
151
  
101
Earnings attributable to noncontrolling interest
  
(4)
  
(2)
Earnings attributable to common shares
$
147
$
99
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, 2015 and 2014
 
(unaudited)
 
SDG&E shareholder's equity
    
 
Pretax
Income tax
Net-of-tax
Noncontrolling
  
 
amount
expense
amount
interest (after-tax)
Total
2015:
                    
Net income
$
235
$
(88)
$
147
$
4
$
151
Other comprehensive loss:
                    
    Financial instruments
  
―
  
―
  
―
  
(2)
  
(2)
    Total other comprehensive loss
  
―
  
―
  
―
  
(2)
  
(2)
Comprehensive income
$
235
$
(88)
$
147
$
2
$
149
2014:
                    
Net income/Comprehensive Income
$
182
$
(83)
$
99
$
2
$
101
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
March 31,
December 31,
   
2015
2014(1)
   
(unaudited)
    
ASSETS
        
Current assets:
        
    Cash and cash equivalents
$
23
$
8
    Restricted cash
  
7
  
8
    Accounts receivable – trade, net
  
297
  
285
    Accounts receivable – other, net
  
36
  
35
    Due from unconsolidated affiliates
  
41
  
1
    Inventories
  
69
  
73
    Regulatory balancing accounts – net undercollected
  
659
  
711
    Regulatory assets
  
101
  
54
    Fixed-price contracts and other derivatives
  
44
  
44
    Other
  
107
  
125
        Total current assets
  
1,384
  
1,344
           
Other assets:
        
    Restricted cash
  
12
  
11
    Deferred taxes recoverable in rates
  
833
  
824
    Other regulatory assets
  
1,015
  
1,086
    Nuclear decommissioning trusts
  
1,150
  
1,131
    Sundry
  
369
  
282
        Total other assets
  
3,379
  
3,334
           
Property, plant and equipment:
        
    Property, plant and equipment
  
15,643
  
15,478
    Less accumulated depreciation
  
(3,921)
  
(3,860)
        Property, plant and equipment, net ($403 and $410 at March 31, 2015 and
            December 31, 2014, respectively, related to VIE)
  
11,722
  
11,618
Total assets
$
16,485
$
16,296
(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,
   
2015
2014(1)
   
(unaudited)
    
LIABILITIES AND EQUITY
        
Current liabilities:
        
    Short-term debt
$
―
$
246
    Accounts payable
  
310
  
441
    Due to unconsolidated affiliates
  
2
  
21
    Income taxes payable
  
30
  
30
    Deferred income taxes
  
114
  
53
    Interest payable
  
51
  
40
    Accrued compensation and benefits
  
66
  
124
    Current portion of long-term debt
  
401
  
365
    Asset retirement obligations
  
105
  
120
    Fixed-price contracts and other derivatives
  
38
  
40
    Customer deposits
  
72
  
71
    Other
  
242
  
237
        Total current liabilities
  
1,431
  
1,788
Long-term debt ($312 and $315 at March 31, 2015 and December 31, 2014,
    respectively, related to VIE)
  
4,668
  
4,319
           
Deferred credits and other liabilities:
        
    Customer advances for construction
  
41
  
41
    Pension and other postretirement benefit plan obligations, net of plan assets
  
220
  
216
    Deferred income taxes
  
2,122
  
2,121
    Deferred investment tax credits
  
21
  
22
    Regulatory liabilities arising from removal obligations
  
1,587
  
1,557
    Asset retirement obligations
  
746
  
754
    Fixed-price contracts and other derivatives
  
151
  
153
    Deferred credits and other
  
360
  
333
        Total deferred credits and other liabilities
  
5,248
  
5,197
           
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
  
3,753
  
3,606
    Accumulated other comprehensive income (loss)
  
(12)
  
