Sempra Energy/SDG&E/SoCalGas June 30, 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
June 30, 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
101 Ash Street
 
488 8th Avenue
   
San Diego,
 
San Diego, California 92101
   
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 July 29, 2015:
         
           
Sempra Energy
247,915,696 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
76
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
116
Item 4.
Controls and Procedures
117
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
118
Item 1A.
Risk Factors
118
Item 6.
Exhibits
118
     
Signatures
120
     

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;
 
§  
deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers;
 
§  
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, including motions to modify settlements;
 
§  
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 June 30,
Six months ended June 30,
   
2015
2014
2015
2014
   
(unaudited)
REVENUES
               
Utilities
$
2,133
$
2,370
$
4,555
$
4,855
Energy-related businesses
 
234
 
308
 
494
 
618
    Total revenues
 
2,367
 
2,678
 
5,049
 
5,473
EXPENSES AND OTHER INCOME
               
Utilities:
               
    Cost of natural gas
 
(239)
 
(395)
 
(585)
 
(1,015)
    Cost of electric fuel and purchased power
 
(498)
 
(571)
 
(979)
 
(1,081)
Energy-related businesses:
               
    Cost of natural gas, electric fuel and purchased power
 
(73)
 
(126)
 
(171)
 
(264)
    Other cost of sales
 
(42)
 
(42)
 
(77)
 
(80)
Operation and maintenance
 
(713)
 
(729)
 
(1,371)
 
(1,405)
Depreciation and amortization
 
(307)
 
(288)
 
(610)
 
(574)
Franchise fees and other taxes
 
(96)
 
(92)
 
(203)
 
(197)
Plant closure adjustment
 
 
 
21
 
13
Gain on sale of equity interest and assets
 
62
 
2
 
62
 
29
Equity earnings, before income tax
 
27
 
23
 
46
 
40
Other income, net
 
37
 
49
 
76
 
89
Interest income
 
10
 
5
 
17
 
9
Interest expense
 
(139)
 
(138)
 
(273)
 
(274)
Income before income taxes and equity earnings
               
    of certain unconsolidated subsidiaries
 
396
 
376
 
1,002
 
763
Income tax expense
 
(98)
 
(93)
 
(261)
 
(220)
Equity earnings, net of income tax
 
22
 
9
 
37
 
15
Net income
 
320
 
292
 
778
 
558
Earnings attributable to noncontrolling interests
 
(24)
 
(22)
 
(45)
 
(41)
Preferred dividends of subsidiary
 
(1)
 
(1)
 
(1)
 
(1)
Earnings
$
295
$
269
$
732
$
516
                   
Basic earnings per common share
$
1.19
$
1.10
$
2.95
$
2.10
                   
Weighted-average number of shares outstanding, basic (thousands)
 
248,108
 
245,688
 
247,916
 
245,484
                   
Diluted earnings per common share
$
1.17
$
1.08
$
2.91
$
2.07
                   
Weighted-average number of shares outstanding, diluted (thousands)
 
251,491
 
250,061
 
251,264
 
249,816
                   
Dividends declared per share of common stock
$
0.70
$
0.66
$
1.40
$
1.32
See Notes to Condensed Consolidated Financial Statements.
       



SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
   
Sempra Energy shareholders' equity
       
   
Pretax
Income tax
Net-of-tax
Noncontrolling
 
   
amount
(expense) benefit
amount
interests (after-tax)
Total
   
Three months ended June 30, 2015 and 2014
   
(unaudited)
2015:
                   
Net income
$
394
$
(98)
$
296
$
24
$
320
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
(43)
 
 
(43)
 
(5)
 
(48)
    Pension and other postretirement benefits
 
2
 
(1)
 
1
 
 
1
    Financial instruments
 
95
 
(36)
 
59
 
6
 
65
    Total other comprehensive income
 
54
 
(37)
 
17
 
1
 
18
Comprehensive income
 
448
 
(135)
 
313
 
25
 
338
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive income, after preferred
                   
    dividends of subsidiary
$
447
$
(135)
$
312
$
25
$
337
2014:
                   
Net income
$
363
$
(93)
$
270
$
22
$
292
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
2
 
 
2
 
1
 
3
    Pension and other postretirement benefits
 
8
 
(3)
 
