Sempra Energy/SDG&E/SoCalGas June 30, 2015 10-Q


  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
 
 
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2015
   
 
or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
   
to
 
     
 
Commission File No.
Exact Name of Registrants as Specified in their Charters, Address and Telephone Number
States of Incorporation
I.R.S. Employer
Identification Nos.
Former name, former address and former fiscal year, if changed since last report
1-14201
SEMPRA ENERGY
California
33-0732627
101 Ash Street
 
488 8th Avenue
   
San Diego,
 
San Diego, California 92101
   
California 92101
 
(619)696-2000
     
         
1-03779
SAN DIEGO GAS & ELECTRIC COMPANY
California
95-1184800
No change
 
8326 Century Park Court
     
 
San Diego, California 92123
     
 
(619)696-2000
     
         
1-01402
SOUTHERN CALIFORNIA GAS COMPANY
California
95-1240705
No change
 
555 West Fifth Street
     
 
Los Angeles, California 90013
     
 
(213)244-1200
     
         
 
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
           
 
Yes
X
 
No
 
 

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
           
Sempra Energy
Yes
X
 
No
 
San Diego Gas & Electric Company
Yes
X
 
No
 
Southern California Gas Company
Yes
X
 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Sempra Energy
[  X  ]
[      ]
[       ]
[      ]
San Diego Gas & Electric Company
[       ]
[      ]
[  X  ]
[      ]
Southern California Gas Company
[       ]
[      ]
[  X  ]
[      ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
 
         
Sempra Energy
Yes
   
No
X
San Diego Gas & Electric Company
Yes
   
No
X
Southern California Gas Company
Yes
   
No
X
           
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.
           
Common stock outstanding on July 29, 2015:
         
           
Sempra Energy
247,915,696 shares
San Diego Gas & Electric Company
Wholly owned by Enova Corporation, which is wholly owned by Sempra Energy
Southern California Gas Company
Wholly owned by Pacific Enterprises, which is wholly owned by Sempra Energy
 
 
 
 
 
 
 
SEMPRA ENERGY FORM 10-Q
SAN DIEGO GAS & ELECTRIC COMPANY FORM 10-Q
SOUTHERN CALIFORNIA GAS COMPANY FORM 10-Q
TABLE OF CONTENTS
 
 
Page
Information Regarding Forward-Looking Statements
4
   
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
76
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
116
Item 4.
Controls and Procedures
117
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
118
Item 1A.
Risk Factors
118
Item 6.
Exhibits
118
     
Signatures
120
     

This combined Form 10-Q is separately filed by Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.

You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Part I – Item 1 sections are provided for each reporting company, except for the Notes to Condensed Consolidated Financial Statements. The Notes to Condensed Consolidated Financial Statements for all of the reporting companies are combined. All Items other than Part I – Item 1 are combined for the reporting companies.
 
 
 
 
 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 

We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the filing date of this report. We assume no obligation to update or revise any forward-looking statement as a result of new information, future events or other factors.
 
In this report, when we use words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “contemplates,” “intends,” “depends,” “should,” “could,” “would,” “will,” “confident,”  “may,” “potential,” “possible,” “proposed,” “target,” “pursue,” “goals,” “outlook,” “maintain,” or similar expressions, or when we discuss our guidance, strategy, plans, goals, opportunities, projections, initiatives, objectives or intentions, we are making forward-looking statements.
 
Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include
 
§  
local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;
 
§  
actions and the timing of actions, including issuances of permits to construct and licenses for operation, by the California Public Utilities Commission, California State Legislature, U.S. Department of Energy, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, Atomic Safety and Licensing Board, California Energy Commission, U.S. Environmental Protection Agency, California Air Resources Board, and other regulatory, governmental and environmental bodies in the United States and other countries in which we operate;
 
§  
the timing and success of business development efforts and construction, maintenance and capital projects, including risks in obtaining, maintaining or extending permits, licenses, certificates and other authorizations on a timely basis and risks in obtaining adequate and competitive financing for such projects;
 
§  
energy markets, including the timing and extent of changes and volatility in commodity prices, and the impact of any protracted reduction in oil prices from historical averages;
 
§  
the impact on the value of our natural gas storage assets from low natural gas prices, low volatility of natural gas prices and the inability to procure favorable long-term contracts for natural gas storage services;
 
§  
delays in the timing of costs incurred and the timing of the regulatory agency authorization to recover such costs in rates from customers;
 
§  
deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers;
 
§  
capital markets conditions, including the availability of credit and the liquidity of our investments;
 
§  
inflation, interest and currency exchange rates;
 
§  
the impact of benchmark interest rates, generally Moody’s A-rated utility bond yields, on our California Utilities’ cost of capital;
 
§  
the availability of electric power, natural gas and liquefied natural gas, and natural gas pipeline and storage capacity, including disruptions caused by failures in the North American transmission grid, pipeline explosions and equipment failures and the decommissioning of San Onofre Nuclear Generating Station (SONGS);
 
§  
cybersecurity threats to the energy grid, natural gas storage and pipeline infrastructure, the information and systems used to operate our businesses and the confidentiality of our proprietary information and the personal information of our customers, terrorist attacks that threaten system operations and critical infrastructure, and wars;
 
§  
the ability to win competitively bid infrastructure projects against a number of strong competitors willing to aggressively bid for these projects;
 
§  
weather conditions, conservation efforts, natural disasters, catastrophic accidents, and other events that may disrupt our operations, damage our facilities and systems, and subject us to third-party liability for property damage or personal injuries;
 
§  
risks that our partners or counterparties will be unable or unwilling to fulfill their contractual commitments;
 
§  
risks posed by decisions and actions of third parties who control the operations of investments in which we do not have a controlling interest;
 
§  
risks inherent with nuclear power facilities and radioactive materials storage, including the catastrophic release of such materials, the disallowance of the recovery of the investment in, or operating costs of, the nuclear facility due to an extended outage and facility closure, and increased regulatory oversight, including motions to modify settlements;
 
§  
business, regulatory, environmental and legal decisions and requirements;
 
§  
expropriation of assets by foreign governments and title and other property disputes;
 
§  
the impact on reliability of San Diego Gas & Electric Company’s (SDG&E) electric transmission and distribution system due to increased amount and variability of power supply from renewable energy sources;
 
§  
the impact on competitive customer rates of the growth in distributed and local power generation and the corresponding decrease in demand for power delivered through SDG&E’s electric transmission and distribution system;
 
§  
the inability or determination not to enter into long-term supply and sales agreements or long-term firm capacity agreements due to insufficient market interest, unattractive pricing or other factors;
 
§  
the resolution of litigation; and
 
§  
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
 
We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described herein and in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.
 