(12)
        Total SDG&E shareholder's equity
  
5,079
  
4,932
    Noncontrolling interest
  
59
  
60
        Total equity
  
5,138
  
4,992
Total liabilities and equity
$
16,485
$
16,296
(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,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
        
    Net income
$
151
$
101
    Adjustments to reconcile net income to net cash provided by operating activities:
        
        Depreciation
  
145
  
130
        Deferred income taxes and investment tax credits
  
56
  
57
        Plant closure adjustment
  
(21)
  
(13)
        Fixed-price contracts and other derivatives
  
(1)
  
(2)
        Other
  
(1)
  
(9)
    Net change in other working capital components
  
7
  
(76)
    Changes in other assets
  
(48)
  
63
    Changes in other liabilities
  
11
  
10
        Net cash provided by operating activities
  
299
  
261
         
CASH FLOWS FROM INVESTING ACTIVITIES
        
    Expenditures for property, plant and equipment
  
(355)
  
(294)
    Purchases of nuclear decommissioning trust assets
  
(94)
  
(198)
    Proceeds from sales by nuclear decommissioning trusts
  
94
  
195
    Decrease in restricted cash
  
10
  
10
    Increase in restricted cash
  
(10)
  
(10)
    Increase in loans to affiliates, net
  
(66)
  
―
        Net cash used in investing activities
  
(421)
  
(297)
         
CASH FLOWS FROM FINANCING ACTIVITIES
        
    Issuances of long-term debt
  
388
  
―
    Payments on long-term debt
  
(3)
  
(3)
    (Decrease) increase in short-term debt, net
  
(246)
  
31
    Capital distributions made by Otay Mesa VIE
  
(2)
  
(7)
        Net cash provided by financing activities
  
137
  
21
         
Increase (decrease) in cash and cash equivalents
  
15
  
(15)
Cash and cash equivalents, January 1
  
8
  
27
Cash and cash equivalents, March 31
$
23
$
12
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
        
    Interest payments, net of amounts capitalized
$
39
$
36
    Income tax payments, net of refunds
  
31
  
―
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
        
    Accrued capital expenditures
$
103
$
99
    Increase in capital lease obligations for investment in property, plant and equipment
  
―
  
60
See Notes to Condensed Consolidated Financial Statements.


 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
Three months ended March 31,
 
2015
2014
 
(unaudited)
         
Operating revenues
$
1,048
$
1,085
Operating expenses
        
    Cost of natural gas
  
267
  
508
    Operation and maintenance
  
314
  
305
    Depreciation
  
113
  
105
    Franchise fees and other taxes
  
34
  
38
        Total operating expenses
  
728
  
956
Operating income
  
320
  
129
Other income, net
  
8
  
4
Interest expense
  
(19)
  
(17)
Income before income taxes
  
309
  
116
Income tax expense
  
(95)
  
(38)
Net income/Earnings attributable to common shares
$
214
$
78
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, 2015 and 2014
 
(unaudited)
 
Pretax
Income tax
Net-of-tax
 
amount
expense
amount
2015:
            
Net income/Comprehensive income
$
309
$
(95)
$
214
2014:
            
Net income/Comprehensive income
$
116
$
(38)
$
78
See Notes to Condensed Consolidated Financial Statements.
            
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
March 31,
December 31,
   
2015
2014(1)
   
(unaudited)
    
ASSETS
        
Current assets:
        
    Cash and cash equivalents
$
21
$
85
    Accounts receivable – trade, net
  
437
  
586
    Accounts receivable – other, net
  
68
  
51
    Due from unconsolidated affiliates
  
61
  
4
    Income taxes receivable
  
―
  
5
    Inventories
  
109
  
181
    Regulatory balancing accounts – net undercollected
  
59
  
35
    Regulatory assets
  
6
  
5
    Other
  
62
  
36
        Total current assets
  
823
  
988
         
Other assets:
        