5
 
 
5
    Financial instruments
 
(12)
 
5
 
(7)
 
(1)
 
(8)
    Total other comprehensive loss
 
(2)
 
2
 
 
 
Comprehensive income
 
361
 
(91)
 
270
 
22
 
292
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive income, after preferred
                   
    dividends of subsidiary
$
360
$
(91)
$
269
$
22
$
291
 
   
Six months ended June 30, 2015 and 2014
   
(unaudited)
2015:
                   
Net income
$
994
$
(261)
$
733
$
45
$
778
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
(105)
 
 
(105)
 
(13)
 
(118)
    Pension and other postretirement benefits
 
4
 
(2)
 
2
 
 
2
    Financial instruments
 
6
 
(2)
 
4
 
1
 
5
    Total other comprehensive loss
 
(95)
 
(4)
 
(99)
 
(12)
 
(111)
Comprehensive income
 
899
 
(265)
 
634
 
33
 
667
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive income, after preferred
                   
    dividends of subsidiary
$
898
$
(265)
$
633
$
33
$
666
2014:
                   
Net income
$
737
$
(220)
$
517
$
41
$
558
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
(41)
 
 
(41)
 
(1)
 
(42)
    Pension and other postretirement benefits
 
13
 
(5)
 
8
 
 
8
    Financial instruments
 
(20)
 
8
 
(12)
 
(1)
 
(13)
    Total other comprehensive loss
 
(48)
 
3
 
(45)
 
(2)
 
(47)
Comprehensive income
 
689
 
(217)
 
472
 
39
 
511
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive income, after preferred
                   
    dividends of subsidiary
$
688
$
(217)
$
471
$
39
$
510
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
 
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
636
$
570
    Restricted cash
 
8
 
11
    Trade accounts receivable, net
 
990
 
1,242
    Other accounts and notes receivable, net
 
164
 
152
    Due from unconsolidated affiliates
 
4
 
38
    Income taxes receivable
 
100
 
45
    Deferred income taxes
 
99
 
305
    Inventories
 
266
 
396
    Regulatory balancing accounts – undercollected
 
798
 
746
    Fixed-price contracts and other derivatives
 
85
 
93
    Asset held for sale, power plant
 
 
293
    Other
 
356
 
293
        Total current assets
 
3,506
 
4,184
           
Investments and other assets:
       
    Restricted cash
 
17
 
29
    Due from unconsolidated affiliates
 
169
 
188
    Regulatory assets
 
3,095
 
3,031
    Nuclear decommissioning trusts
 
1,145
 
1,131
    Investments
 
2,929
 
2,848
    Goodwill
 
885
 
931
    Other intangible assets
 
410
 
415
    Dedicated assets in support of certain benefit plans
 
483
 
512
    Sundry
 
674
 
561
        Total investments and other assets
 
9,807
 
9,646
           
Property, plant and equipment:
       
    Property, plant and equipment
 
36,523
 
35,407
    Less accumulated depreciation and amortization
 
(9,830)
 
(9,505)
        Property, plant and equipment, net ($396 and $410 at June 30, 2015 and
            December 31, 2014, respectively, related to VIE)
 
26,693
 
25,902
Total assets
$
40,006
$
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)
   
June 30,
December 31,
 
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
738
$
1,733
    Accounts payable – trade
 
890
 
1,198
    Accounts payable – other
 
124
 
155
    Due to unconsolidated affiliate
 
 
2
    Dividends and interest payable
 
300
 
282
    Accrued compensation and benefits
 
271
 
373
    Current portion of long-term debt
 
1,273
 
469
    Fixed-price contracts and other derivatives
 
55
 
55
    Customer deposits
 
150
 
153
    Other
 
598
 
649
        Total current liabilities
 
4,399
 
5,069
Long-term debt ($310 and $315 at June 30, 2015 and December 31, 2014, respectively,
     related to VIE)
 
12,626
 
12,167
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
144
 
144
    Pension and other postretirement benefit plan obligations, net of plan assets
 
1,101
 
1,064
    Deferred income taxes
 
3,016
 
3,003
    Deferred investment tax credits
 
35
 
37
    Regulatory liabilities arising from removal obligations
 
2,762
 
2,741
    Asset retirement obligations
 
2,067
 
2,048
    Fixed-price contracts and other derivatives
 
300
 
255
    Deferred credits and other
 
1,081
 
1,104
        Total deferred credits and other liabilities
 
10,506
 
10,396
           
Commitments and contingencies (Note 11)
       
