Sempra Energy/SDG&E/SoCalGas June 30, 2016 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, 2016
 
 
 
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
 
488 8th Avenue
     
 
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 July 29, 2016:
         
           
Sempra Energy
249,801,432 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
81
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
128
Item 4.
Controls and Procedures
129
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
130
Item 1A.
Risk Factors
130
Item 6.
Exhibits
130
     
Signatures
132
     

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," "assumes," "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, legal and regulatory conditions, decisions and developments;
§
actions and the timing of actions, including general rate case decisions, new regulations, issuances of permits to construct, operate, and maintain facilities and equipment and to use land, franchise agreements and licenses for operation, by the California Public Utilities Commission, California State Legislature, U.S. Department of Energy, California Division of Oil, Gas, and Geothermal Resources, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, California Energy Commission, U.S. Environmental Protection Agency, Pipeline and Hazardous Materials Safety Administration, California Air Resources Board, South Coast Air Quality Management District, Los Angeles County Department of Public Health, Mexican Competition Commission, states, cities and counties, and other regulatory and governmental bodies in the 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, risks in obtaining the consent of our partners, and risks in obtaining adequate and competitive financing for such projects;
§
the resolution of civil and criminal litigation and regulatory investigations;
§
deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers, and delays in, or disallowance or denial of, regulatory agency authorization to recover costs in rates from customers;
§
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, moratoriums on the ability to withdraw natural gas from or inject natural gas into storage facilities, pipeline explosions and equipment failures;
§
energy markets; the timing and extent of changes and volatility in commodity prices; and the impact on the value of our natural gas storage and related assets and our investments 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;
§
risks posed by decisions and actions of third parties who control the operations of investments in which we do not have a controlling interest, and risks that our partners or counterparties will be unable (due to liquidity issues, bankruptcy or otherwise) or unwilling to fulfill their contractual commitments;
§
weather conditions, natural disasters, catastrophic accidents, equipment failures, terrorist attacks and other events that may disrupt our operations, damage our facilities and systems, cause the release of greenhouse gasses, radioactive materials and harmful emissions, and subject us to third-party liability for property damage or personal injuries, fines and penalties, some of which may not be covered by insurance (including costs in excess of applicable policy limits) or may be disputed by insurers;
§
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 and employees;
§
failure to obtain regulatory approval for projects required to enhance safety and reliability;
§
the ability to win competitively bid infrastructure projects against a number of strong competitors willing to aggressively bid for these projects;
§
capital markets conditions, including the availability of credit and the liquidity of our investments, and inflation, interest and currency exchange rates;
§
disallowance of regulatory assets associated with, or decommissioning costs of, the San Onofre Nuclear Generating Station facility due to increased regulatory oversight, including motions to modify settlements;
§
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 and increased reliance on natural gas and natural gas transmission systems;
§
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; 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 and other reports that we file 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,
   
2016
2015
2016
2015
   
(unaudited)
REVENUES
               
Utilities
$
1,994
$
2,133
$
4,436
$
4,555
Energy-related businesses
 
162
 
234
 
342
 
494
    Total revenues
 
2,156
 
2,367
 
4,778
 
5,049
EXPENSES AND OTHER INCOME
               
Utilities:
               
    Cost of natural gas
 
(183)
 
(239)
 
(494)
 
(585)
    Cost of electric fuel and purchased power
 
(561)
 
(498)
 
(1,076)
 
(979)
Energy-related businesses:
               
    Cost of natural gas, electric fuel and purchased power
 
(62)
 
(73)
 
(118)
 
(171)
    Other cost of sales
 
(226)
 
(42)
 
(261)
 
(77)
Operation and maintenance
 
(727)
 
(713)
 
(1,428)
 
(1,371)
Depreciation and amortization
 
(314)
 
(307)
 
(642)
 
(610)
Franchise fees and other taxes
 
(96)
 
(96)
 
(207)
 
(203)
Plant closure adjustment
 
 
 
 
21
Gain on sale of assets
 
 
62
 
 
62
Equity earnings (losses), before income tax
 
14
 
27
 
(8)
 
46
Other income, net
 
23
 
37
 
72
 
76
Interest income
 
6
 
10
 
12
 
17
Interest expense
 
(142)
 
(139)
 
(285)
 
(273)
(Loss) income before income taxes and equity earnings
               
    of certain unconsolidated subsidiaries
 
(112)
 
396
 
343
 
1,002
Income tax benefit (expense)
 
106
 
(98)
 
(36)
 
(261)
Equity earnings, net of income tax
 
33
 
22
 
50
 
37
Net income
 
27
 
320
 
357
 
778
Earnings attributable to noncontrolling interests
 
(10)
 
(24)
 
(21)
 
(45)
Preferred dividends of subsidiary
 
(1)
 
(1)
 
(1)
 
(1)
Earnings
$
16
$
295
$
335
$
732
                   
Basic earnings per common share
$
0.06
$
1.19
$
1.34
$
2.95
                   
Weighted-average number of shares outstanding,
               
    basic (thousands)
 
250,096
 
248,108
 
249,915
 
247,916
                   
Diluted earnings per common share
$
0.06
$
1.17
$
1.33
$
2.91
                   
Weighted-average number of shares outstanding,
               
    diluted (thousands)
 
251,938
 
251,491
 
251,686
 
251,264
                   
Dividends declared per share of common stock
$
0.75
$
0.70
$
1.51
$
1.40
See Notes to Condensed Consolidated Financial Statements.
       
 

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
   
Sempra Energy shareholders' equity
       
   
Pretax
Income tax
Net-of-tax
Noncontrolling
 
   
amount
benefit (expense)
amount
interests (after-tax)
Total
   
Three months ended June 30, 2016 and 2015
   
(unaudited)
2016:
                   
Net (loss) income
$
(89)
$
106
$
17
$
10
$
27
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
11
 
 
11
 
 
11
    Financial instruments
 
(78)
 
35
 
(43)
 
1
 
(42)
    Pension and other postretirement benefits
 
2
 
(1)
 
1
 
 
1
    Total other comprehensive (loss) income
 
(65)
 
34
 
(31)
 
1
 
(30)
Comprehensive (loss) income
 
(154)
 
140
 
(14)
 
11
 
(3)
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive (loss) income, after preferred
                   
    dividends of subsidiary
$
(155)
$
140
$
(15)
$
11
$
(4)
2015:
                   
Net income
$
394
$
(98)
$
296
$
24
$
320
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
(43)
 
 
(43)
 
(5)
 
(48)
    Financial instruments
 
95
 
(36)
 
59
 
6
 
65
    Pension and other postretirement benefits
 
2
 
(1)
 
1
 
 
1
    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
                       
 
   
Six months ended June 30, 2016 and 2015
   
(unaudited)
2016:
                   
Net income
$
372
$
(36)
$
336
$
21
$
357
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
79
 
 
79
 
5
 
84
    Financial instruments
 
(237)
 
110
 
(127)
 
(4)
 
(131)
    Pension and other postretirement benefits
 
4
 
(2)
 
2
 
 
2
    Total other comprehensive (loss) income
 
(154)
 
108
 
(46)
 
1
 
(45)
Comprehensive income
 
218
 
72
 
290
 
22
 
312
Preferred dividends of subsidiary
 
(1)
 
 
(1)
 
 
(1)
Comprehensive income, after preferred
                   
    dividends of subsidiary
$
217
$
72
$
289
$
22
$
311
2015:
                   