    Regulatory assets arising from pension obligations
  
633
  
617
    Other regulatory assets
  
532
  
472
    Other postretirement benefit plan assets, net of plan obligations
  
4
  
4
    Sundry
  
147
  
136
        Total other assets
  
1,316
  
1,229
         
Property, plant and equipment:
        
    Property, plant and equipment
  
13,130
  
12,886
    Less accumulated depreciation
  
(4,706)
  
(4,642)
        Property, plant and equipment, net
  
8,424
  
8,244
Total assets
$
10,563
$
10,461
(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,
   
2015
2014(1)
   
(unaudited)
    
LIABILITIES AND SHAREHOLDERS' EQUITY
        
Current liabilities:
        
    Short-term debt
$
―
$
50
    Accounts payable – trade
  
344
  
532
    Accounts payable – other
  
84
  
88
    Due to unconsolidated affiliate
  
―
  
13
    Income taxes payable
  
100
  
―
    Deferred income taxes
  
56
  
53
    Accrued compensation and benefits
  
104
  
129
    Customer deposits
  
75
  
75
    Other
  
148
  
149
        Total current liabilities
  
911
  
1,089
Long-term debt
  
1,906
  
1,906
Deferred credits and other liabilities:
        
    Customer advances for construction
  
101
  
102
    Pension obligation, net of plan assets
  
650
  
633
    Deferred income taxes
  
1,249
  
1,212
    Deferred investment tax credits
  
15
  
16
    Regulatory liabilities arising from removal obligations
  
1,150
  
1,167
    Asset retirement obligations
  
1,280
  
1,255
    Deferred credits and other
  
306
  
300
        Total deferred credits and other liabilities
  
4,751
  
4,685
         
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
  
2,125
  
1,911
    Accumulated other comprehensive income (loss)
  
(18)
  
(18)
        Total shareholders' equity
  
2,995
  
2,781
Total liabilities and shareholders' equity
$
10,563
$
10,461
(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,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
        
    Net income
$
214
$
78
    Adjustments to reconcile net income to net cash provided by operating activities:
        
        Depreciation
  
113
  
105
        Deferred income taxes and investment tax credits
  
(9)
  
26
        Other
  
(6)
  
―
    Net change in other working capital components
  
85
  
197
    Changes in other assets
  
(19)
  
18
    Changes in other liabilities
  
(3)
  
3
        Net cash provided by operating activities
  
375
  
427
         
CASH FLOWS FROM INVESTING ACTIVITIES
        
    Expenditures for property, plant and equipment
  
(315)
  
(260)
    Increase in loans to affiliates, net
  
(74)
  
(117)
        Net cash used in investing activities
  
(389)
  
(377)
         
CASH FLOWS FROM FINANCING ACTIVITIES
        
    Issuances of long-term debt
  
―
  
248
    Repayment of long-term debt
  
―
  
(250)
    Decrease in short-term debt, net
  
(50)
  
(42)
    Other
  
―
  
(1)
        Net cash used in financing activities
  
(50)
  
(45)
         
(Decrease) increase in cash and cash equivalents
  
(64)
  
5
Cash and cash equivalents, January 1
  
85
  
27
Cash and cash equivalents, March 31
$
21
$
32
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
        
    Interest payments, net of amounts capitalized
$
17
$
12
    Income tax (refunds) payments, net
  
(3)
  
30
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
        
    Accrued capital expenditures
$
129
$
111
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 
SEMPRA ENERGY AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE 1. GENERAL
 

 
IMPACT OF SEASONALIZATION AT SEMPRA ENERGY AND SOUTHERN CALIFORNIA GAS COMPANY
 
In the first quarter of 2015, Southern California Gas Company (SoCalGas) adopted a California Public Utilities Commission (CPUC) decision in the Triennial Cost Allocation Proceeding (TCAP) requiring SoCalGas to recognize annual authorized revenue for core natural gas customers using seasonal factors established in the TCAP, instead of recognizing such revenue ratably over the year as was previously required. This “seasonalization” resulted in $163 million higher operating revenues and $113 million higher earnings for Sempra Energy and SoCalGas in the first quarter of 2015 compared to the same period in 2014. While this seasonalization will cause variability in comparable revenue and earnings from quarter to quarter within the year, it will not impact full-year 2015 results nor have any impact on cash flow. Accordingly, substantially all of SoCalGas’ annual earnings will be recognized in the first and fourth quarters of the year. We discuss the CPUC decision further in Note 10.
 