           
Equity:
       
    Preferred stock (50 million shares authorized; none issued)
 
 
    Common stock (750 million shares authorized; 248 million and 246 million shares
       
        outstanding at June 30, 2015 and December 31, 2014, respectively; no par value)
 
2,555
 
2,484
    Retained earnings
 
9,724
 
9,339
    Accumulated other comprehensive income (loss)
 
(596)
 
(497)
        Total Sempra Energy shareholders’ equity
 
11,683
 
11,326
    Preferred stock of subsidiary
 
20
 
20
    Other noncontrolling interests
 
772
 
754
        Total equity
 
12,475
 
12,100
Total liabilities and equity
$
40,006
$
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)
   
Six months ended June 30,
   
2015
2014
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
778
$
558
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation and amortization
 
610
 
574
        Deferred income taxes and investment tax credits
 
203
 
105
        Gain on sale of equity interest and assets
 
(62)
 
(29)
        Plant closure adjustment
 
(21)
 
(13)
        Equity earnings
 
(83)
 
(55)
        Fixed-price contracts and other derivatives
 
 
(17)
        Other
 
(8)
 
(6)
    Net change in other working capital components
 
(116)
 
(125)
    Changes in other assets
 
(89)
 
21
    Changes in other liabilities
 
7
 
21
        Net cash provided by operating activities
 
1,219
 
1,034
           
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(1,466)
 
(1,513)
    Expenditures for investments and acquisition of business
 
(161)
 
(160)
    Proceeds from sale of equity interest and assets, net of cash sold
 
347
 
66
    Distributions from investments
 
9
 
6
    Purchases of nuclear decommissioning and other trust assets
 
(229)
 
(356)
    Proceeds from sales by nuclear decommissioning and other trusts
 
221
 
350
    Decrease in restricted cash
 
49
 
87
    Increase in restricted cash
 
(34)
 
(87)
    Advances to unconsolidated affiliates
 
(20)
 
(24)
    Repayments of advances to unconsolidated affiliates
 
74
 
    Other
 
9
 
10
        Net cash used in investing activities
 
(1,201)
 
(1,621)
           
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Common dividends paid
 
(308)
 
(301)
    Preferred dividends paid by subsidiary
 
(1)
 
(1)
    Issuances of common stock
 
31
 
28
    Repurchases of common stock
 
(66)
 
(37)
    Issuances of debt (maturities greater than 90 days)
 
1,547
 
2,345
    Payments on debt (maturities greater than 90 days)
 
(846)
 
(1,475)
    Decrease in short-term debt, net
 
(339)
 
(54)
    Net distributions to noncontrolling interests
 
(14)
 
(23)
    Other
 
46
 
(10)
        Net cash provided by financing activities
 
50
 
472
         
Effect of exchange rate changes on cash and cash equivalents
 
(2)
 
           
Increase (decrease) in cash and cash equivalents
 
66
 
(115)
Cash and cash equivalents, January 1
 
570
 
904
Cash and cash equivalents, June 30
$
636
$
789
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
   
Six months ended June 30,
 
2015
2014
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
260
$
269
    Income tax payments, net of refunds
 
72
 
148
           
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
$
302
$
287
    Redemption of industrial development bonds
 
79
 
    Increase in capital lease obligations for investment in property, plant and equipment
 
 
60
    Dividends declared but not paid
 
178
 
165
    Financing of build-to-suit property
 
39
 
32
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Dollars in millions)
 
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
 
(unaudited)
Operating revenues
               
    Electric
$
874
$
948
$
1,679
$
1,759
    Natural gas
 
98
 
115
 
259
 
291
        Total operating revenues
 
972
 
1,063
 
1,938
 
2,050
Operating expenses
               
    Cost of electric fuel and purchased power
 
251
 
329
 
479
 
595
    Cost of natural gas
 
31
 
51
 
85
 
126
    Operation and maintenance
 
255
 
256
 
472
 
508
    Depreciation
 
149
 
131
 
294
 
261
    Franchise fees and other taxes
 
59
 
54
 
120
 
110
    Plant closure adjustment
 
 
 