Net income
$
994
$
(261)
$
733
$
45
$
778
Other comprehensive income (loss):
                   
    Foreign currency translation adjustments
 
(105)
 
 
(105)
 
(13)
 
(118)
    Financial instruments
 
6
 
(2)
 
4
 
1
 
5
    Pension and other postretirement benefits
 
4
 
(2)
 
2
 
 
2
    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
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
 
2016
2015(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
616
$
403
    Restricted cash
 
17
 
27
    Accounts receivable – trade, net
 
994
 
1,283
    Accounts receivable – other
 
140
 
190
    Due from unconsolidated affiliates
 
6
 
6
    Income taxes receivable
 
36
 
30
    Inventories
 
270
 
298
    Regulatory balancing accounts – undercollected
 
336
 
307
    Fixed-price contracts and other derivatives
 
65
 
80
    Assets held for sale
 
654
 
    Other
 
207
 
267
        Total current assets
 
3,341
 
2,891
           
Other assets:
       
    Restricted cash
 
18
 
20
    Due from unconsolidated affiliates
 
192
 
186
    Regulatory assets
 
3,353
 
3,273
    Nuclear decommissioning trusts
 
1,103
 
1,063
    Investments
 
2,267
 
2,905
    Goodwill
 
786
 
819
    Other intangible assets
 
399
 
404
    Dedicated assets in support of certain benefit plans
 
436
 
464
    Insurance receivable for Aliso Canyon costs
 
679
 
325
    Sundry
 
806
 
761
        Total other assets
 
10,039
 
10,220
           
Property, plant and equipment:
       
    Property, plant and equipment
 
39,756
 
38,200
    Less accumulated depreciation and amortization
 
(10,261)
 
(10,161)
        Property, plant and equipment, net ($372 and $383 at June 30, 2016 and
            December 31, 2015, respectively, related to VIE)
 
29,495
 
28,039
Total assets
$
42,875
$
41,150
(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,
 
2016
2015(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
1,777
$
622
    Accounts payable – trade
 
1,140
 
1,133
    Accounts payable – other
 
101
 
142
    Due to unconsolidated affiliates
 
8
 
14
    Dividends and interest payable
 
314
 
303
    Accrued compensation and benefits
 
289
 
423
    Regulatory balancing accounts – overcollected
 
120
 
34
    Current portion of long-term debt
 
907
 
907
    Fixed-price contracts and other derivatives
 
54
 
56
    Customer deposits
 
150
 
153
    Reserve for Aliso Canyon costs
 
117
 
274
    Liabilities held for sale
 
222
 
    Other
 
481
 
551
        Total current liabilities
 
5,680
 
4,612
Long-term debt ($298 and $303 at June 30, 2016 and December 31, 2015, respectively,
     related to VIE)
 
13,178
 
13,134
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
152
 
149
    Pension and other postretirement benefit plan obligations, net of plan assets
 
1,171
 
1,152
    Deferred income taxes
 
3,071
 
3,157
    Deferred investment tax credits
 
32
 
32
    Regulatory liabilities arising from removal obligations
 
2,891
 
2,793
    Asset retirement obligations
 
2,491
 
2,126
    Fixed-price contracts and other derivatives
 
262
 
240
    Deferred credits and other
 
1,384
 
1,176
        Total deferred credits and other liabilities
 
11,454
 
10,825
           
Commitments and contingencies (Note 11)
       
           
Equity:
       
    Preferred stock (50 million shares authorized; none issued)
 
 
    Common stock (750 million shares authorized; 250 million and 248 million shares
       
        outstanding at June 30, 2016 and December 31, 2015, respectively; no par value)
 
2,681
 
2,621
    Retained earnings
 
9,952
 
9,994
    Accumulated other comprehensive income (loss)
 
(852)
 
(806)
        Total Sempra Energy shareholders' equity
 
11,781
 
11,809
    Preferred stock of subsidiary
 
20
 
20
    Other noncontrolling interests
 
762
 
750
        Total equity
 
12,563
 
12,579
Total liabilities and equity
$
42,875
$
41,150
(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,
   
2016
2015
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
357
$
778
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation and amortization
 
642
 
610
        Deferred income taxes and investment tax credits
 
(42)
 
203
        Gain on sale of assets
 
 
(62)
        Plant closure adjustment
 
 
(21)
        Equity earnings
 
(42)
 
(83)
        Fixed-price contracts and other derivatives
 
41
 
        Other
 
33
 
(8)
    Net change in other working capital components
 
167
 
(116)
    Insurance receivable for Aliso Canyon costs
 
(354)
 
    Changes in other assets
 
(67)
 
(89)
    Changes in other liabilities
 
147
 
7
        Net cash provided by operating activities
 
882
 
1,219
           
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(2,006)
 
(1,466)
    Expenditures for investments and acquisition of business
 
(46)
 
(161)
    Proceeds from sale of assets
 
443
 
347
    Distributions from investments
 
12
 
9
    Purchases of nuclear decommissioning and other trust assets
 
(206)
 
(229)
    Proceeds from sales by nuclear decommissioning and other trusts
 
204
 
221
    Increases in restricted cash
 
(32)
 
(34)
    Decreases in restricted cash
 
44
 
49
    Advances to unconsolidated affiliates
 
(9)
 
(20)
    Repayments of advances to unconsolidated affiliates
 
9
 
74
    Other
 
(6)
 
9
        Net cash used in investing activities
 
(1,593)
 
(1,201)
           
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Common dividends paid
 
(335)
 
(308)
    Preferred dividends paid by subsidiary
 
(1)
 
(1)
    Issuances of common stock
 
29
 
31
    Repurchases of common stock
 
(54)
 
(66)
    Issuances of debt (maturities greater than 90 days)
 
1,384
 
1,547
    Payments on debt (maturities greater than 90 days)
 
(986)
 
(846)
    Increase (decrease) in short-term debt, net
 
865
 
(339)
    Net distributions to noncontrolling interests
 
(10)
 
(14)
    Tax benefit related to share-based compensation
 
34
 
52
    Other
 
(10)
 
(6)
        Net cash provided by financing activities
 
916
 
50
         
Effect of exchange rate changes on cash and cash equivalents
 
8
 
(2)
           
Increase in cash and cash equivalents
 
213
 
66
Cash and cash equivalents, January 1
 
403
 
570
Cash and cash equivalents, June 30
$
616
$
636
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
   
Six months ended June 30,
 
2016
2015
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
279
$
260
    Income tax payments, net of refunds
 
73
 
72
           
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
$
541
   $
302
    Financing of build-to-suit property
 
 
39
    Redemption of industrial development bonds
 
 
79
    Common dividends issued in stock
 
27
 
27
    Dividends declared but not paid
 
195
 
178
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,
 
2016
2015
2016
2015
 
(unaudited)
Operating revenues
               
    Electric
$
897
$
874
$
1,740
$
1,679
    Natural gas
 
95
 
98
 
243
 
259
        Total operating revenues
 
992
 
972
 
1,983
 
1,938
Operating expenses
               
    Cost of electric fuel and purchased power
 
314
 
251
 
562
 
479
    Cost of natural gas
 
25
 
31
 
64
 
85
    Operation and maintenance
 
266
 
255
 
512
 
472
    Depreciation and amortization
 
158
 
149
 
317
 
294
    Franchise fees and other taxes
 
59
 
59
 
122
 
120
    Plant closure adjustment
 
 
 
 
(21)
        Total operating expenses
 
822
 
745
 
1,577
 
1,429
Operating income
 
170
 
227
 
406
 
509
Other income, net
 
13
 
9
 
27
 
18
Interest expense
 
(48)
 
(52)
 
(96)
 
(104)
Income before income taxes
 
135
 
184
 
337
 
423
Income tax expense
 
(48)
 
(54)
 
(120)
 
(142)
Net income
 
87
 
130
 
217
 
281
Losses (earnings) attributable to noncontrolling interest
 
13
 
(4)
 
12
 
(8)
Earnings attributable to common shares
$
100
$
126
$
229
$
273
See Notes to Condensed Consolidated Financial Statements.
       