 
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 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 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014 (the Annual Report), which includes the combined reports for Sempra Energy, SDG&E and SoCalGas.
 
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 Notes 3 and 4 herein and in the Notes to Consolidated Financial Statements in the Annual Report.
 
 
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 minimis accounts of inactive subsidiaries. SoCalGas’ common stock is wholly owned by Pacific Enterprises, 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, 2015 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, 2014 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2014 Consolidated Financial Statements in the Annual Report. 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.
 
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.
 
You should read the information in this Quarterly Report in conjunction with the Annual Report.
 


 
Regulated Operations
 

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.
 


 
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) 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09): ASU 2014-09 provides accounting guidance for revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach.
 
As issued, ASU 2014-09 will become effective on January 1, 2017; however, the Financial Accounting Standards Board has proposed a one-year delay in the effective date that is pending review. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
 
ASU 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03): ASU 2015-03 provides guidance on the financial statement presentation of debt issuance costs and requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related long-term debt liability. This guidance must be applied using a full retrospective approach for all periods presented in the period of adoption.
 
We will adopt ASU 2015-03 for our annual reporting period ending December 31, 2015.  The adoption will not affect our results of operations or cash flows. Deferred debt issuance costs that are the subject of ASU 2015-03 are included in Sundry on the Sempra Energy, SDG&E and SoCalGas Condensed Consolidated Balance Sheets and total $85 million, $33 million, and $15 million at March 31, 2015, respectively, and $84 million, $33 million, and $15 million at December 31, 2014, respectively.
 


 
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. Sempra Renewables recognized a pretax gain on the sale of $27 million ($16 million after-tax), included in Gain on Sale of Equity Interest 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 accounted for under the equity method. Based on the nature of the underlying assets, this investment is considered in-substance real estate. Therefore, in accordance with applicable U.S. GAAP, for Copper Mountain Solar 3, the equity method investment was measured at historical cost and 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
   
At March 13, 2014
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 liabilities
  
3
Accumulated other comprehensive income
  
(2)
Gain on sale of equity interest
  
(27)
(Increase) in equity method investment upon deconsolidation
$
(39)

 
In March 2015, Sempra Renewables acquired a 100-percent interest in the Black Oak Getty Wind project, a 78-MW wind farm under development in Stearns County, Minnesota. The wind farm has a 20-year power purchase agreement with Minnesota Municipal Power Agency. The total acquisition cost for the project is $8 million, of which $2 million was paid in cash at closing, and $6 million is payable contingent on certain events as the project is further developed.
 
 
SEMPRA NATURAL GAS
 


 
Asset Held for Sale, Power Plant
 

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.
 
In January 2014, management approved a formal plan to market and sell the remaining 625-MW block of the Mesquite Power plant, and in October 2014, Sempra Natural Gas entered into a definitive agreement to sell the remaining block of the plant. The asset is classified as held for sale at March 31, 2015. In April 2015, Sempra Natural Gas sold the remaining block of the plant, together with a related power sales contract. Sempra Natural Gas received net cash proceeds of $345 million, and expects to recognize a pretax gain on the sale of approximately $58 million ($34 million after-tax) in the second quarter of 2015, subject to certain post-closing adjustments related to working capital.
 