(21)
 
(13)
        Total operating expenses
 
745
 
821
 
1,429
 
1,587
Operating income
 
227
 
242
 
509
 
463
Other income, net
 
9
 
7
 
18
 
20
Interest expense
 
(52)
 
(51)
 
(104)
 
(101)
Income before income taxes
 
184
 
198
 
423
 
382
Income tax expense
 
(54)
 
(69)
 
(142)
 
(152)
Net income
 
130
 
129
 
281
 
230
Earnings attributable to noncontrolling interest
 
(4)
 
(6)
 
(8)
 
(8)
Earnings attributable to common shares
$
126
$
123
$
273
$
222
See Notes to Condensed Consolidated Financial Statements.
       
 

 

SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
SDG&E shareholder's equity
   
 
Pretax
Income tax
Net-of-tax
Noncontrolling
 
 
amount
expense
amount
interest (after-tax)
Total
 
Three months ended June 30, 2015 and 2014
 
(unaudited)
2015:
                   
Net income
$
180
$
(54)
$
126
$
4
$
130
Other comprehensive income:
                   
    Financial instruments
 
 
 
 
3
 
3
    Total other comprehensive income
 
 
 
 
3
 
3
Comprehensive income
$
180
$
(54)
$
126
$
7
$
133
2014:
                   
Net income
$
192
$
(69)
$
123
$
6
$
129
Other comprehensive income (loss):
                   
    Pension and other postretirement benefits
 
2
 
(1)
 
1
 
 
1
    Financial instruments
 
 
 
 
(1)
 
(1)
    Total other comprehensive income (loss)
 
2
 
(1)
 
1
 
(1)
 
Comprehensive income
$
194
$
(70)
$
124
$
5
$
129
 
 
Six months ended June 30, 2015 and 2014
 
(unaudited)
2015:
                   
Net income
$
415
$
(142)
$
273
$
8
$
281
Other comprehensive income:
                   
    Financial instruments
 
 
 
 
1
 
1
    Total other comprehensive income
 
 
 
 
1
 
1
Comprehensive income
$
415
$
(142)
$
273
$
9
$
282
2014:
                   
Net income
$
374
$
(152)
$
222
$
8
$
230
Other comprehensive income (loss):
                   
    Pension and other postretirement benefits
 
2
 
(1)
 
1
 
 
1
    Financial instruments
 
 
 
 
(1)
 
(1)
    Total other comprehensive income (loss)
 
2
 
(1)
 
1
 
(1)
 
Comprehensive income
$
376
$
(153)
$
223
$
7
$
230
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
23
$
8
    Restricted cash
 
7
 
8
    Accounts receivable – trade, net
 
314
 
285
    Accounts receivable – other, net
 
21
 
35
    Due from unconsolidated affiliates
 
1
 
1
    Income taxes receivable
 
59
 
    Inventories
 
67
 
73
    Regulatory balancing accounts – net undercollected
 
626
 
711
    Regulatory assets
 
116
 
54
    Fixed-price contracts and other derivatives
 
40
 
44
    Other
 
86
 
125
        Total current assets
 
1,360
 
1,344
           
Other assets:
       
    Restricted cash
 
12
 
11
    Deferred taxes recoverable in rates
 
848
 
824
    Other regulatory assets
 
1,026
 
1,086
    Nuclear decommissioning trusts
 
1,145
 
1,131
    Sundry
 
368
 
282
        Total other assets
 
3,399
 
3,334
           
Property, plant and equipment:
       
    Property, plant and equipment
 
15,882
 
15,478
    Less accumulated depreciation
 
(4,008)
 
(3,860)
        Property, plant and equipment, net ($396 and $410 at June 30, 2015 and
            December 31, 2014, respectively, related to VIE)
 
11,874
 
11,618
Total assets
$
16,633
$
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)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
40
$
246
    Accounts payable
 
361
 
441
    Due to unconsolidated affiliates
 
7
 
21
    Income taxes payable
 
 
30
    Deferred income taxes
 
185
 
53
    Interest payable
 
41
 
40
    Accrued compensation and benefits
 
74
 
124
    Current portion of long-term debt
 
470
 
365
    Asset retirement obligations
 
100
 
120
    Fixed-price contracts and other derivatives
 
45
 
40
    Customer deposits
 
70
 
71
    Other
 
203
 
237
        Total current liabilities
 
1,596
 
1,788
 
Long-term debt ($310 and $315 at June 30, 2015 and December 31, 2014,
    respectively, related to VIE)
 