                 
 
 
 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(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, 2016 and 2015
 
(unaudited)
2016:
                   
Net income (loss)
$
148
$
(48)
$
100
$
(13)
$
87
Other comprehensive income (loss):
                   
    Financial instruments
 
 
 
 
1
 
1
    Total other comprehensive income
 
 
 
 
1
 
1
Comprehensive income (loss)
$
148
$
(48)
$
100
$
(12)
$
88
2015:
                   
Net income
$
180
$
(54)
$
126
$
4
$
130
Other comprehensive income (loss):
                   
    Financial instruments
 
 
 
 
3
 
3
    Total other comprehensive income
 
 
 
 
3
 
3
Comprehensive income
$
180
$
(54)
$
126
$
7
$
133

 
Six months ended June 30, 2016 and 2015
 
(unaudited)
2016:
                   
Net income (loss)
$
349
$
(120)
$
229
$
(12)
$
217
Other comprehensive income (loss):
                   
    Financial instruments
 
 
 
 
(1)
 
(1)
    Total other comprehensive loss
 
 
 
 
(1)
 
(1)
Comprehensive income (loss)
$
349
$
(120)
$
229
$
(13)
$
216
2015:
                   
Net income
$
415
$
(142)
$
273
$
8
$
281
Other comprehensive income (loss):
                   
    Financial instruments
 
 
 
 
1
 
1
    Total other comprehensive income
 
 
 
 
1
 
1
Comprehensive income
$
415
$
(142)
$
273
$
9
$
282
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2016
2015(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
8
$
20
    Restricted cash
 
17
 
23
    Accounts receivable – trade, net
 
310
 
331
    Accounts receivable – other
 
14
 
17
    Due from unconsolidated affiliates
 
163
 
1
    Income taxes receivable
 
33
 
1
    Inventories
 
71
 
75
    Regulatory balancing accounts – net undercollected
 
336
 
307
    Regulatory assets
 
93
 
107
    Fixed-price contracts and other derivatives
 
39
 
53
    Other
 
42
 
69
        Total current assets
 
1,126
 
1,004
           
Other assets:
       
    Restricted cash
 
3
 
    Deferred taxes recoverable in rates
 
938
 
914
    Other regulatory assets
 
933
 
977
    Nuclear decommissioning trusts
 
1,103
 
1,063
    Sundry
 
335
 
301
        Total other assets
 
3,312
 
3,255
           
Property, plant and equipment:
       
    Property, plant and equipment
 
17,000
 
16,458
    Less accumulated depreciation and amortization
 
(4,399)
 
(4,202)
        Property, plant and equipment, net ($372 and $383 at June 30, 2016 and
            December 31, 2015, respectively, related to VIE)
 
12,601
 
12,256
Total assets
$
17,039
$
16,515
(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,
   
2016
2015(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
54
$
168
    Accounts payable
 
375
 
377
    Due to unconsolidated affiliates
 
190
 
55
    Interest payable
 
40
 
39
    Accrued compensation and benefits
 
77
 
129
    Accrued franchise fees
 
31
 
66
    Current portion of long-term debt
 
191
 
50
    Asset retirement obligations
 
63
 
99
    Fixed-price contracts and other derivatives
 
37
 
51
    Customer deposits
 
72
 
72
    Other
 
88
 
101
        Total current liabilities
 
1,218
 
1,207
Long-term debt ($298 and $303 at June 30, 2016 and December 31, 2015,
    respectively, related to VIE)
 
4,681
 
4,455
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
50
 
46
    Pension and other postretirement benefit plan obligations, net of plan assets
 
221
 
212
    Deferred income taxes
 
2,523
 
2,472
    Deferred investment tax credits
 
20
 
19
    Regulatory liabilities arising from removal obligations
 
1,743
 
1,629
    Asset retirement obligations
 
765
 
729
    Fixed-price contracts and other derivatives
 
98
 
106
    Deferred credits and other
 
406
 
364
        Total deferred credits and other liabilities
 
5,826
 
5,577
           
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
 
3,947
 
3,893
    Accumulated other comprehensive income (loss)
 
(8)
 
(8)
        Total SDG&E shareholder's equity
5,277
 
5,223
    Noncontrolling interest
 
37
 
53
        Total equity
 
5,314
 
5,276
Total liabilities and equity
$
17,039
$
16,515
(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,
 
2016
2015
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
217
$
281
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation and amortization
 
317
 
294
        Deferred income taxes and investment tax credits
 
26
 
103
        Plant closure adjustment
 
 
(21)
        Fixed-price contracts and other derivatives
 
(1)
 
(2)
        Other
 
(21)
 
(9)
    Net change in other working capital components
 
 
(40)
    Changes in other assets
 
(39)
 
(59)
    Changes in other liabilities
 
9
 
3
        Net cash provided by operating activities
 
508
 
550
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(602)
 
(600)
    Purchases of nuclear decommissioning trust assets
 
(203)
 
(227)
    Proceeds from sales by nuclear decommissioning trusts
 
204
 
221
    Increases in restricted cash
 
(21)
 
(19)
    Decreases in restricted cash
 
24
 
19
    Increase in loans to affiliate
 
(172)
 
        Net cash used in investing activities
 
(770)
 
(606)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Issuances of debt (maturities greater than 90 days)
 
498
 
388
    Payments on debt (maturities greater than 90 days)
 
(128)
 
(105)
    Decrease in short-term debt, net
 
(114)
 
(206)
    Capital distributions made by VIE
 
(3)
 
(6)
    Other
 
(3)
 
        Net cash provided by financing activities
 
250
 
71
         
(Decrease) increase in cash and cash equivalents
 
(12)
 
15
Cash and cash equivalents, January 1
 
20
 
8
Cash and cash equivalents, June 30
$
8
$
23
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
92
$
99
    Income tax payments, net
 
125
 
99
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
       
    Dividends declared but not paid
$
175
$
    Accrued capital expenditures
 
124
 
118
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
       
CONDENSED STATEMENTS OF OPERATIONS
       
(Dollars in millions)
       
 
Three months ended June 30,
Six months ended June 30,
 
2016
2015
2016
2015
 
(unaudited)
                 
Operating revenues
$
617
$
780
$
1,650
$
1,828
Operating expenses
               
    Cost of natural gas
 
147
 
196
 
400
 
463
    Operation and maintenance
 
339
 
346
 
666
 
660
    Depreciation and amortization
 
112
 
113
 
234
 
226
    Franchise fees and other taxes
 
30
 
31
 
67
 
65
        Total operating expenses
 
628
 
686
 
1,367
 
1,414
Operating (loss) income
 
(11)
 
94
 
283
 
414
Other income, net
 
6
 
9
 
16
 
17
Interest income
 
 
3
 
 
3
Interest expense
 
(24)
 
(19)
 
(46)
 
(38)
(Loss) income before income taxes
 
(29)
 
87
 
253
 
396
Income tax benefit (expense)
 
29
 
(16)
 
(58)
 
(111)
Net income
 
 
71
 
195
 
285
Preferred dividend requirements
 
(1)
 
(1)
 
(1)
 
(1)
(Losses) earnings attributable to common shares
$
(1)
$
70
$
194
$
284
See Notes to Condensed Financial Statements.
       