At March 31, 2015, the carrying amount of the major classes of assets and related liability held for sale associated with the plant included the following:
 


ASSET HELD FOR SALE, POWER PLANT
(Dollars in millions)
  
   
March 31, 2015
Property, plant, and equipment, net
$
291
Inventories
  
4
   Total assets held for sale
  
295
Liability held for sale - asset retirement obligation(1)
  
(6)
   Total
$
289
(1)
Included in Other Current Liabilities on the Condensed Consolidated Balance Sheet.

 
 
NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
 

We provide additional information concerning our equity method investments in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
SEMPRA RENEWABLES
 

Sempra Renewables invested cash of $17 million and $12 million in its joint ventures during the three months ended March 31, 2015 and 2014, respectively.
 


 
SEMPRA NATURAL GAS
 

During the three months ended March 31, 2015, Sempra Natural Gas invested $3 million of cash in its joint venture, Cameron LNG Holdings, LLC (Cameron LNG Holdings or Cameron LNG JV), and capitalized $12 million of interest related to its investment.
 


 
NOTE 5. OTHER FINANCIAL DATA
 


 
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,
2015
December 31,
2014
March 31,
2015
December 31,
2014
March 31,
2015
December 31,
2014
March 31,
2015
December 31,
2014
SDG&E
$
6
$
8
$
―
$
―
$
63
$
65
$
69
$
73
SoCalGas
  
83
  
155
  
―
  
―
  
26
  
26
  
109
  
181
Sempra South American
                                
     Utilities
  
―
  
―
  
―
  
―
  
32
  
33
  
32
  
33
Sempra Mexico
  
―
  
―
  
7
  
9
  
9
  
9
  
16
  
18
Sempra Renewables
  
―
  
―
  
―
  
―
  
2
  
2
  
2
  
2
Sempra Natural Gas
  
22
  
83
  
4
  
5
  
1
  
1
  
27
  
89
Sempra Energy
                                
     Consolidated
$
111
$
246
$
11
$
14
$
133
$
136
$
255
$
396


 
GOODWILL
 

We discuss goodwill in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $931 million at December 31, 2014 to $903 million at March 31, 2015 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. We determine if SDG&E 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, holds no equity in OMEC LLC 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. Accordingly, SDG&E and Sempra Energy have consolidated Otay Mesa VIE. Otay Mesa VIE’s equity of $59 million at March 31, 2015 and $60 million at December 31, 2014 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 $322 million at March 31, 2015, 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.
 
 
Cameron LNG JV
 
Sempra Energy’s equity-method investment in Cameron LNG JV is considered to be a VIE generally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary because we do not have the power to direct the most significant activities of Cameron LNG JV. We will continue to evaluate Cameron LNG JV for any changes that may impact our determination of the primary beneficiary. The carrying value of our investment in Cameron LNG JV was $969 million and $1,007 million at March 31, 2015 and December 31, 2014, respectively. Our maximum exposure to loss includes the carrying value of our investment and the guarantees discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 
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, 2015. 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 in 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,
 
2015
2014
Operating expenses
        
    Cost of electric fuel and purchased power
$
(18)
$
(18)
    Operation and maintenance
  
4
  
5
    Depreciation
  
6
  
7
        Total operating expenses
  
(8)
  
(6)
Operating income
  
8
  
6
Interest expense
  
(4)
  
(4)
Income before income taxes/Net income
  
4
  
2
Earnings attributable to noncontrolling interest
  
(4)
  
(2)
   Earnings attributable to common shares
$
―
$
―

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


 
PENSION AND OTHER POSTRETIREMENT BENEFITS
 


 
Net Periodic Benefit Cost
 

The following three tables provide the components of net periodic benefit cost:
 


NET PERIODIC BENEFIT COST – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended March 31,
 
2015
2014
2015
2014
Service cost
$
30
$
26
$
7
$
6
Interest cost
  
39
  
41
  
12
  
12
Expected return on assets
  
(44)
  
(43)
  
(17)
  
(16)
Amortization of:
                
    Prior service cost (credit)
  