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 

ITEM 1. FINANCIAL STATEMENTS
 


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



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

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
 
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
636
$
570
    Restricted cash
 
8
 
11
    Trade accounts receivable, net
 
990
 
1,242
    Other accounts and notes receivable, net
 
164
 
152
    Due from unconsolidated affiliates
 
4
 
38
    Income taxes receivable
 
100
 
45
    Deferred income taxes
 
99
 
305
    Inventories
 
266
 
396
    Regulatory balancing accounts – undercollected
 
798
 
746
    Fixed-price contracts and other derivatives
 
85
 
93
    Asset held for sale, power plant
 
 
293
    Other
 
356
 
293
        Total current assets
 
3,506
 
4,184
           
Investments and other assets:
       
    Restricted cash
 
17
 
29
    Due from unconsolidated affiliates
 
169
 
188
    Regulatory assets
 
3,095
 
3,031
    Nuclear decommissioning trusts
 
1,145
 
1,131
    Investments
 
2,929
 
2,848
    Goodwill
 
885
 
931
    Other intangible assets
 
410
 
415
    Dedicated assets in support of certain benefit plans
 
483
 
512
    Sundry
 
674
 
561
        Total investments and other assets
 
9,807
 
9,646
           
Property, plant and equipment:
       
    Property, plant and equipment
 
36,523
 
35,407
    Less accumulated depreciation and amortization
 
(9,830)
 
(9,505)
        Property, plant and equipment, net ($396 and $410 at June 30, 2015 and
            December 31, 2014, respectively, related to VIE)
 
26,693
 
25,902
Total assets
$
40,006
$
39,732
(1)
Derived from audited financial statements.
       
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
   
June 30,
December 31,
 
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
738
$
1,733
    Accounts payable – trade
 
890
 
1,198
    Accounts payable – other
 
124
 
155
    Due to unconsolidated affiliate
 
 
2
    Dividends and interest payable
 
300
 
282
    Accrued compensation and benefits
 
271
 
373
    Current portion of long-term debt
 
1,273
 
469
    Fixed-price contracts and other derivatives
 
55
 
55
    Customer deposits
 
150
 
153
    Other
 
598
 
649
        Total current liabilities
 
4,399
 
5,069
Long-term debt ($310 and $315 at June 30, 2015 and December 31, 2014, respectively,
     related to VIE)
 
12,626
 
12,167
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
144
 
144
    Pension and other postretirement benefit plan obligations, net of plan assets
 
1,101
 
1,064
    Deferred income taxes
 
3,016
 
3,003
    Deferred investment tax credits
 
35
 
37
    Regulatory liabilities arising from removal obligations
 
2,762
 
2,741
    Asset retirement obligations
 
2,067
 
2,048
    Fixed-price contracts and other derivatives
 
300
 
255
    Deferred credits and other
 
1,081
 
1,104
        Total deferred credits and other liabilities
 
10,506
 
10,396
           
Commitments and contingencies (Note 11)
       
           
Equity:
       
    Preferred stock (50 million shares authorized; none issued)
 
 
    Common stock (750 million shares authorized; 248 million and 246 million shares
       
        outstanding at June 30, 2015 and December 31, 2014, respectively; no par value)
 
2,555
 
2,484
    Retained earnings
 
9,724
 
9,339
    Accumulated other comprehensive income (loss)
 
(596)
 
(497)
        Total Sempra Energy shareholders’ equity
 
11,683
 
11,326
    Preferred stock of subsidiary
 
20
 
20
    Other noncontrolling interests
 
772
 
754
        Total equity
 
12,475
 
12,100
Total liabilities and equity
$
40,006
$
39,732
(1)
Derived from audited financial statements.
       
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
   
Six months ended June 30,
   
2015
2014
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
778
$
558
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation and amortization
 
610
 
574
        Deferred income taxes and investment tax credits
 
203
 
105
        Gain on sale of equity interest and assets
 
(62)
 
(29)
        Plant closure adjustment
 
(21)
 
(13)
        Equity earnings
 
(83)
 
(55)
        Fixed-price contracts and other derivatives
 
 
(17)
        Other
 
(8)
 
(6)
    Net change in other working capital components
 
(116)
 
(125)
    Changes in other assets
 
(89)
 
21
    Changes in other liabilities
 
7
 
21
        Net cash provided by operating activities
 
1,219
 
1,034
           
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(1,466)
 
(1,513)
    Expenditures for investments and acquisition of business
 
(161)
 
(160)
    Proceeds from sale of equity interest and assets, net of cash sold
 
347
 
66
    Distributions from investments
 
9
 
6
    Purchases of nuclear decommissioning and other trust assets
 
(229)
 
(356)
    Proceeds from sales by nuclear decommissioning and other trusts
 
221
 
350
    Decrease in restricted cash
 
49
 
87
    Increase in restricted cash
 
(34)
 
(87)
    Advances to unconsolidated affiliates
 
(20)
 
(24)
    Repayments of advances to unconsolidated affiliates
 
74
 
    Other
 
9
 
10
        Net cash used in investing activities
 
(1,201)
 
(1,621)
           
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Common dividends paid
 
(308)
 
(301)
    Preferred dividends paid by subsidiary
 
(1)
 
(1)
    Issuances of common stock
 
31
 
28
    Repurchases of common stock
 
(66)
 
(37)
    Issuances of debt (maturities greater than 90 days)
 
1,547
 
2,345
    Payments on debt (maturities greater than 90 days)
 
(846)
 
(1,475)
    Decrease in short-term debt, net
 
(339)
 
(54)
    Net distributions to noncontrolling interests
 
(14)
 
(23)
    Other
 
46
 
(10)
        Net cash provided by financing activities
 
50
 
472
         
Effect of exchange rate changes on cash and cash equivalents
 
(2)
 
           
Increase (decrease) in cash and cash equivalents
 
66
 
(115)
Cash and cash equivalents, January 1
 
570
 
904
Cash and cash equivalents, June 30
$
636
$
789
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
   
Six months ended June 30,
 
2015
2014
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
260
$
269
    Income tax payments, net of refunds
 
72
 
148
           
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
       
    Acquisition of business:
       
          Assets acquired
$
10
$
          Liabilities assumed
 
(2)
 
          Accrued purchase price
 
(6)
 
          Cash paid
$
2
$
           
    Accrued capital expenditures
$
302
$
287
    Redemption of industrial development bonds
 
79
 
    Increase in capital lease obligations for investment in property, plant and equipment
 
 
60
    Dividends declared but not paid
 
178
 
165
    Financing of build-to-suit property
 
39
 
32
See Notes to Condensed Consolidated Financial Statements.
 
 

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

 

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

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
23
$
8
    Restricted cash
 
7
 
8
    Accounts receivable – trade, net
 
314
 
285
    Accounts receivable – other, net
 
21
 
35
    Due from unconsolidated affiliates
 
1
 
1
    Income taxes receivable
 
59
 
    Inventories
 
67
 
73
    Regulatory balancing accounts – net undercollected
 
626
 
711
    Regulatory assets
 
116
 
54
    Fixed-price contracts and other derivatives
 
40
 
44
    Other
 
86
 
125
        Total current assets
 
1,360
 
1,344
           
Other assets:
       
    Restricted cash
 
12
 
11
    Deferred taxes recoverable in rates
 
848
 
824
    Other regulatory assets
 
1,026
 
1,086
    Nuclear decommissioning trusts
 
1,145
 
1,131
    Sundry
 
368
 
282
        Total other assets
 
3,399
 
3,334
           
Property, plant and equipment:
       
    Property, plant and equipment
 
15,882
 
15,478
    Less accumulated depreciation
 
(4,008)
 
(3,860)
        Property, plant and equipment, net ($396 and $410 at June 30, 2015 and
            December 31, 2014, respectively, related to VIE)
 
11,874
 
11,618
Total assets
$
16,633
$
16,296
(1)
Derived from audited financial statements.
       