 
 
 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
 
Pretax
Income tax
Net-of-tax
 
amount
benefit (expense)
amount
 
Three months ended June 30, 2016 and 2015
 
(unaudited)
2016:
           
Net loss/Comprehensive loss
$
(29)
$
29
$
2015:
           
Net income/Comprehensive income
$
87
$
(16)
$
71

 
Six months ended June 30, 2016 and 2015
 
(unaudited)
2016:
           
Net income/Comprehensive income
$
253
$
(58)
$
195
2015:
           
Net income/Comprehensive income
$
396
$
(111)
$
285
See Notes to Condensed Financial Statements.
           
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2016
2015(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
211
$
58
    Accounts receivable – trade, net
 
337
 
635
    Accounts receivable – other
 
82
 
99
    Due from unconsolidated affiliates
 
7
 
48
    Income taxes receivable
 
6
 
    Inventories
 
44
 
79
    Regulatory assets
 
8
 
7
    Other
 
35
 
40
        Total current assets
 
730
 
966
         
Other assets:
       
    Regulatory assets arising from pension obligations
 
732
 
699
    Other regulatory assets
 
717
 
636
    Insurance receivable for Aliso Canyon costs
 
679
 
325
    Sundry
 
252
 
207
        Total other assets
 
2,380
 
1,867
         
Property, plant and equipment:
       
    Property, plant and equipment
 
14,910
 
14,171
    Less accumulated depreciation and amortization
 
(4,934)
 
(4,900)
        Property, plant and equipment, net
 
9,976
 
9,271
Total assets
$
13,086
$
12,104
(1)
Derived from audited financial statements.
See Notes to Condensed Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
   
June 30,
December 31,
   
2016
2015(1)
   
(unaudited)
   
LIABILITIES AND SHAREHOLDERS' EQUITY
       
Current liabilities:
       
    Accounts payable – trade
$
277
$
422
    Accounts payable – other
 
63
 
76
    Due to unconsolidated affiliate
 
25
 
    Income taxes payable
 
 
3
    Accrued compensation and benefits
 
123
 
160
    Regulatory balancing accounts – net overcollected
 
120
 
34
    Current portion of long-term debt
 
1
 
9
    Customer deposits
 
72
 
76
    Reserve for Aliso Canyon costs
 
117
 
274
    Other
 
181
 
184
        Total current liabilities
 
979
 
1,238
 
Long-term debt
 
2,981
 
2,481
Deferred credits and other liabilities:
       
    Customer advances for construction
 
102
 
103
    Pension obligation, net of plan assets
 
749
 
716
    Deferred income taxes
 
1,637
 
1,532
    Deferred investment tax credits
 
12
 
14
    Regulatory liabilities arising from removal obligations
 
1,149
 
1,145
    Asset retirement obligations
 
1,697
 
1,354
    Deferred credits and other
 
437
 
372
        Total deferred credits and other liabilities
 
5,783
 
5,236
         
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
 
2,474
 
2,280
    Accumulated other comprehensive income (loss)
 
(19)
 
(19)
        Total shareholders' equity
 
3,343
 
3,149
Total liabilities and shareholders' equity
$
13,086
$
12,104
(1)
Derived from audited financial statements.
See Notes to Condensed Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Six months ended June 30,
 
2016
2015
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
195
$
285
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation and amortization
 
234
 
226
        Deferred income taxes and investment tax credits
 
32
 
76
        Other
 
7
 
(15)
    Net change in other working capital components
 
190
 
(58)
    Insurance receivable for Aliso Canyon costs
 
(354)
 
    Changes in other assets
 
(54)
 
(30)
    Changes in other liabilities
 
12
 
(1)
        Net cash provided by operating activities
 
262
 
483
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(650)
 
(603)
    Decrease (increase) in loans to affiliate, net
 
50
 
(279)
        Net cash used in investing activities
 
(600)
 
(882)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Preferred dividends paid
 
(1)
 
(1)
    Issuances of long-term debt
 
499
 
599
    Payments on long-term debt
 
(3)
 
Decrease in short-term debt, net
 
 
(50)
    Other
 
(4)
 
(3)
        Net cash provided by financing activities
 
491
 
545
         
Increase in cash and cash equivalents
 
153
 
146
Cash and cash equivalents, January 1
 
58
 
85
Cash and cash equivalents, June 30
$
211
$
231
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
43
$
36
    Income tax payments, net
 
35
 
14
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
       
    Accrued capital expenditures
$
140
$
143
See Notes to Condensed Financial Statements.
 

 
SEMPRA ENERGY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. GENERAL

PRINCIPLES OF CONSOLIDATION
Sempra Energy
Sempra Energy's Condensed Consolidated Financial Statements include the accounts of Sempra Energy, a California-based Fortune 500 energy-services holding company, and its consolidated subsidiaries and variable interest entities (VIEs). Sempra Energy's principal operating units are
§
San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), which are separate, reportable segments;
§
Sempra International, which includes our Sempra South American Utilities and Sempra Mexico reportable segments; and
§
Sempra U.S. Gas & Power, which includes our Sempra Renewables and Sempra Natural Gas reportable segments.
We provide descriptions of each of our segments in Note 12.
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our Sempra International and Sempra U.S. Gas & Power operating units. Sempra Global is the holding company for most of our subsidiaries that are not subject to California utility regulation. All references in these Notes to "Sempra International," "Sempra U.S. Gas & Power" and their respective reportable segments are not intended to refer to any legal entity with the same or similar name.
Our Sempra Mexico segment includes the operating companies of our subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), as well as certain holding companies and risk management activity. We discuss IEnova further in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015 (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 Notes 3, 4 and 10 of 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' 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.
Throughout this report, we refer to the following as Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements when discussed together or collectively:
§
the Condensed Consolidated Financial Statements and related Notes of Sempra Energy and its subsidiaries and VIEs,
§
the Condensed Consolidated Financial Statements and related Notes of SDG&E and its VIE, and
§
the Condensed Financial Statements and related Notes of SoCalGas.
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, 2016 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, 2015 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2015 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.
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, and their subsidiaries. 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, Mobile Gas, Willmut Gas, and Ecogas prepare their financial statements in accordance with U.S. GAAP provisions governing rate-regulated operations, as we discuss in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
Pipeline projects currently under construction by IEnova that are both regulated by the Comisión Reguladora de Energía (or CRE, the Energy Regulatory Commission) and meet the regulatory accounting requirements of U.S. GAAP record the impact of allowance for funds used during construction (AFUDC) related to equity. We discuss AFUDC in Note 5 below and 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 2015-14, "Deferral of the Effective Date," ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," ASU 2016-10, "Identifying Performance Obligations and Licensing," and ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients": ASU 2014-09 provides accounting guidance for revenue 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. Amending ASU 2014-09, ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10 clarifies the determination of whether a good or service is separately identifiable from other promises and revenue recognition related to licenses of intellectual property, and ASU 2016-12 provides guidance on transition, collectability, noncash consideration, and the presentation of sales and other similar taxes.