3
  
2
  
(1)
  
(1)
    Actuarial loss
  
8
  
5
  
―
  
―
Settlement
  
―
  
3
  
―
  
―
Regulatory adjustment
  
(29)
  
(24)
  
―
  
―
Total net periodic benefit cost
$
7
$
10
$
1
$
1
 

 
NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended March 31,
 
2015
2014
2015
2014
Service cost
$
8
$
8
$
2
$
2
Interest cost
  
10
  
11
  
2
  
2
Expected return on assets
  
(14)
  
(14)
  
(3)
  
(3)
Amortization of:
                
    Prior service cost
  
―
  
―
  
1
  
1
    Actuarial loss
  
2
  
1
  
―
  
―
Regulatory adjustment
  
(5)
  
(5)
  
(2)
  
(2)
Total net periodic benefit cost
$
1
$
1
$
―
$
―
 

 
NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended March 31,
 
2015
2014
2015
2014
Service cost
$
19
$
16
$
5
$
4
Interest cost
  
25
  
25
  
9
  
9
Expected return on assets
  
(27)
  
(26)
  
(14)
  
(13)
Amortization of:
                
    Prior service cost (credit)
  
2
  
2
  
(2)
  
(2)
    Actuarial loss
  
5
  
2
  
―
  
―
Regulatory adjustment
  
(24)
  
(19)
  
2
  
2
Total net periodic benefit cost
$
―
$
―
$
―
$
―

 
 
Benefit Plan Contributions
 

The following table shows our year-to-date contributions to pension and other postretirement benefit plans and the amounts we expect to contribute in 2015:
 


BENEFIT PLAN CONTRIBUTIONS
(Dollars in millions)
 
Sempra Energy
    
 
Consolidated
SDG&E
SoCalGas
Contributions through March 31, 2015:
            
    Pension plans
$
15
$
1
$
1
    Other postretirement benefit plans
  
1
  
―
  
―
Total expected contributions in 2015:
            
    Pension plans
$
31
$
3
$
2
    Other postretirement benefit plans
  
11
  
8
  
―

 
 
RABBI TRUST
 

In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $476 million and $512 million at March 31, 2015 and December 31, 2014, respectively.
 


 
EARNINGS PER SHARE
 

The following table provides the per share computations for our earnings for the three months ended March 31, 2015 and 2014. Basic earnings per common share (EPS) is calculated by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
 


EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions, except per share amounts; shares in thousands)
   
Three months ended March 31,
   
2015
2014
Numerator:
        
    Earnings/Income attributable to common shares
$
437
$
247
           
Denominator:
        
    Weighted-average common shares
        
 
outstanding for basic EPS
  
247,722
  
245,277
    Dilutive effect of stock options, restricted
        
 
stock awards and restricted stock units
  
3,484
  
4,392
    Weighted-average common shares
        
 
outstanding for diluted EPS
  
251,206
  
249,669
           
Earnings per share:
        
    Basic
$
1.76
$
1.01
    Diluted
$
1.74
$
0.99

The dilution from common stock options is based on the treasury stock method. Under this method, proceeds based on the exercise price plus unearned compensation and windfall tax benefits recognized, minus tax shortfalls recognized, are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits are tax deductions we would receive upon the assumed exercise of stock options in excess of the deferred income taxes we recorded related to the compensation expense on the stock options. Tax shortfalls occur when the assumed tax deductions are less than recorded deferred income taxes. The calculation of dilutive common stock equivalents excludes options for which the exercise price on common stock was greater than the average market price during the period (out-of-the-money options). We had no such antidilutive stock options outstanding for the three months ended March 31, 2015 or 2014.
 
For the three months ended March 31, 2015 and 2014, we had no stock options outstanding that were antidilutive because of the unearned compensation and windfall tax benefits included in the assumed proceeds under the treasury stock method.
 