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND EQUITY
       
Current liabilities:
       
    Short-term debt
$
40
$
246
    Accounts payable
 
361
 
441
    Due to unconsolidated affiliates
 
7
 
21
    Income taxes payable
 
 
30
    Deferred income taxes
 
185
 
53
    Interest payable
 
41
 
40
    Accrued compensation and benefits
 
74
 
124
    Current portion of long-term debt
 
470
 
365
    Asset retirement obligations
 
100
 
120
    Fixed-price contracts and other derivatives
 
45
 
40
    Customer deposits
 
70
 
71
    Other
 
203
 
237
        Total current liabilities
 
1,596
 
1,788
 
Long-term debt ($310 and $315 at June 30, 2015 and December 31, 2014,
    respectively, related to VIE)
 
4,498
 
4,319
           
Deferred credits and other liabilities:
       
    Customer advances for construction
 
42
 
41
    Pension and other postretirement benefit plan obligations, net of plan assets
 
225
 
216
    Deferred income taxes
 
2,133
 
2,121
    Deferred investment tax credits
 
20
 
22
    Regulatory liabilities arising from removal obligations
 
1,584
 
1,557
    Asset retirement obligations
 
745
 
754
    Fixed-price contracts and other derivatives
 
179
 
153
    Deferred credits and other
 
345
 
333
        Total deferred credits and other liabilities
 
5,273
 
5,197
           
Commitments and contingencies (Note 11)
       
           
Equity:
       
    Common stock (255 million shares authorized; 117 million shares outstanding;
       
        no par value)
 
1,338
 
1,338
    Retained earnings
 
3,879
 
3,606
    Accumulated other comprehensive income (loss)
 
(12)
 
(12)
        Total SDG&E shareholder's equity
 
5,205
 
4,932
    Noncontrolling interest
 
61
 
60
        Total equity
 
5,266
 
4,992
Total liabilities and equity
$
16,633
$
16,296
(1)
Derived from audited financial statements.
       
See Notes to Condensed Consolidated Financial Statements.
       
 
 

 
SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Six months ended June 30,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
281
$
230
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation
 
294
 
261
        Deferred income taxes and investment tax credits
 
103
 
132
        Plant closure adjustment
 
(21)
 
(13)
        Fixed-price contracts and other derivatives
 
(2)
 
(3)
        Other
 
(9)
 
(24)
    Net change in other working capital components
 
(40)
 
(231)
    Changes in other assets
 
(59)
 
37
    Changes in other liabilities
 
3
 
19
        Net cash provided by operating activities
 
550
 
408
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(600)
 
(543)
    Purchases of nuclear decommissioning trust assets
 
(227)
 
(354)
    Proceeds from sales by nuclear decommissioning trusts
 
221
 
350
    Decrease in restricted cash
 
19
 
62
    Increase in restricted cash
 
(19)
 
(64)
        Net cash used in investing activities
 
(606)
 
(549)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Issuances of long-term debt
 
388
 
100
    Payments on long-term debt
 
(105)
 
(20)
    (Decrease) increase in short-term debt, net
 
(206)
 
68
    Capital distributions made by Otay Mesa VIE
 
(6)
 
(13)
        Net cash provided by financing activities
 
71
 
135
         
Increase (decrease) in cash and cash equivalents
 
15
 
(6)
Cash and cash equivalents, January 1
 
8
 
27
Cash and cash equivalents, June 30
$
23
$
21
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
99
$
98
    Income tax payments, net of refunds
 
99
 
12
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
       
    Accrued capital expenditures
$
118
$
103
    Increase in capital lease obligations for investment in property, plant and equipment
 
 
60
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
       
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
       
(Dollars in millions)
       
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
 
(unaudited)
                 
Operating revenues
$
780
$
917
$
1,828
$
2,002
Operating expenses
               
    Cost of natural gas
 
196
 
321
 
463
 
829
    Operation and maintenance
 
346
 
337
 
660
 
642
    Depreciation
 
113
 
107
 
226
 
212
    Franchise fees and other taxes
 
31
 
30
 
65
 
68
        Total operating expenses
 
686
 
795
 
1,414
 
1,751
Operating income
 
94
 
122
 
414
 
251
Other income, net
 
9
 
3
 
17
 
7
Interest income
 
3
 
 
3
 
Interest expense
 
(19)
 
(16)
 
(38)
 
(33)
Income before income taxes
 
87
 
109
 
396
 
225
Income tax expense
 
(16)
 
(28)
 
(111)
 
(66)
Net income
 
71
 
81
 
285
 
159
Preferred dividend requirements
 
(1)
 
(1)
 
(1)
 
(1)
Earnings attributable to common shares
$
70
$
80
$
284
$
158
See Notes to Condensed Consolidated Financial Statements.
       

 

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

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

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
ASSETS
       
Current assets:
       
    Cash and cash equivalents
$
231
$
85
    Accounts receivable – trade, net
 
348
 
586
    Accounts receivable – other, net
 
76
 
51
    Due from unconsolidated affiliates
 
273
 
4
    Income taxes receivable
 
 
5
    Inventories
 
57
 
181
    Regulatory balancing accounts – net undercollected
 
172
 
35
    Regulatory assets
 
7
 
5
    Temporary LIFO liquidation
 
41
 
    Other
 
28
 
36
        Total current assets
 
1,233
 
988
         
Other assets:
       
    Regulatory assets arising from pension obligations
 
650
 
617
    Other regulatory assets
 
539
 
472
    Other postretirement benefit plan assets, net of plan obligations
 
5
 
4
    Sundry
 
146
 
136
        Total other assets
 
1,340
 
1,229
         
Property, plant and equipment:
       
    Property, plant and equipment
 
13,403
 
12,886
    Less accumulated depreciation
 
(4,767)
 
(4,642)
        Property, plant and equipment, net
 
8,636
 
8,244
Total assets
$
11,209
$
10,461
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
   
June 30,
December 31,
   
2015
2014(1)
   
(unaudited)
   
LIABILITIES AND SHAREHOLDERS' EQUITY
       
Current liabilities:
       
    Short-term debt
$
$
50
    Accounts payable – trade
 
305
 
532
    Accounts payable – other
 
66
 
88
    Due to unconsolidated affiliate
 
 
13
    Income taxes payable
 
13
 
    Deferred income taxes
 
146
 
53
    Accrued compensation and benefits
 
118
 
129
    Current portion of long-term debt
 
9
 
    Customer deposits
 
73
 
75
    Other
 
142
 
149
        Total current liabilities
 
872
 
1,089
Long-term debt
 
2,498
 
1,906
Deferred credits and other liabilities:
       
    Customer advances for construction
 
102
 
102
    Pension obligation, net of plan assets
 
666
 
633
    Deferred income taxes
 
1,267
 
1,212
    Deferred investment tax credits
 
14
 
16
    Regulatory liabilities arising from removal obligations
 
1,160
 
1,167
    Asset retirement obligations
 
1,281
 
1,255
    Deferred credits and other
 
284
 
300
        Total deferred credits and other liabilities
 
4,774
 
4,685
         
Commitments and contingencies (Note 11)
       