ASU 2015-14 defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. For public entities, ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016, and is effective for interim periods in the year of adoption. We are currently evaluating the effect of the standards on our ongoing financial reporting and have not yet selected the timing of adoption or our transition method.

ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities": In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments not accounted for under the equity method at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Upon adoption, entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted. The guidance on equity securities without readily determinable fair value will be applied prospectively to all equity investments that exist as of the date of adoption of the standard.
For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. We will adopt ASU 2016-01 on January 1, 2018 as required and do not expect it to materially affect our financial condition, results of operations or cash flows. We will make the required changes to our disclosures upon adoption.
ASU 2016-02, "Leases": ASU 2016-02 requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting and ASU 2014-09. ASU 2016-02 also requires qualitative disclosures along with specific quantitative disclosures for both lessees and lessors.

For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and is effective for interim periods in the year of adoption. The standard requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes optional practical expedients that may be elected, which would allow entities to continue to account for leases that commence before the effective date of the standard in accordance with previous U.S. GAAP unless the lease is modified, except for the lessee requirement to recognize right-of-use assets and lease liabilities for all operating leases on the balance sheet at the reporting date. We are currently evaluating the effect of the standard on our ongoing financial reporting, and have not yet selected the year in which we will adopt the standard.
ASU 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships": ASU 2016-05 provides clarification that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 may be adopted prospectively or using a modified retrospective approach. We prospectively adopted ASU 2016-05 on January 1, 2016, and it did not affect our financial condition, results of operations or cash flows.
ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting": ASU 2016-09 is intended to simplify several aspects of the accounting for employee share-based payment transactions. Under ASU 2016-09, excess tax benefits and tax deficiencies are required to be recorded in earnings, and the requirement to reclassify excess tax benefits from operating to financing activities on the statement of cash flows has been eliminated. ASU 2016-09 also allows entities to withhold taxes up to the maximum individual statutory tax rate without resulting in liability classification of the award and clarifies that cash payments made to taxing authorities in connection with withheld shares should be classified as financing activities in the statement of cash flows. Additionally, the standard provides for an accounting policy election to either continue to estimate forfeitures or account for them as they occur. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted, and is effective for interim periods in the year of adoption. We are currently evaluating the full effect of the standard on our ongoing financial reporting, and have not yet concluded as to whether we will elect an early adoption. If we early adopt in 2016, we will recognize a $34 million tax benefit in earnings, which is currently recorded in Shareholders' Equity, related to the six months ended June 30, 2016, and a benefit to retained earnings as of January 1, 2016 of approximately $107 million, both associated with the provision in ASU 2016-09 to recognize all excess tax benefits related to share-based compensation.
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments": ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments. The standard introduces an "expected credit loss" impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity's assumptions, models and methods for estimating the credit losses.

For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect of the standard on our ongoing financial reporting.

 



NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY

We consolidate assets and liabilities acquired as of the purchase date and include earnings from acquisitions in consolidated earnings after the purchase date.


ACQUISITIONS


Sempra Renewables

In July 2016, Sempra Renewables invested $22 million to acquire a 100-percent interest in the Apple Blossom Wind project, a 100-megawatt (MW) wind farm currently under development in Huron County, Michigan. The wind farm has a 15-year power purchase agreement with Consumers Energy that will commence upon commercial operation, expected in late 2017.
In March 2015, Sempra Renewables invested $8 million to acquire a 100-percent interest in the Black Oak Getty Wind project, a 78-MW wind farm currently under construction in Stearns County, Minnesota. The wind farm has a 20-year power purchase agreement with Minnesota Municipal Power Agency that will commence upon commercial operation, expected in late 2016.


PENDING ACQUISITION


Sempra Mexico

IEnova and Petróleos Mexicanos (or PEMEX, the Mexican state-owned oil company) are 50-50 partners in the joint venture Gasoductos de Chihuahua S. de R.L. de C.V. (GdC). GdC develops and operates energy infrastructure in Mexico. On July 31, 2015, IEnova entered into an agreement to purchase PEMEX's 50-percent interest in GdC. The assets involved in the acquisition included three natural gas pipelines, an ethane pipeline, and a liquid petroleum gas pipeline and associated storage terminal.
In December 2015, Mexico's Comisión Federal de Competencia Económica (COFECE or Mexican Competition Commission) objected to the transaction based upon previous antitrust rulings on PEMEX's indirect ownership of two of the assets, the TDF S. de R.L. de C.V. liquid petroleum gas pipeline (TDF Pipeline) and the San Fernando natural gas pipeline (San Fernando Pipeline), included in the acquisition as proposed. COFECE specified that these assets must be offered by PEMEX in a competitive bidding process as a prerequisite for approval of any transaction involving these two assets. COFECE's decision did not object to IEnova's acquisition of the assets on a market concentration basis.
In July 2016, IEnova announced that the parties reached an agreement to restructure the transaction to allow PEMEX to satisfy the conditions imposed by the COFECE to hold the TDF Pipeline and San Fernando Pipeline for sale in an open bidding process. The open bidding process was held in July 2016 and ended with no bidders participating. Subject to final approval by the COFECE, IEnova expects to acquire GdC's assets consistent with the original agreement, including the TDF and San Fernando pipelines, for a purchase price of approximately $1.1 billion. Also consistent with the original agreement, we expect the transaction to exclude the Los Ramones Norte pipeline that is owned under a separate joint venture with GdC, PEMEX, BlackRock and First Reserve, keeping IEnova's interest in the pipeline at the current 25 percent. We expect the transaction to close in the third quarter of 2016. The transaction remains subject to the satisfactory completion of the Mexican antitrust review and customary closing conditions, and may require further approvals from other Mexican authorities.
IEnova currently accounts for its 50-percent interest in GdC as an equity method investment. At closing, GdC will become a wholly owned, consolidated subsidiary of IEnova. We anticipate that we will recognize a noncash gain associated with the remeasurement of our equity interest in GdC upon consummation of the transaction; however, as the assets to be included in the transaction are not yet confirmed and the valuation of such assets is not finalized, we are unable to reasonably estimate the gain at this time.
Sempra Energy has committed to provide interim financing to close the transaction. We expect to ultimately finance the acquisition with a combination of debt and equity at IEnova based on market conditions.


ASSETS HELD FOR SALE

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 12 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.
The following table summarizes the carrying amounts of the major classes of assets and related liabilities held for sale at June 30, 2016, and we discuss each group of assets below.


ASSETS HELD FOR SALE AT JUNE 30, 2016
(Dollars in millions)
   
   
Termoeléctrica de Mexicali
EnergySouth Inc.
   