The dilution from unvested restricted stock awards (RSAs) and restricted stock units (RSUs) is also based on the treasury stock method. Proceeds equal to the unearned compensation and windfall tax benefits recognized, minus tax shortfalls recognized, related to the awards and units are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits or tax shortfalls recognized are the difference between tax deductions we would receive upon the assumed vesting of RSAs or RSUs and the deferred income taxes we recorded related to the compensation expense on such awards and units. There were no antidilutive RSAs and 614 antidilutive RSUs from the application of unearned compensation in the treasury stock method for the three months ended March 31, 2015. There were no such antidilutive RSAs or RSUs for the three months ended March 31, 2014.
 
Our performance-based RSUs include awards that vest at the end of three-year (for awards granted in 2015) or four-year performance periods based on Sempra Energy’s total return to shareholders relative to that of specified market indices (Total Shareholder Return or TSR RSUs) or based on the compound annual growth rate of Sempra Energy’s EPS (EPS RSUs). The comparative market indices for the TSR RSUs are the Standard & Poor’s (S&P) 500 Utilities Index and the S&P 500 Index. Targets for our EPS RSUs were developed based on Sempra Energy’s long-term earnings-per-share growth guidance as well as analyst consensus long-term earnings-per-share growth estimates for S&P 500 Utilities Index peer companies. TSR RSUs represent the right to receive from zero to 1.5 shares (2.0 shares for awards granted during or after 2014) of Sempra Energy common stock if performance targets are met. EPS RSUs represent the right to receive from zero to 2.0 shares of Sempra Energy common stock if performance targets are met. If performance falls between the targets specified for each performance metric, we calculate the payout using linear interpolation. Participants also receive additional shares for dividend equivalents on shares subject to RSUs, which are deemed reinvested to purchase additional units that become subject to the same vesting conditions as the RSUs to which the dividends relate.
 
Our RSAs, which are solely service-based, and those RSUs that are service-based or issued in connection with certain other performance goals represent the right to receive up to 1.0 share if the service requirements or certain other vesting conditions are met. These RSAs and RSUs have the same dividend equivalent rights as the performance-based RSUs described above. We include RSAs and these RSUs in potential dilutive shares at 100 percent, subject to the application of the treasury stock method. We include our TSR RSUs and EPS RSUs in potential dilutive shares at zero to up to 200 percent to the extent that they currently meet the performance requirements for vesting, subject to the application of the treasury stock method. Due to market fluctuations of both Sempra Energy stock and the comparative indices, dilutive TSR RSU shares may vary widely from period-to-period. If it were assumed that performance goals for all performance-based RSUs were met at maximum levels and if the treasury stock method were not applied to any of our RSAs or RSUs, the incremental potential dilutive shares would be 1,285,193 and 1,142,023 for the three months ended March 31, 2015 and 2014, respectively.
 


 
SHARE-BASED COMPENSATION
 

We discuss our share-based compensation plans in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. We recorded share-based compensation expense, net of income taxes, of $8 million and $7 million for the three months ended March 31, 2015 and 2014, respectively. Pursuant to our Sempra Energy share-based compensation plans, Sempra Energy’s compensation committee granted 300,719 TSR RSUs, 76,505 EPS RSUs and 127,753 RSUs issued either as service-based awards or in connection with certain other performance goals during the three months ended March 31, 2015, primarily in January.
 
During the three months ended March 31, 2015, IEnova issued 148,781 RSUs from the IEnova 2013 Long-Term Incentive Plan, under which awards are cash settled at vesting based on the price of IEnova common stock.
 


 
CAPITALIZED FINANCING COSTS
 

Capitalized financing costs include capitalized interest costs and, primarily at the California Utilities, an allowance for funds used during construction (AFUDC) related to both debt and equity financing of construction projects.
 
Pipeline projects currently under construction by Sempra Mexico and Sempra Natural Gas that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC related to equity.
 