         
Shareholders' equity:
       
    Preferred stock
 
22
 
22
    Common stock (100 million shares authorized; 91 million shares outstanding;
       
        no par value)
 
866
 
866
    Retained earnings
 
2,195
 
1,911
    Accumulated other comprehensive income (loss)
 
(18)
 
(18)
        Total shareholders' equity
 
3,065
 
2,781
Total liabilities and shareholders' equity
$
11,209
$
10,461
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
 
 

 
SOUTHERN CALIFORNIA GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Six months ended June 30,
 
2015
2014
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
       
    Net income
$
285
$
159
    Adjustments to reconcile net income to net cash provided by operating activities:
       
        Depreciation
 
226
 
212
        Deferred income taxes and investment tax credits
 
76
 
59
        Other
 
(15)
 
(2)
    Net change in other working capital components
 
(58)
 
61
    Changes in other assets
 
(30)
 
(27)
    Changes in other liabilities
 
(1)
 
1
        Net cash provided by operating activities
 
483
 
463
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
    Expenditures for property, plant and equipment
 
(603)
 
(500)
    Increase in loans to affiliates, net
 
(279)
 
        Net cash used in investing activities
 
(882)
 
(500)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
    Preferred dividends paid
 
(1)
 
(1)
    Issuances of long-term debt
 
599
 
248
    Repayment of long-term debt
 
 
(250)
    (Decrease) increase in short-term debt, net
 
(50)
 
31
    Other
 
(3)
 
(2)
        Net cash provided by financing activities
 
545
 
26
         
Increase (decrease) in cash and cash equivalents
 
146
 
(11)
Cash and cash equivalents, January 1
 
85
 
27
Cash and cash equivalents, June 30
$
231
$
16
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
    Interest payments, net of amounts capitalized
$
36
$
32
    Income tax payments, net
 
14
 
19
         
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
       
    Accrued capital expenditures
$
143
$
102
See Notes to Condensed Consolidated Financial Statements.

 
 
 
SEMPRA ENERGY AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 


NOTE 1. GENERAL
 

 
IMPACT OF SEASONALIZATION AT SEMPRA ENERGY AND SOUTHERN CALIFORNIA GAS COMPANY
 
In the first quarter of 2015, Southern California Gas Company (SoCalGas) adopted a California Public Utilities Commission (CPUC) decision in the Triennial Cost Allocation Proceeding (TCAP) requiring SoCalGas to recognize annual authorized revenue for core natural gas customers using seasonal factors established in the TCAP, instead of recognizing such revenue ratably over the year as was previously required. This “seasonalization” resulted in $72 million lower operating revenues and $48 million lower earnings for both Sempra Energy and SoCalGas for the three months ended June 30, 2015 compared to the same period in 2014, and $91 million higher operating revenues and $65 million higher earnings for both Sempra Energy and SoCalGas for the first six months of 2015 compared to the same period in 2014. While this seasonalization will cause variability in comparable revenue and earnings from quarter to quarter within the year, it will not impact full-year 2015 results nor have any impact on cash flow. Accordingly, substantially all of SoCalGas’ annual earnings will be recognized in the first and fourth quarters of the year. We discuss the CPUC decision further in Note 10.
 
 
PRINCIPLES OF CONSOLIDATION
 
 
Sempra Energy
 
Sempra Energy’s Condensed Consolidated Financial Statements include the accounts of Sempra Energy, a California-based Fortune 500 energy-services holding company, and its consolidated subsidiaries and variable interest entities (VIEs). Sempra Energy’s principal operating units are
 
§  
San Diego Gas & Electric Company (SDG&E) and SoCalGas, which are separate, reportable segments;
 
§  
Sempra International, which includes our Sempra South American Utilities and Sempra Mexico reportable segments; and
 
§  
Sempra U.S. Gas & Power, which includes our Sempra Renewables and Sempra Natural Gas reportable segments.
 
We provide descriptions of each of our segments in Note 12.
 
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our Sempra International and Sempra U.S. Gas & Power operating units. Sempra Global is the holding company for most of our subsidiaries that are not subject to California utility regulation. All references in these Notes to “Sempra International,” “Sempra U.S. Gas & Power” and their respective reportable segments are not intended to refer to any legal entity with the same or similar name.
 
Our Sempra Mexico segment includes the operating companies of our subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), as well as certain holding companies and risk management activity. We discuss IEnova further in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014 (the Annual Report), which includes the combined reports for Sempra Energy, SDG&E and SoCalGas.
 
Sempra Energy uses the equity method to account for investments in affiliated companies over which we have the ability to exercise significant influence, but not control. We discuss our investments in unconsolidated entities in Notes 3 and 4 herein and in the Notes to Consolidated Financial Statements in the Annual Report.
 
 
SDG&E
 
SDG&E’s Condensed Consolidated Financial Statements include its accounts and the accounts of a VIE of which SDG&E is the primary beneficiary, as we discuss in Note 5 under “Variable Interest Entities.” SDG&E’s common stock is wholly owned by Enova Corporation, which is a wholly owned subsidiary of Sempra Energy.
 
 
SoCalGas
 
SoCalGas’ Condensed Consolidated Financial Statements include its accounts and the de minimis accounts of inactive subsidiaries. SoCalGas’ common stock is wholly owned by Pacific Enterprises, which is a wholly owned subsidiary of Sempra Energy.
 

 
BASIS OF PRESENTATION
 

This is a combined report of Sempra Energy, SDG&E and SoCalGas. We provide separate information for SDG&E and SoCalGas as required. References in this report to “we,” “our” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, unless otherwise indicated by the context. We have eliminated intercompany accounts and transactions within the consolidated financial statements of each reporting entity.
 
We have prepared the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the interim-period-reporting requirements of Form 10-Q. Results of operations for interim periods are not necessarily indicative of results for the entire year. We evaluated events and transactions that occurred after June 30, 2015 through the date the financial statements were issued and, in the opinion of management, the accompanying statements reflect all adjustments necessary for a fair presentation. These adjustments are only of a normal, recurring nature.
 
All December 31, 2014 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2014 Consolidated Financial Statements in the Annual Report. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the interim-period-reporting provisions of U.S. GAAP and the Securities and Exchange Commission.
 
We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes, except for the adoption of new accounting standards as we discuss in Note 2.
 
You should read the information in this Quarterly Report in conjunction with the Annual Report.
 


 
Regulated Operations
 

Sempra South American Utilities has controlling interests in two electric distribution utilities in South America, Chilquinta Energía S.A. (Chilquinta Energía) in Chile and Luz del Sur S.A.A. (Luz del Sur) in Peru. Sempra Natural Gas owns Mobile Gas Service Corporation (Mobile Gas) in southwest Alabama and Willmut Gas Company (Willmut Gas) in Mississippi, and Sempra Mexico owns Ecogas México, S. de R.L. de C.V. (Ecogas) in northern Mexico, all natural gas distribution utilities. The California Utilities, Sempra Natural Gas’ Mobile Gas and Willmut Gas, and Sempra Mexico’s Ecogas prepare their financial statements in accordance with U.S. GAAP provisions governing regulated operations, as we discuss in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 

NOTE 2. NEW ACCOUNTING STANDARDS
 

We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, cash flows or disclosures.
 