4,498
 
4,319
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
42
 
41
    Pension and other postretirement benefit plan obligations, net of plan assets
 
225
 
216
    Deferred income taxes
 
2,133
 
2,121
    Deferred investment tax credits
 
20
 
22
    Regulatory liabilities arising from removal obligations
 
1,584
 
1,557
    Asset retirement obligations
 
745
 
754
    Fixed-price contracts and other derivatives
 
179
 
153
    Deferred credits and other
 
345
 
333
        Total deferred credits and other liabilities
 
5,273
 
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
 
3,879
 
3,606
    Accumulated other comprehensive income (loss)
 
(12)
 
(12)
        Total SDG&E shareholder's equity
 
5,205
 
4,932
    Noncontrolling interest
 
61
 
60
        Total equity
 
5,266
 
4,992
Total liabilities and equity
$
16,633
$
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)
 
Six months ended June 30,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
281
$
230
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation
 
294
 
261
        Deferred income taxes and investment tax credits
 
103
 
132
        Plant closure adjustment
 
(21)
 
(13)
        Fixed-price contracts and other derivatives
 
(2)
 
(3)
        Other
 
(9)
 
(24)
    Net change in other working capital components
 
(40)
 
(231)
    Changes in other assets
 
(59)
 
37
    Changes in other liabilities
 
3
 
19
        Net cash provided by operating activities
 
550
 
408
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(600)
 
(543)
    Purchases of nuclear decommissioning trust assets
 
(227)
 
(354)
    Proceeds from sales by nuclear decommissioning trusts
 
221
 
350
    Decrease in restricted cash
 
19
 
62
    Increase in restricted cash
 
(19)
 
(64)
        Net cash used in investing activities
 
(606)
 
(549)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Issuances of long-term debt
 
388
 
100
    Payments on long-term debt
 
(105)
 
(20)
    (Decrease) increase in short-term debt, net
 
(206)
 
68
    Capital distributions made by Otay Mesa VIE
 
(6)
 
(13)
        Net cash provided by financing activities
 
71
 
135
         
Increase (decrease) in cash and cash equivalents
 
15
 
(6)
Cash and cash equivalents, January 1
 
8
 
27
Cash and cash equivalents, June 30
$
23
$
21
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
99
$
98
    Income tax payments, net of refunds
 
99
 
12
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
       
    Accrued capital expenditures
$
118
$
103
    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 June 30,
Six months ended June 30,
 
2015
2014
2015
2014
 
(unaudited)
                 
Operating revenues
$
780
$
917
$
1,828
$
2,002
Operating expenses
               
    Cost of natural gas
 
196
 
321
 
463
 
829
    Operation and maintenance
 
346
 
337
 
660
 
642
    Depreciation
 
113
 
107
 
226
 
212
    Franchise fees and other taxes
 
31
 
30
 
65
 
68
        Total operating expenses
 
686
 
795
 
1,414
 
1,751
Operating income
 
94
 
122
 
414
 
251
Other income, net
 
9
 
3
 
17
 
7
Interest income
 
3
 
 
3
 
Interest expense
 
(19)
 
(16)
 
(38)
 
(33)
Income before income taxes
 
87
 
109
 
396
 
225
Income tax expense
 
(16)
 
(28)
 
(111)
 
(66)
Net income
 
71
 
81
 
285
 
159
Preferred dividend requirements
 
(1)
 
(1)
 
(1)
 
(1)
Earnings attributable to common shares
$
70
$
80
$
284
$
158
See Notes to Condensed Consolidated Financial Statements.
       

 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Pretax
Income tax
Net-of-tax
 
amount
expense
amount
 
Three months ended June 30, 2015 and 2014
 
(unaudited)
2015:
           
Net income/Comprehensive income
$
87
$
(16)
$
71
2014:
           
Net income/Comprehensive income
$
109
$
(28)
$
81

 
Six months ended June 30, 2015 and 2014
 
(unaudited)
2015:
           
Net income/Comprehensive income
$
396
$
(111)
$
285
2014:
           
Net income/Comprehensive income
$
225
$
(66)
$
159
See Notes to Condensed Consolidated Financial Statements.
           