Sempra International and Sempra U.S. Gas & Power businesses capitalize interest costs incurred to finance capital projects and interest on equity method investments that have not commenced planned principal operations. The California Utilities also capitalize certain interest costs.
 
The following table shows capitalized financing costs for the three months ended March 31, 2015 and 2014.
 


CAPITALIZED FINANCING COSTS
(Dollars in millions)
   
Three months ended March 31,
   
2015
2014
Sempra Energy Consolidated:
        
    AFUDC related to debt
$
6
$
6
    AFUDC related to equity
  
27
  
25
    Other capitalized financing costs
  
17
  
8
        Total Sempra Energy Consolidated
$
50
$
39
SDG&E:
        
    AFUDC related to debt
$
3
$
4
    AFUDC related to equity
  
8
  
11
        Total SDG&E
$
11
$
15
SoCalGas:
        
    AFUDC related to debt
$
3
$
2
    AFUDC related to equity
  
9
  
5
        Total SoCalGas
$
12
$
7

 
COMPREHENSIVE INCOME
 

The following tables present the changes in Accumulated Other Comprehensive Income (Loss) (AOCI) by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to noncontrolling interests:
 


CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
       
Pension and other
        
       
postretirement benefits
        
   
Foreign
          
Total
   
currency
Unamortized
Unamortized
  
accumulated other
   
translation
net actuarial
prior service
Financial
comprehensive
   
adjustments
gain (loss)
cost
instruments
income (loss)
   
Three months ended March 31, 2015 and 2014
2015:
                    
Balance as of December 31, 2014
$
(322)
$
(83)
$
(2)
$
(90)
$
(497)
Other comprehensive loss before
                    
   reclassifications
  
(62)
  
―
  
―
  
(54)
  
(116)
Amounts reclassified from accumulated other
                    
   comprehensive income (loss)
  
―
  
1
  
―
  
(1)
  
―
Net other comprehensive income (loss)
  
(62)
  
1
  
―
  
(55)
  
(116)
Balance as of March 31, 2015
$
(384)
$
(82)
$
(2)
$
(145)
$
(613)
2014:
                    
Balance as of December 31, 2013
$
(129)
$
(73)
$
―
$
(26)
$
(228)
Other comprehensive loss before
                    
   reclassifications
  
(43)
  
―
  
―
  
(14)
  
(57)
Amounts reclassified from accumulated other
                    
   comprehensive income
  
―
  
3
  
―
  
9
  
12
Net other comprehensive income (loss)
  
(43)
  
3
  
―
  
(5)
  
(45)
Balance as of March 31, 2014
$
(172)
$
(70)
$
―
$
(31)
$
(273)
(1)
All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.
 
 

RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated
Amounts reclassified
    
other comprehensive income (loss)
from accumulated other
  
Affected line item on Condensed
components
comprehensive income (loss)
  
Consolidated Statements of Operations
     
Three months ended March 31,
          
     
2015
  
2014
          
Sempra Energy Consolidated:
                    
Financial instruments:
                    
    Interest rate and foreign exchange instruments
$
6
  
$
3
  
Interest Expense
    Interest rate instruments
  
―
    
2
  
Gain on Sale of Equity Interest
    Interest rate instruments
  
3
    
3
  
Equity Earnings, Before Income Tax
    Commodity contracts not subject
            
Revenues: Energy-Related
 
to rate recovery
  
(7)
    
10
  
   Businesses
Total before income tax
  
2
    
18
    
       
1
    
(6)
  
Income Tax Expense
Net of income tax
  
3
    
12
    
       
(4)
    
(3)
  
Earnings Attributable to Noncontrolling Interests
     
$
(1)
  
$
9
          
                         
Pension and other postretirement benefits:
                    
    Amortization of actuarial loss
$
2
  
$
5
  
See (1) below
       
(1)
    
(2)
  
Income Tax Expense
Net of income tax
$
1
  
$
3
    
                        <