 
SEMPRA ENERGY, SDG&E AND SOCALGAS
 

Accounting Standards Update (ASU) 2014-09,Revenue from Contracts with Customers(ASU 2014-09): ASU 2014-09 provides accounting guidance for revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach.
 
ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
 
ASU 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03): ASU 2015-03 provides guidance on the financial statement presentation of debt issuance costs and requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related long-term debt liability. This guidance must be applied using a full retrospective approach for all periods presented in the period of adoption.
 
We will adopt ASU 2015-03 for our annual reporting period ending December 31, 2015.  The adoption will not affect our results of operations or cash flows. Deferred debt issuance costs that are the subject of ASU 2015-03 are included in Sundry on the Sempra Energy, SDG&E and SoCalGas Condensed Consolidated Balance Sheets and total $88 million, $34 million, and $18 million at June 30, 2015, respectively, and $84 million, $33 million, and $15 million at December 31, 2014, respectively.
 


 
 

NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY
 


 
SEMPRA RENEWABLES
 

In March 2014, Sempra Renewables formed a joint venture with Consolidated Edison Development (Con Edison Development), a non-related party, by selling a 50-percent interest in its 250-megawatt (MW) Copper Mountain Solar 3 solar power facility for $66 million in cash, net of $2 million cash sold. Sempra Renewables recognized a pretax gain on the sale of $27 million ($16 million after-tax), included in Gain on Sale of Equity Interest and Assets on our Condensed Consolidated Statement of Operations for the six months ended June 30, 2014. Our remaining 50-percent interest in Copper Mountain Solar 3 is accounted for under the equity method. Based on the nature of the underlying assets, this investment is considered in-substance real estate. Therefore, in accordance with applicable U.S. GAAP, the Copper Mountain Solar 3 equity method investment was measured at historical cost and no portion of the gain was attributable to a remeasurement of the retained investment to fair value.
 
The following table summarizes the deconsolidation:
 


DECONSOLIDATION OF SUBSIDIARY
(Dollars in millions)
 
   
Copper Mountain Solar 3
   
At March 13, 2014
Proceeds from sale, net of negligible transaction costs
$
68
Cash
 
(2)
Property, plant and equipment, net
 
(247)
Other assets
 
(11)
Accounts payable and accrued expenses
 
82
Long-term debt, including current portion
 
97
Other liabilities
 
3
Accumulated other comprehensive income
 
(2)
Gain on sale of equity interest
 
(27)
(Increase) in equity method investment upon deconsolidation
$
(39)

In May 2014, Sempra Renewables invested $109 million (and an additional $12 million in November 2014, as adjusted for financial position at closing) to become a 50-percent partner with Con Edison Development in four fully operating solar facilities in California. We discuss our investment in the California solar partnership further in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 

In March 2015, Sempra Renewables acquired a 100-percent interest in the Black Oak Getty Wind project, a 78-MW wind farm under development in Stearns County, Minnesota. The wind farm has a 20-year power purchase agreement with Minnesota Municipal Power Agency. The total acquisition cost for the project is $8 million, a portion of which was paid in the first quarter of 2015.
 


 
SEMPRA NATURAL GAS
 


 
Mesquite Power Sale
 

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

NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
 

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


 
SEMPRA RENEWABLES
 

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


 
SEMPRA NATURAL GAS
 

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


 
 

NOTE 5. OTHER FINANCIAL DATA
 


 
INVENTORIES
 

The components of inventories by segment are as follows:
 
 
INVENTORY BALANCES
(Dollars in millions)
   
Natural gas
Liquefied natural gas
Materials and supplies
Total
   
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
June 30,
2015
December 31,
2014
SDG&E
$
3
$
8
$
$
$
64
$
65
$
67
$
73
SoCalGas
 
29
 
155
 
 
 
28
 
26
 
57
 
181
Sempra South American
                               
     Utilities
 
 
 
 
 
35
 
33
 
35
 
33
Sempra Mexico
 
 
 
10
 
9
 
9
 
9
 
19
 
18
Sempra Renewables
 
 
 
 
 
2
 
2
 
2
 
2
Sempra Natural Gas
 
81
 
83
 
4
 
5
 
1
 
1
 
86
 
89
Sempra Energy
                               
     Consolidated
$
113
$
246
$
14
$
14
$
139
$
136
$
266
$
396

Temporary LIFO Liquidation
 

SoCalGas values natural gas inventory by the last-in first-out (LIFO) method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. Temporary LIFO liquidation represents the difference between the carrying value of natural gas inventory withdrawn during the period for delivery to customers and the projected cost of the replacement of that inventory during summer months. For interim periods, these differences result in an asset or liability, which at June 30, 2015 is an asset recorded in Temporary LIFO Liquidation on SoCalGas’ Condensed Consolidated Balance Sheet and Other Current Assets on Sempra Energy’s Condensed Consolidated Balance Sheet.
 
 
GOODWILL
 

We discuss goodwill in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $931 million at December 31, 2014 to $885 million at June 30, 2015 is due to foreign currency translation at Sempra South American Utilities. We record the offset of this fluctuation in Other Comprehensive Income (Loss).
 

 
VARIABLE INTEREST ENTITIES (VIE)
 
We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess
 
§  
the purpose and design of the VIE;
 
§  
the nature of the VIE’s risks and the risks we absorb;
 
§  
the power to direct activities that most significantly impact the economic performance of the VIE; and
 
§  
the obligation to absorb losses or right to receive benefits that could be significant to the VIE.
 
 
SDG&E
 
Tolling Agreements
 
SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements). SDG&E’s obligation to absorb natural gas costs may be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. We determine if SDG&E is the primary beneficiary in these cases based on a qualitative approach in which we consider the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE, as we discuss below.
 
Otay Mesa VIE
 
SDG&E has an agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-MW generating facility. In addition to tolling, the agreement provides SDG&E with the option to purchase the power plant at the end of the contract term in 2019, or upon earlier termination of the purchased-power agreement, at a predetermined price subject to adjustments based on performance of the facility. If SDG&E does not exercise its option, under certain circumstances, it may be required to purchase the power plant at a predetermined price, which we refer to as the put option.
 
The facility owner, Otay Mesa Energy Center LLC (OMEC LLC), is a VIE (Otay Mesa VIE), of which SDG&E is the primary beneficiary. SDG&E has no OMEC LLC voting rights, holds no equity in OMEC LLC and does not operate OMEC. In addition to the risks absorbed under the tolling agreement, SDG&E absorbs separately through the put option a significant portion of the risk that the value of Otay Mesa VIE could decline. Accordingly, SDG&E and Sempra Energy have consolidated Otay Mesa VIE. Otay Mesa VIE’s equity of $61 million at June 30, 2015 and $60 million at December 31, 2014 is included on the Condensed Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E.
 