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
231
$
85
    Accounts receivable – trade, net
 
348
 
586
    Accounts receivable – other, net
 
76
 
51
    Due from unconsolidated affiliates
 
273
 
4
    Income taxes receivable
 
 
5
    Inventories
 
57
 
181
    Regulatory balancing accounts – net undercollected
 
172
 
35
    Regulatory assets
 
7
 
5
    Temporary LIFO liquidation
 
41
 
    Other
 
28
 
36
        Total current assets
 
1,233
 
988
         
Other assets:
       
    Regulatory assets arising from pension obligations
 
650
 
617
    Other regulatory assets
 
539
 
472
    Other postretirement benefit plan assets, net of plan obligations
 
5
 
4
    Sundry
 
146
 
136
        Total other assets
 
1,340
 
1,229
         
Property, plant and equipment:
       
    Property, plant and equipment
 
13,403
 
12,886
    Less accumulated depreciation
 
(4,767)
 
(4,642)
        Property, plant and equipment, net
 
8,636
 
8,244
Total assets
$
11,209
$
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)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND SHAREHOLDERS' EQUITY
       
Current liabilities:
       
    Short-term debt
$
$
50
    Accounts payable – trade
 
305
 
532
    Accounts payable – other
 
66
 
88
    Due to unconsolidated affiliate
 
 
13
    Income taxes payable
 
13
 
    Deferred income taxes
 
146
 
53
    Accrued compensation and benefits
 
118
 
129
    Current portion of long-term debt
 
9
 
    Customer deposits
 
73
 
75
    Other
 
142
 
149
        Total current liabilities
 
872
 
1,089
Long-term debt
 
2,498
 
1,906
Deferred credits and other liabilities:
       
    Customer advances for construction
 
102
 
102
    Pension obligation, net of plan assets
 
666
 
633
    Deferred income taxes
 
1,267
 
1,212
    Deferred investment tax credits
 
14
 
16
    Regulatory liabilities arising from removal obligations
 
1,160
 
1,167
    Asset retirement obligations
 
1,281
 
1,255
    Deferred credits and other
 
284
 
300
        Total deferred credits and other liabilities
 
4,774
 
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
 
2,195
 
1,911
    Accumulated other comprehensive income (loss)
 
(18)
 
(18)
        Total shareholders' equity
 
3,065
 
2,781
Total liabilities and shareholders' equity
$
11,209
$
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)
 
Six months ended June 30,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
285
$
159
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation
 
226
 
212
        Deferred income taxes and investment tax credits
 
76
 
59
        Other
 
(15)
 
(2)
    Net change in other working capital components
 
(58)
 
61
    Changes in other assets
 
(30)
 
(27)
    Changes in other liabilities
 
(1)
 
1
        Net cash provided by operating activities
 
483
 
463
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(603)
 
(500)
    Increase in loans to affiliates, net
 
(279)
 
        Net cash used in investing activities
 
(882)
 
(500)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Preferred dividends paid
 
(1)
 
(1)
    Issuances of long-term debt
 
599
 
248
    Repayment of long-term debt
 
 
(250)
    (Decrease) increase in short-term debt, net
 
(50)
 
31
    Other
 
(3)
 
(2)
        Net cash provided by financing activities
 
545
 
26
         
Increase (decrease) in cash and cash equivalents
 
146
 
(11)
Cash and cash equivalents, January 1
 
85
 
27
Cash and cash equivalents, June 30
$
231
$
16
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
36
$
32
    Income tax payments, net
 
14
 
19
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
       
    Accrued capital expenditures
$
143
$
102
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 $72 million lower operating revenues and $48 million lower earnings for both Sempra Energy and SoCalGas for the three months ended June 30, 2015 compared to the same period in 2014, and $91 million higher operating revenues and $65 million higher earnings for both Sempra Energy and SoCalGas for the first six months 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 June 30, 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, Chilquinta Energía S.A. (Chilquinta Energía) in Chile and Luz del Sur S.A.A. (Luz del Sur) in Peru. 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.
 
ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 $88 million, $34 million, and $18 million at June 30, 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 (Con Edison 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 and Assets on our Condensed Consolidated Statement of Operations for the six months ended June 30, 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, the Copper Mountain Solar 3 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 May 2014, Sempra Renewables invested $109 million (and an additional $12 million in November 2014, as adjusted for financial position at closing) to become a 50-percent partner with Con Edison Development in four fully operating solar facilities in California. We discuss our investment in the California solar partnership further in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 

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, a portion of which was paid in the first quarter of 2015.
 


 
SEMPRA NATURAL GAS
 


 
Mesquite Power Sale
 

In April 2015, Sempra Natural Gas sold the remaining 625-MW block of the Mesquite Power plant, together with a related power sales contract, for net cash proceeds of $347 million. We recognized a pretax gain on the sale of $61 million ($36 million after-tax), included in Gain on Sale of Equity Interest and Assets on our Condensed Consolidated Statement of Operations. The asset was classified as held for sale at December 31, 2014.
 
 
 

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
 

In addition to Sempra Renewables’ investment in the California solar partnership discussed in Note 3 above, during the six months ended June 30, 2015 and 2014, Sempra Renewables invested cash of $18 million and $45 million, respectively, in its other joint ventures.
 


 
SEMPRA NATURAL GAS
 

During the six months ended June 30, 2015, Sempra Natural Gas invested $3 million of cash in its joint venture, Cameron LNG Holdings, LLC (Cameron LNG Holdings or Cameron LNG JV), accrued $7 million for a project capital call due and subsequently paid in July 2015, and capitalized $24 million of interest related to this equity method investment that has not commenced planned principal operations.
 
In April 2015, Sempra Natural Gas invested $113 million of cash in its equity method investment, Rockies Express Pipeline LLC, a partnership that operates the Rockies Express pipeline, to repay project debt that matured in early 2015.
 


 
 

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
   
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
SDG&E
$
3
$
8
$
$
$
64
$
65
$
67
$
73
SoCalGas
 
29
 
155
 
 
 
28
 
26
 
57
 
181
Sempra South American
                               
     Utilities
 
 
 
 
 
35
 
33
 
35
 
33
Sempra Mexico
 
 
 
10
 
9
 
9
 
9
 
19
 
18
Sempra Renewables
 
 
 
 
 
2
 
2
 
2
 
2
Sempra Natural Gas
 
81
 
83
 
4
 
5
 
1
 
1
 
86
 
89
Sempra Energy
                               
     Consolidated
$
113
$
246
$
14
$
14
$
139
$
136
$
266
$
396

Temporary LIFO Liquidation
 

SoCalGas values natural gas inventory by the last-in first-out (LIFO) method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. Temporary LIFO liquidation represents the difference between the carrying value of natural gas inventory withdrawn during the period for delivery to customers and the projected cost of the replacement of that inventory during summer months. For interim periods, these differences result in an asset or liability, which at June 30, 2015 is an asset recorded in Temporary LIFO Liquidation on SoCalGas’ Condensed Consolidated Balance Sheet and Other Current Assets on Sempra Energy’s Condensed Consolidated Balance Sheet.
 
 
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 $885 million at June 30, 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 $61 million at June 30, 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 $320 million at June 30, 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.
 
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 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 June 30,
Six months ended June 30,
 
2015
2014
2015
2014
Operating expenses
               
    Cost of electric fuel and purchased power
$
(21)
$
(22)
$
(39)
$
(40)
    Operation and maintenance
 
6
 
5
 
10
 
10
    Depreciation
 
6
 
7
 
12
 
14
        Total operating expenses
 
(9)
 
(10)
 
(17)
 
(16)
Operating income
 
9
 
10
 
17
 
16
Interest expense
 
(5)
 
(4)
 
(9)
 
(8)
Income before income taxes/Net income
 
4
 
6
 
8
 
8
Earnings attributable to noncontrolling interest
 
(4)
 
(6)
 
(8)
 
(8)
   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.
 


 
Sempra Natural Gas
 

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 $1,043 million and $1,007 million at June 30, 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 June 30, 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; however, their financial statements are not material to the financial statements of Sempra Energy. 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.
 



 
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 June 30,
 
2015
2014
2015
2014
Service cost
$
29
$
26
$
7
$
6
Interest cost
 
39
 
41
 
11
 
12
Expected return on assets
 
(44)