Cash and cash equivalents
$
1
$
1
Inventories
 
8
 
3
Other current assets
 
21
 
13
Regulatory assets
 
 
12
Goodwill
 
 
72
Other assets
 
17
 
53
Property, plant and equipment, net
 
250
 
203
    Total assets held for sale
$
297
$
357
           
Accounts payable
$
1
$
9
Other current liabilities
 
6
 
12
Long-term debt
 
 
67
Deferred income taxes
 
13
 
38
Regulatory liabilities
 
 
22
Asset retirement obligations
 
4
 
12
Other liabilities
 
19
 
19
    Total liabilities held for sale
$
43
$
179
   
 
Sempra Mexico

Termoeléctrica de Mexicali
In February 2016, management approved a plan to market and sell Sempra Mexico's Termoeléctrica de Mexicali (TdM), a 625-MW natural gas-fired power plant located in Mexicali, Baja California, Mexico. As a result, we stopped depreciating the plant and classified it as held for sale.
In connection with classifying TdM as held for sale, we recognized expense of $3 million ($2 million after noncontrolling interests) and $32 million ($26 million after noncontrolling interests) in the three months and six months ended June 30, 2016, respectively, in Income Tax Expense on Sempra Energy's Condensed Consolidated Statements of Operations for a deferred Mexican income tax liability related to the excess of carrying value over the tax basis. As the Mexican income tax on this basis difference is based on current carrying value, foreign exchange rates and inflation, such amount could change in future periods until the date of sale.
We considered the estimated fair value of the plant, less costs to sell, and determined that no adjustment to carrying value was required. In estimating fair value, we used both a market approach and discounted cash flow valuation techniques. In the event that the estimated sales price, less transaction costs, is less than the carrying value, or updated market information indicates fair value may be less than carrying value, we would recognize a loss in our results of operations at that time. We expect to complete the sale in the second half of 2016.


Sempra Natural Gas

EnergySouth Inc.
In April 2016, Sempra Natural Gas signed a definitive agreement to sell 100 percent of the outstanding equity of EnergySouth Inc. (EnergySouth), the parent company of Mobile Gas and Willmut Gas. We expect to receive cash proceeds of approximately $323 million, subject to normal adjustments at closing, and the buyer will assume existing debt of approximately $67 million. Litigation at Mobile Gas, discussed in Note 11, will be retained by Mobile Gas at the close of the transaction. The transaction is subject to customary regulatory approvals. In addition, the State of Missouri Public Service Commission (MPSC) in July 2016 opened an investigation into whether the transaction will have any effect on Missouri ratepayers and is subject to MPSC's jurisdiction. We expect the sale to close in 2016.


DIVESTITURES


Sempra Natural Gas

Investment in Rockies Express Pipeline LLC
In March 2016, Sempra Natural Gas entered into an agreement to sell its 25-percent interest in Rockies Express Pipeline LLC (Rockies Express) to a subsidiary of Tallgrass Development, LP for cash consideration of $440 million, subject to adjustment at closing. The transaction closed in May 2016 for total cash proceeds of $443 million.
At the date of the agreement, the carrying value of Sempra Natural Gas' investment in Rockies Express was $484 million. Sempra Natural Gas measured the fair value of its equity method investment at $440 million, and recognized a $44 million ($27 million after-tax) impairment in Equity Earnings (Losses), Before Income Tax, on the Sempra Energy Condensed Consolidated Statement of Operations in the first quarter of 2016. We discuss non-recurring fair value measures and the associated accounting impact on our investment in Rockies Express in Note 8.
In the second quarter of 2016, Sempra Natural Gas permanently released pipeline capacity that it held with Rockies Express and others, as we discuss in Note 11.
Mesquite Power Plant
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 Assets on our Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2015.
 
 


NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

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


SEMPRA MEXICO

In June 2016, Infraestructura Marina del Golfo (IMG), a joint venture between IEnova and a subsidiary of TransCanada Corporation (TransCanada), was awarded the right to build, own and operate the Sur de Texas – Tuxpan natural gas pipeline by the Federal Electricity Commission (Comisión Federal de Electricidad, or CFE). IEnova has a 40-percent interest in the project and TransCanada owns the remaining 60-percent interest. The project is expected to be completed in late 2018 and is fully contracted under a 25-year natural gas transportation service contract with the CFE.


SEMPRA RENEWABLES

Sempra Renewables invested cash of $18 million in its joint ventures during both the six months ended June 30, 2016 and 2015.


SEMPRA NATURAL GAS

Sempra Natural Gas capitalized $24 million of interest during both the six months ended June 30, 2016 and 2015 related to its investment in Cameron LNG Holdings, LLC (Cameron LNG JV), which has not commenced planned principal operations. In addition, during the six months ended June 30, 2015, Sempra Natural Gas invested cash of $3 million in the joint venture and accrued $7 million for a project capital call due and subsequently paid in July 2015.
In May 2016, Sempra Natural Gas sold its 25-percent interest in Rockies Express, as we discuss in Note 3. In April 2015, Sempra Natural Gas invested $113 million of cash in Rockies Express to repay project debt that matured in early 2015.


GUARANTEES

We discuss guarantees that we have provided, which have a maximum aggregate amount of $4.5 billion, in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. These guarantees have an aggregate carrying value of $63 million at June 30, 2016.
 
 


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,
2016
 
December 31,
2015
June 30,
2016
December 31,
2015
June 30,
2016
December 31,
2015
June 30,
2016
December 31,
2015
SDG&E
$
1
 
$
6
$
$
$
70
$
69
$
71
$
75
SoCalGas(1)
 
   
49
 
 
 
44
 
30
 
44
 
79
Sempra South American
                                 
    Utilities
 
   
 
 
 
43
 
30
 
43
 
30
Sempra Mexico
 
   
 
7
 
3
 
2
 
10
 
9
 
13
Sempra Renewables
 
   
 
 
 
3
 
3
 
3
 
3
Sempra Natural Gas
 
96
   
94
 
4
 
3
 
 
1
 
100
 
98
Sempra Energy
                                 
    Consolidated
$
97
 
$
149
$
11
$
6
$
162
$
143
$
270
$
298
(1)
At both June 30, 2016 and December 31, 2015, SoCalGas' natural gas inventory for core customers is net of an inventory loss related to the Aliso Canyon natural gas leak, which we discuss in Note 11.

 
GOODWILL

We discuss goodwill in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $819 million at December 31, 2015 to $786 million at June 30, 2016 is due to the reclassification of EnergySouth goodwill at Sempra Natural Gas to assets held for sale, offset by foreign currency translation at Sempra South American Utilities. We record the offset of the fluctuation from foreign currency translation in Other Comprehensive Income (Loss).

VARIABLE INTEREST ENTITIES
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
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.
Tolling Agreements
SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements). SDG&E's obligation to absorb natural gas costs may be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility's useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on a qualitative approach in which we consider the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE.
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 OMEC 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 $37 million at June 30, 2016 and $53 million at December 31, 2015 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 $310 million at June 30, 2016, 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,
 
2016
2015
2016
2015
Operating expenses
               
    Cost of electric fuel and purchased power
$
(17)
$
(21)
$
(34)
$
(39)
    Operation and maintenance
 
15
 
6
 
19
 
10
    Depreciation and amortization
 
10
 
6
 
17
 
12
        Total operating expenses
 
8
 
(9)
 
2
 
(17)
Operating (loss) income
 
(8)
 
9
 
(2)
 
17
Interest expense
 
(5)
 
(5)
 
(10)
 
(9)
(Loss) income before income taxes/Net (loss) income
 
(13)
 
4
 
(12)
 
8
Losses (earnings) attributable to noncontrolling interest
 
13
 
(4)
 
12
 
(8)
   Earnings attributable to common shares
$
$
$
$
                 

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 of a variable interest entity at June 30, 2016. 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. We provide additional information about power purchase agreements with peaker plant facilities that are VIEs of which SDG&E is not the primary beneficiary in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
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

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, including amounts recognized in Accumulated Other Comprehensive Income (Loss) (AOCI) related to interest-rate cash flow hedges at Cameron LNG JV, was $818 million at June 30, 2016 and $983 million at December 31, 2015. Our maximum exposure to loss includes the carrying value of our investment and the guarantees discussed above in Note 4 and in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.