OMEC LLC has a loan outstanding of $320 million at June 30, 2015, the proceeds of which were used for the construction of OMEC. The loan is with third party lenders and is secured by OMEC’s property, plant and equipment. SDG&E is not a party to the loan agreement and does not have any additional implicit or explicit financial responsibility to OMEC LLC. The loan fully matures in April 2019 and bears interest at rates varying with market rates. In addition, OMEC LLC has entered into interest rate swap agreements to moderate its exposure to interest rate changes. We provide additional information concerning the interest rate swaps in Note 7.
 
The Condensed Consolidated Statements of Operations of Sempra Energy and SDG&E include the following amounts associated with Otay Mesa VIE. The amounts are net of eliminations of transactions between SDG&E and Otay Mesa VIE. The captions in the table below generally correspond to SDG&E’s Condensed Consolidated Statements of Operations.
 

AMOUNTS ASSOCIATED WITH OTAY MESA VIE
       
(Dollars in millions)
       
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
Operating expenses
               
    Cost of electric fuel and purchased power
$
(21)
$
(22)
$
(39)
$
(40)
    Operation and maintenance
 
6
 
5
 
10
 
10
    Depreciation
 
6
 
7
 
12
 
14
        Total operating expenses
 
(9)
 
(10)
 
(17)
 
(16)
Operating income
 
9
 
10
 
17
 
16
Interest expense
 
(5)
 
(4)
 
(9)
 
(8)
Income before income taxes/Net income
 
4
 
6
 
8
 
8
Earnings attributable to noncontrolling interest
 
(4)
 
(6)
 
(8)
 
(8)
   Earnings attributable to common shares
$
$
$
$
                 

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


 
Sempra Natural Gas
 

Cameron LNG JV
 
Sempra Energy’s equity-method investment in Cameron LNG JV is considered to be a VIE generally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary because we do not have the power to direct the most significant activities of Cameron LNG JV. We will continue to evaluate Cameron LNG JV for any changes that may impact our determination of the primary beneficiary. The carrying value of our investment in Cameron LNG JV was $1,043 million and $1,007 million at June 30, 2015 and December 31, 2014, respectively. Our maximum exposure to loss includes the carrying value of our investment and the guarantees discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Other Variable Interest Entities
 

SDG&E’s power procurement is subject to reliability requirements that may require SDG&E to enter into various power purchase arrangements which include variable interests. SDG&E evaluates the respective entities to determine if variable interests exist and, based on the qualitative and quantitative analyses described above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary. SDG&E has determined that no contracts, other than the one relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary at June 30, 2015. In addition to the tolling agreements described above, other variable interests involve various elements of fuel and power costs, including certain construction costs, tax credits, and other components of cash flow expected to be paid to or received by our counterparties. In most of these cases, the expectation of variability is not substantial, and SDG&E generally does not have the power to direct activities that most significantly impact the economic performance of the other VIEs. If our ongoing evaluation of these VIEs were to conclude that SDG&E becomes the primary beneficiary and consolidation by SDG&E becomes necessary, the effects are not expected to significantly affect the financial position, results of operations, or liquidity of SDG&E. In addition, SDG&E is not exposed to losses or gains as a result of these other VIEs, because all such variability would be recovered in rates.
 
Sempra Energy’s other operating units also enter into arrangements which could include variable interests. We evaluate these arrangements and applicable entities based upon the qualitative and quantitative analyses described above. Certain of these entities are service companies that are VIEs. As the primary beneficiary of these service companies, we consolidate them; however, their financial statements are not material to the financial statements of Sempra Energy. In all other cases, we have determined that these contracts are not variable interests in a VIE and therefore are not subject to the U.S. GAAP requirements concerning the consolidation of VIEs.
 



 
PENSION AND OTHER POSTRETIREMENT BENEFITS
 


 
Net Periodic Benefit Cost
 

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


NET PERIODIC BENEFIT COST – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended June 30,
 
2015
2014
2015
2014
Service cost
$
29
$
26
$
7
$
6
Interest cost
 
39
 
41
 
11
 
12
Expected return on assets
 
(44)
 
(43)
 
(17)
 
(16)
Amortization of:
               
    Prior service cost (credit)
 
2
 
3
 
 
(1)
    Actuarial loss
 
11
 
5
 
 
Settlement
 
 
6
 
 
Regulatory adjustment
 
(30)
 
 
 
Total net periodic benefit cost
$
7
$
38
$
1
$
1
                 
 
Six months ended June 30,
 
2015
2014
2015
2014
Service cost
$
59
$
52
$
14
$
12
Interest cost
 
78
 
82
 
23
 
24
Expected return on assets
 
(88)
 
(86)
 
(34)
 
(32)
Amortization of:
               
    Prior service cost (credit)
 
5
 
5
 
(1)
 
(2)
    Actuarial loss
 
19
 
10
 
 
Settlements
 
 
9
 
 
Regulatory adjustment
 
(59)
 
(24)
 
 
Total net periodic benefit cost
$
14
$
48
$
2
$
2



NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended June 30,
 
2015
2014
2015
2014
Service cost
$
8
$
7
$
2
$
1
Interest cost
 
10
 
11
 
2
 
2
Expected return on assets
 
(13)
 
(14)
 
(3)
 
(3)
Amortization of:
               
    Prior service cost
 
1
 
1
 
1
 
1
    Actuarial loss
 
2
 
1
 
 
Settlements
 
 
2
 
 
Regulatory adjustment
 
(7)
 
6
 
(2)
 
(1)
Total net periodic benefit cost
$
1
$
14
$
$
                 
 
Six months ended June 30,
 
2015
2014
2015
2014
Service cost
$
16
$
15
$
4
$
3
Interest cost
 
20
 
22
 
4
 
4
Expected return on assets
 
(27)
 
(28)
 
(6)
 
(6)
Amortization of:
               
    Prior service cost
 
1
 
1
 
2
 
2
    Actuarial loss
 
4
 
2
 
 
Settlements
 
 
2
 
 
Regulatory adjustment
 
(12)
 
1
 
(4)
 
(3)
Total net periodic benefit cost
$
2
$
15
$
$



NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
 
Pension benefits
Other postretirement benefits
 
Three months ended June 30,
 
2015
2014
2015
2014
Service cost
$
19
$
16
$
5
$
4
Interest cost
 
24
 
26
 
9
 
10
Expected return on assets
 
(27)
 
(26)
 
(14)
 
(13)
Amortization of:
               
    Prior service cost (credit)
 
2
 
2
 
(2)
 
(2)
    Actuarial loss
 
6
 
2
 
 
Regulatory adjustment
 
(23)
 
(6)
 
2
 
1
Total net periodic benefit cost
$
1
$
14
$
$
                 
 
Six months ended June 30,
 
2015
2014
2015
2014
Service cost
$
38
$
32
$
10
$
8
Interest cost
 
49
 
51
 
18
 
19
Expected return on assets
 
(54)
 
(52)
 
(28)
 
(26)
Amortization of:
               
    Prior service cost (credit)
 
4
 
4
 
(4)
 
(4)
    Actuarial loss
 
11
 
4
 
 
Regulatory adjustment
 
(47)
 
(25)
 
4
 
3
Total net periodic benefit cost
$
1
$
14
$
$

 
 
Benefit Plan Contributions
 

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


BENEFIT PLAN CONTRIBUTIONS
(Dollars in millions)
 
Sempra Energy
   
 
Consolidated
SDG&E
SoCalGas
Contributions through June 30, 2015:
           
    Pension plans
$
17
$
2
$
1
    Other postretirement benefit plans
 
1
 
 
Total expected contributions in 2015:
           
    Pension plans
$
36
$
3
$
7
    Other postretirement benefit plans
 
11
 
8
 
 
 
 
RABBI TRUST
 

In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $483 million and $512 million at June 30, 2015 and December 31, 2014, respectively.
 