Other Variable Interest Entities

Sempra Energy's other operating units also enter into arrangements which could include variable interests. We evaluate these arrangements and applicable entities based on 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,
 
2016
2015
2016
2015
Service cost
$
27
$
29
$
6
$
7
Interest cost
 
40
 
39
 
11
 
11
Expected return on assets
 
(41)
 
(44)
 
(18)
 
(17)
Amortization of:
               
    Prior service cost
 
3
 
2
 
 
    Actuarial loss
 
7
 
11
 
 
Regulatory adjustment
 
(28)
 
(30)
 
2
 
Total net periodic benefit cost
$
8
$
7
$
1
$
1
                 
 
Six months ended June 30,
 
2016
2015
2016
2015
Service cost
$
55
$
59
$
11
$
14
Interest cost
 
80
 
78
 
22
 
23
Expected return on assets
 
(83)
 
(88)
 
(35)
 
(34)
Amortization of:
               
    Prior service cost (credit)
 
6
 
5
 
 
(1)
    Actuarial loss
 
13
 
19
 
 
Regulatory adjustment
 
(56)
 
(59)
 
4
 
Total net periodic benefit cost
$
15
$
14
$
2
$
2


NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended June 30,
 
2016
2015
2016
2015
Service cost
$
8
$
8
$
1
$
2
Interest cost
 
11
 
10
 
2
 
2
Expected return on assets
 
(13)
 
(13)
 
(2)
 
(3)
Amortization of:
               
    Prior service cost
 
1
 
1
 
1
 
1
    Actuarial loss (gain)
 
2
 
2
 
(1)
 
Regulatory adjustment
 
(8)
 
(7)
 
(1)
 
(2)
Total net periodic benefit cost
$
1
$
1
$
$
                 
 
Six months ended June 30,
 
2016
2015
2016
2015
Service cost
$
15
$
16
$
2
$
4
Interest cost
 
21
 
20
 
4
 
4
Expected return on assets
 
(25)
 
(27)
 
(5)
 
(6)
Amortization of:
               
    Prior service cost
 
1
 
1
 
2
 
2
    Actuarial loss (gain)
 
5
 
4
 
(1)
 
Regulatory adjustment
 
(15)
 
(12)
 
(2)
 
(4)
Total net periodic benefit cost
$
2
$
2
$
$
 
 
NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended June 30,
 
2016
2015
2016
2015
Service cost
$
18
$
19
$
3
$
5
Interest cost
 
25
 
24
 
9
 
9
Expected return on assets
 
(27)
 
(27)
 
(14)
 
(14)
Amortization of:
               
    Prior service cost (credit)
 
2
 
2
 
(1)
 
(2)
    Actuarial loss
 
2
 
6
 
 
Regulatory adjustment
 
(20)
 
(23)
 
3
 
2
Total net periodic benefit cost
$
$
1
$
$
                 
 
Six months ended June 30,
 
2016
2015
2016
2015
Service cost
$
35
$
38
$
7
$
10
Interest cost
 
50
 
49
 
17
 
18
Expected return on assets
 
(52)
 
(54)
 
(28)
 
(28)
Amortization of:
               
    Prior service cost (credit)
 
4
 
4
 
(2)
 
(4)
    Actuarial loss
 
5
 
11
 
 
Regulatory adjustment
 
(41)
 
(47)
 
6
 
4
Total net periodic benefit cost
$
1
$
1
$
$

 
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 2016:


BENEFIT PLAN CONTRIBUTIONS
(Dollars in millions)
 
Sempra Energy
   
 
Consolidated
SDG&E
SoCalGas
Contributions through June 30, 2016:
           
    Pension plans
$
23
$
2
$
    Other postretirement benefit plans
 
2
 
 
1
Total expected contributions in 2016:
           
    Pension plans
$
123
$
4
$
77
    Other postretirement benefit plans
 
6
 
2
 
1

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 $436 million and $464 million at June 30, 2016 and December 31, 2015, respectively.


EARNINGS PER SHARE

The following table provides earnings per share (EPS) computations for the three months and six months ended June 30, 2016 and 2015. Basic 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 June 30,
 
Six months ended June 30,
   
2016
2015
 
2016
2015
Numerator:
                 
    Earnings/Income attributable to common shares
$
16
$
295
 
$
335
$
732
                     
Denominator:
                 
    Weighted-average common shares
                 
 
outstanding for basic EPS(1)
 
250,096
 
248,108
   
249,915
 
247,916
    Dilutive effect of stock options, restricted
                 
 
stock awards and restricted stock units
 
1,842
 
3,383
   
1,771
 
3,348
    Weighted-average common shares
                 
 
outstanding for diluted EPS
 
251,938
 
251,491
   
251,686
 
251,264
                     
Earnings per share:
                 
    Basic
$
0.06
$
1.19
 
$
1.34
$
2.95
    Diluted
 
0.06
 
1.17
   
1.33
 
2.91
(1)
Includes 568 and 501 average fully vested restricted stock units held in our Deferred Compensation Plan for the three months ended June 30, 2016 and 2015, respectively, and 562 and 476 of such units for the six months ended June 30, 2016 and 2015, respectively. These fully vested restricted stock units are included in weighted-average common shares outstanding for basic EPS because there are no conditions under which the corresponding shares will not be issued.

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). For the three months and six months ended June 30, 2016 and 2015, we had no such antidilutive stock options outstanding. For the three months and six months ended June 30, 2016 and 2015, 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 1,010 antidilutive RSUs from the application of unearned compensation in the treasury stock method for the three months ended June 30, 2016. There were no such antidilutive RSAs and 2,408 such antidilutive RSUs for the six months ended June 30, 2016. There were no such antidilutive RSAs and 4,715 such antidilutive RSUs for both the three months and six months ended June 30, 2015.
Our performance-based RSUs include awards that vest at the end of three-year (for awards granted during or after 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. We primarily use long-term analyst consensus growth estimates for S&P 500 Utilities Index peer companies to develop our EPS RSU targets. 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. We discuss performance-based RSU awards further in Note 8 of the Notes to Consolidated Financial Statements in our Annual Report.
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 1,417,481 and 1,370,460 for the three months ended June 30, 2016 and 2015, respectively, and 1,491,195 and 1,424,855 for the six months ended June 30, 2016 and 2015, 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 $6 million and $7 million for the three months ended June 30, 2016 and 2015, respectively, and $13 million and $15 million for the six months ended June 30, 2016 and 2015, respectively. Pursuant to our Sempra Energy share-based compensation plans, Sempra Energy's compensation committee granted 373,070 TSR RSUs, 94,760 EPS RSUs and 95,876 service-based RSUs during the six months ended June 30, 2016, primarily in January.
During the six months ended June 30, 2016, IEnova issued 183,970 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 AFUDC related to both debt and equity financing of construction projects. We capitalize interest costs incurred to finance capital projects and interest on equity method investments that have not commenced planned principal operations.


The following table shows capitalized financing costs for the three months and six months ended June 30, 2016 and 2015.