 
EARNINGS PER SHARE
 

The following table provides the per share computations for our earnings for the three months and six months ended June 30, 2015 and 2014. Basic earnings per common share (EPS) is calculated by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
 


EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions, except per share amounts; shares in thousands)
   
Three months ended June 30,
 
Six months ended June 30,
   
2015
2014
 
2015
2014
Numerator:
                 
    Earnings/Income attributable to common shares
$
295
$
269
 
$
732
$
516
                     
Denominator:
                 
    Weighted-average common shares
                 
 
outstanding for basic EPS(1)
 
248,108
 
245,688
   
247,916
 
245,484
    Dilutive effect of stock options, restricted
                 
 
stock awards and restricted stock units
 
3,383
 
4,373
   
3,348
 
4,332
    Weighted-average common shares
                 
 
outstanding for diluted EPS
 
251,491
 
250,061
   
251,264
 
249,816
                     
Earnings per share:
                 
    Basic
$
1.19
$
1.10
 
$
2.95
$
2.10
    Diluted
 
1.17
 
1.08
   
2.91
 
2.07
(1)
Includes fully vested restricted stock units of 501 and 476 held in our Deferred Compensation Plan for the three months and six months ended June 30, 2015, respectively, and 221 and 202 for the three months and six months ended June 30, 2014, 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). We had no such antidilutive stock options outstanding for the three months or six months ended June 30, 2015 or 2014. For the three months and six months ended June 30, 2015 and 2014, we had no stock options outstanding that were antidilutive because of the unearned compensation and windfall tax benefits included in the assumed proceeds under the treasury stock method.
 
The dilution from unvested restricted stock awards (RSAs) and restricted stock units (RSUs) is also based on the treasury stock method. Proceeds equal to the unearned compensation and windfall tax benefits recognized, minus tax shortfalls recognized, related to the awards and units are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits or tax shortfalls recognized are the difference between tax deductions we would receive upon the assumed vesting of RSAs or RSUs and the deferred income taxes we recorded related to the compensation expense on such awards and units. There were no antidilutive RSAs and 4,715 antidilutive RSUs from the application of unearned compensation in the treasury stock method for the three months and six months ended June 30, 2015. There were no such antidilutive RSAs or RSUs for the three months or six months ended June 30, 2014.
 
Our performance-based RSUs include awards that vest at the end of three-year (for awards granted in 2015) or four-year performance periods based on Sempra Energy’s total return to shareholders relative to that of specified market indices (Total Shareholder Return or TSR RSUs) or based on the compound annual growth rate of Sempra Energy’s EPS (EPS RSUs). The comparative market indices for the TSR RSUs are the Standard & Poor’s (S&P) 500 Utilities Index and the S&P 500 Index. Targets for our EPS RSUs were developed based on Sempra Energy’s long-term earnings-per-share growth guidance as well as analyst consensus long-term earnings-per-share growth estimates for S&P 500 Utilities Index peer companies. TSR RSUs represent the right to receive from zero to 1.5 shares (2.0 shares for awards granted during or after 2014) of Sempra Energy common stock if performance targets are met. EPS RSUs represent the right to receive from zero to 2.0 shares of Sempra Energy common stock if performance targets are met. If performance falls between the targets specified for each performance metric, we calculate the payout using linear interpolation. Participants also receive additional shares for dividend equivalents on shares subject to RSUs, which are deemed reinvested to purchase additional units that become subject to the same vesting conditions as the RSUs to which the dividends relate.
 
Our RSAs, which are solely service-based, and those RSUs that are service-based or issued in connection with certain other performance goals represent the right to receive up to 1.0 share if the service requirements or certain other vesting conditions are met. These RSAs and RSUs have the same dividend equivalent rights as the performance-based RSUs described above. We include RSAs and these RSUs in potential dilutive shares at 100 percent, subject to the application of the treasury stock method. We include our TSR RSUs and EPS RSUs in potential dilutive shares at zero to up to 200 percent to the extent that they currently meet the performance requirements for vesting, subject to the application of the treasury stock method. Due to market fluctuations of both Sempra Energy stock and the comparative indices, dilutive TSR RSU shares may vary widely from period-to-period. If it were assumed that performance goals for all performance-based RSUs were met at maximum levels and if the treasury stock method were not applied to any of our RSAs or RSUs, the incremental potential dilutive shares would be 1,370,460 and 1,424,855 for the three months and six months ended June 30, 2015, respectively, and 1,137,593 and 1,206,873 for the three months and six months ended June 30, 2014, respectively.
 


 
SHARE-BASED COMPENSATION
 

We discuss our share-based compensation plans in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. We recorded share-based compensation expense, net of income taxes, of $7 million for each of the three-month periods ended June 30, 2015 and 2014, and $15 million and $14 million for the six-month periods ended June 30, 2015 and 2014, respectively. Pursuant to our Sempra Energy share-based compensation plans, Sempra Energy’s compensation committee granted 301,319 TSR RSUs, 76,675 EPS RSUs and 133,159 RSUs issued either as service-based awards or in connection with certain other performance goals during the six months ended June 30, 2015, primarily in January.
 
During the six months ended June 30, 2015, IEnova issued 148,781 RSUs from the IEnova 2013 Long-Term Incentive Plan, under which awards are cash settled at vesting based on the price of IEnova common stock.
 


 
CAPITALIZED FINANCING COSTS
 

Capitalized financing costs include capitalized interest costs and, primarily at the California Utilities, an allowance for funds used during construction (AFUDC) related to both debt and equity financing of construction projects.
 
Pipeline projects currently under construction by Sempra Mexico and Sempra Natural Gas that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC related to equity.
 
Sempra International’s and Sempra U.S. Gas & Power’s businesses capitalize interest costs incurred to finance capital projects and interest on equity method investments that have not commenced planned principal operations. The California Utilities also capitalize certain interest costs.
 
The following table shows capitalized financing costs for the three months and six months ended June 30, 2015 and 2014.
 