CAPITALIZED FINANCING COSTS
       
(Dollars in millions)
       
   
Three months ended June 30,
Six months ended June 30,
   
2016
2015
2016
2015
Sempra Energy Consolidated:
               
    AFUDC related to debt
$
8
$
7
$
15
$
13
    AFUDC related to equity
 
30
 
31
 
57
 
58
    Other capitalized interest
 
20
 
17
 
38
 
34
        Total Sempra Energy Consolidated
$
58
$
55
$
110
$
105
SDG&E:
               
    AFUDC related to debt
$
4
$
4
$
8
$
7
    AFUDC related to equity
 
13
 
10
 
24
 
18
        Total SDG&E
$
17
$
14
$
32
$
25
SoCalGas:
               
    AFUDC related to debt
$
4
$
3
$
7
$
6
    AFUDC related to equity
 
10
 
10
 
20
 
19
        Total SoCalGas
$
14
$
13
$
27
$
25


COMPREHENSIVE INCOME

The following tables present the changes in 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)
   
Foreign
       
Total
   
currency
 
Pension and other
accumulated other
   
translation
Financial
postretirement
comprehensive
   
adjustments
instruments
benefits
income (loss)
   
Three months ended June 30, 2016 and 2015
2016:
               
Balance as of March 31, 2016
$
(514)
$
(221)
$
(86)
$
(821)
Other comprehensive income (loss) before
               
   reclassifications
 
11
 
(48)
 
 
(37)
Amounts reclassified from accumulated other
               
   comprehensive income
 
 
5
 
1
 
6
Net other comprehensive income (loss)
 
11
 
(43)
 
1
 
(31)
Balance as of June 30, 2016
$
(503)
$
(264)
$
(85)
$
(852)
2015:
               
Balance as of March 31, 2015
$
(384)
$
(145)
$
(84)
$
(613)
Other comprehensive (loss) income before
               
   reclassifications
 
(43)
 
57
 
 
14
Amounts reclassified from accumulated other
               
   comprehensive income
 
 
2
 
1
 
3
Net other comprehensive (loss) income
 
(43)
 
59
 
1
 
17
Balance as of June 30, 2015
$
(427)
$
(86)
$
(83)
$
(596)
                   
   
Six months ended June 30, 2016 and 2015
2016:
               
Balance as of December 31, 2015
$
(582)
$
(137)
$
(87)
$
(806)
Other comprehensive income (loss) before
               
   reclassifications
 
79
 
(130)
 
 
(51)
Amounts reclassified from accumulated other
               
   comprehensive income
 
 
3
 
2
 
5
Net other comprehensive income (loss)
 
79
 
(127)
 
2
 
(46)
Balance as of June 30, 2016
$
(503)
$
(264)
$
(85)
$
(852)
2015:
         
.
   
Balance as of December 31, 2014
$
(322)
$
(90)
$
(85)
$
(497)
Other comprehensive (loss) income before
               
   reclassifications
 
(105)
 
3
 
 
(102)
Amounts reclassified from accumulated other
               
   comprehensive income
 
 
1
 
2
 
3
Net other comprehensive (loss) income
 
(105)
 
4
 
2
 
(99)
Balance as of June 30, 2015
$
(427)
$
(86)
$
(83)
$
(596)
(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)
 
Amounts reclassified
   
Details about accumulated
from accumulated other
 
Affected line item on Condensed
other comprehensive income (loss) components
comprehensive income (loss)
 
Consolidated Statements of Operations
     
Three months ended June 30,
         
     
2016
 
2015
         
Sempra Energy Consolidated:
                   
Financial instruments:
                   
    Interest rate and foreign exchange instruments
$
3
 
$
3
 
Interest Expense
    Interest rate instruments
 
2
   
3
 
Equity Earnings (Losses), Before Income Tax
    Interest rate and foreign exchange instruments
 
5
   
 
Equity Earnings, Net of Income Tax
Total before income tax
 
10
   
6
   
       
(1)
   
(1)
 
Income Tax Expense
Net of income tax
 
9
   
5
   
       
(4)
   
(3)
 
Earnings Attributable to Noncontrolling Interests
     
$
5
 
$
2
         
                         
Pension and other postretirement benefits:
                   
    Amortization of actuarial loss
$
2
 
$
2
 
See note (1) below
       
(1)
   
(1)
 
Income Tax Expense
Net of income tax
$
1
 
$
1
   
                         
Total reclassifications for the period, net of tax
$
6
 
$
3
         
SDG&E:
                   
Financial instruments:
                   
    Interest rate instruments
$
3
 
$
3
 
Interest Expense
       
(3)
   
(3)
 
Losses (Earnings) Attributable to Noncontrolling Interest
Total reclassifications for the period, net of tax
$
 
$
         
(1)
Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).



RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
 
Amount reclassified
   
Details about accumulated
from accumulated other
 
Affected line item on Condensed
other comprehensive income (loss) components
comprehensive income (loss)
 
 Consolidated Statements of Operations
     
Six months ended June 30,
         
     
2016
2015
         
Sempra Energy Consolidated:
                 
Financial instruments:
                 
    Interest rate and foreign exchange instruments
$
7
$
9
 
Interest Expense
    Interest rate instruments
 
5
 
6
 
Equity Earnings (Losses), Before Income Tax
    Interest rate and foreign exchange instruments
 
6
 
 
Equity Earnings, Net of Income Tax
    Commodity contracts not subject to
           
 
rate recovery
 
(7)
 
(7)
 
Revenues: Energy-Related Businesses
Total before income tax
 
11
 
8
   
       
(1)
 
 
Income Tax Expense
Net of income tax
 
10
 
8
   
       
(7)
 
(7)
 
Earnings Attributable to Noncontrolling Interests
     
$
3
$
1
         
                       
Pension and other postretirement benefits:
                 
    Amortization of actuarial loss
$
4
$
4
 
See note (1) below
       
(2)
 
(2)
 
Income Tax Expense
Net of income tax
$
2
$
2
   
                       
Total reclassifications for the period, net of tax
$
5
$
3
         
SDG&E:
                 
Financial instruments:
                 
    Interest rate instruments
$
6
$
6
 
Interest Expense
       
(6)
 
(6)
 
Losses (Earnings) Attributable to Noncontrolling Interest
Total reclassifications for the period, net of tax
$
$
         
(1)
Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).
 
 
For the three months and six months ended June 30, 2016 and 2015, Other Comprehensive Income (Loss) (OCI), excluding amounts attributable to noncontrolling interests, at SDG&E and SoCalGas was negligible, and reclassifications out of AOCI to Net Income were also negligible for SoCalGas.



SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

The following tables provide reconciliations of changes in Sempra Energy's and SDG&E's shareholders' equity and noncontrolling interests for the six months ended June 30, 2016 and 2015.


SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
     
Sempra Energy
 
Non-
   
     
shareholders'
 
controlling
 
Total
     
equity
 
interests(1)
 
equity
Balance at December 31, 2015
$
11,809
$
770
$
12,579
Comprehensive income
 
290
 
22
 
312
Preferred dividends of subsidiary
 
(1)
 
 
(1)
Share-based compensation expense
 
24
 
 
24
Common stock dividends declared
 
(377)
 
 
(377)
Issuances of common stock
 
56
 
 
56
Repurchases of common stock
 
(54)
 
 
(54)
Tax benefit related to share-based compensation
 
34
 
 
34
Equity contributed by noncontrolling interest
 
 
1
 
1
Distributions to noncontrolling interests
 
 
(11)
 
(11)
Balance at June 30, 2016
$
11,781
$
782
$
12,563
Balance at December 31, 2014
$
11,326
$
774
$
12,100
Comprehensive income
 
634
 
33
 
667
Preferred dividends of subsidiary
 
(1)
 
 
(1)
Share-based compensation expense
 
26
 
 
26
Common stock dividends declared
 
(347)
 
 
(347)
Issuances of common stock
 
59
 
 
59