CAPITALIZED FINANCING COSTS
       
(Dollars in millions)
       
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
Sempra Energy Consolidated:
               
    AFUDC related to debt
$
7
$
4
$
13
$
10
    AFUDC related to equity
 
31
 
24
 
58
 
49
    Other capitalized financing costs
 
17
 
8
 
34
 
16
        Total Sempra Energy Consolidated
$
55
$
36
$
105
$
75
SDG&E:
               
    AFUDC related to debt
$
4
$
3
$
7
$
7
    AFUDC related to equity
 
10
 
7
 
18
 
18
        Total SDG&E
$
14
$
10
$
25
$
25
SoCalGas:
               
    AFUDC related to debt
$
3
$
1
$
6
$
3
    AFUDC related to equity
 
10
 
6
 
19
 
11
        Total SoCalGas
$
13
$
7
$
25
$
14



 
COMPREHENSIVE INCOME
 

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


CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
       
Pension and other
       
       
postretirement benefits
       
   
Foreign
         
Total
   
currency
Unamortized
Unamortized
 
accumulated other
   
translation
net actuarial
prior service
Financial
comprehensive
   
adjustments
gain (loss)
cost
instruments
income (loss)
   
Three months ended June 30, 2015 and 2014
2015:
                   
Balance as of March 31, 2015
$
(384)
$
(82)
$
(2)
$
(145)
$
(613)
Other comprehensive (loss) income before
                   
   reclassifications
 
(43)
 
 
 
57
 
14
Amounts reclassified from accumulated other
                   
   comprehensive income
 
 
1
 
 
2
 
3
Net other comprehensive (loss) income
 
(43)
 
1
 
 
59
 
17
Balance as of June 30, 2015
$
(427)
$
(81)
$
(2)
$
(86)
$
(596)
2014:
                   
Balance as of March 31, 2014
$
(172)
$
(70)
$
$
(31)
$
(273)
Other comprehensive income (loss) before
                   
   reclassifications
 
2
 
 
 
(12)
 
(10)
Amounts reclassified from accumulated other
                   
   comprehensive income
 
 
5
 
 
5
 
10
Net other comprehensive income (loss)
 
2
 
5
 
 
(7)
 
Balance as of June 30, 2014
$
(170)
$
(65)
$
$
(38)
$
(273)
                       
   
Six months ended June 30, 2015 and 2014
2015:
                   
Balance as of December 31, 2014
$
(322)
$
(83)
$
(2)
$
(90)
$
(497)
Other comprehensive (loss) income before
                   
   reclassifications
 
(105)
 
 
 
3
 
(102)
Amounts reclassified from accumulated other
                   
   comprehensive income
 
 
2
 
 
1
 
3
Net other comprehensive (loss) income
 
(105)
 
2
 
 
4
 
(99)
Balance as of June 30, 2015
$
(427)
$
(81)
$
(2)
$
(86)
$
(596)
2014:
                   
Balance as of December 31, 2013
$
(129)
$
(73)
$
$
(26)
$
(228)
Other comprehensive loss before
                   
   reclassifications
 
(41)
 
 
 
(26)
 
(67)
Amounts reclassified from accumulated other
                   
   comprehensive income
 
 
8
 
 
14
 
22
Net other comprehensive (loss) income
 
(41)
 
8
 
 
(12)
 
(45)
Balance as of June 30, 2014
$
(170)
$
(65)
$
$
(38)
$
(273)
(1)
All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.



CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SAN DIEGO GAS & ELECTRIC COMPANY
(Dollars in millions)
   
Pension and other
     
   
postretirement benefits
     
           
Total
   
Unamortized
Unamortized
 
accumulated other
   
net actuarial
prior service
 
comprehensive
   
gain (loss)
credit
 
income (loss)
   
Three months ended June 30, 2015 and 2014
2015:
             
Balance as of March 31, and June 30, 2015
$
(13)
$
1
 
$
(12)
2014:
             
Balance as of March 31, 2014
$
(10)
$
1
 
$
(9)
Amounts reclassified from accumulated other
             
   comprehensive income
 
1
 
   
1
Net other comprehensive income
 
1
 
   
1
Balance as of June 30, 2014
$
(9)
$
1
 
$
(8)
                 
   
Six months ended June 30, 2015 and 2014
2015:
             
Balance as of December 31, 2014 and June 30, 2015
$
(13)
$
1
 
$
(12)
2014:
             
Balance as of December 31, 2013
$
(10)
$
1
 
$
(9)
Amounts reclassified from accumulated other
             
   comprehensive income
 
1
 
   
1
Net other comprehensive income
 
1
 
   
1
Balance as of June 30, 2014
$
(9)
$
1
 
$
(8)
(1)
All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.



RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated
Amounts reclassified
   
other comprehensive income (loss)
from accumulated other
 
Affected line item on Condensed
components
comprehensive income (loss)
 
Consolidated Statements of Operations
     
Three months ended June 30,
         
     
2015
 
2014
         
Sempra Energy Consolidated:
                   
Financial instruments:
                   
    Interest rate and foreign exchange instruments
$
3
 
$
6
 
Interest Expense
    Interest rate instruments
 
3
   
2
 
Equity Earnings, Before Income Tax
Total before income tax
 
6
   
8
   
       
(1)
   
(1)
 
Income Tax Expense
Net of income tax
 
5
   
7
   
       
(3)
   
(2)
 
Earnings Attributable to Noncontrolling Interests
     
$
2
 
$
5
         
                         
Pension and other postretirement benefits:
                   
    Amortization of actuarial loss
$
2
 
$
8
 
See note (1) below
       
(1)
   
(3)
 
Income Tax Expense
Net of income tax
$
1
 
$
5
   
                         
Total reclassifications for the period, net of tax
$
3
 
$
10
         
SDG&E:
                   
Financial instruments:
                   
    Interest rate instruments
$
3
 
$
2
 
Interest Expense
       
(3)
   
(2)
 
Earnings Attributable to Noncontrolling Interest
 
$
 
$
         
                         
Pension and other postretirement benefits:
                   
    Amortization of actuarial loss
$
 
$
2
 
See note (1) below
       
   
(1)
 
Income Tax Expense
Net of income tax
$
 
$
1
   
                         
Total reclassifications for the period, net of tax
$
 
$
1
         
(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)
Details about accumulated
Amount reclassified
   
other comprehensive income (loss)
from accumulated other
 
Affected line item on Condensed
components
comprehensive income (loss)
 
 Consolidated Statements of Operations
     
Six months ended June 30,
         
     
2015
2014
         
Sempra Energy Consolidated:
                 
Financial instruments:
                 
    Interest rate and foreign exchange instruments
$
9
$
9
 
Interest Expense
    Interest rate instruments
 
 
2
 
Gain on Sale of Equity Interest and Assets
    Interest rate instruments
 
6
 
5
 
Equity Earnings, Before Income Tax
    Commodity contracts not subject to
         
Revenues: Energy-Related
 
rate recovery
 
(7)
 
10
 
    Businesses
Total before income tax
 
8
 
26
   
       
 
(7)
 
Income Tax Expense
Net of income tax
 
8
 
19
   
       
(7)
 
(5)
 
Earnings Attributable to Noncontrolling Interests
     
$
1
$
14
         
                       
Pension and other postretirement benefits:
                 
    Amortization of actuarial loss
$
4
$
13
 
See note (1) below
       
(2)
 
(5)
 
Income Tax Expense
Net of income tax
$
2
$
8
   
                       
Total reclassifications for the period, net of tax
$
3
$
22
         
SDG&E:
                 
Financial instruments:
                 
    Interest rate instruments
$
6
$
5
 
Interest Expense
       
(6)
 
(5)
 
Earnings Attributable to Noncontrolling Interest
     
$
$
         
                       
Pension and other postretirement benefits:
                 
    Amortization of actuarial loss
$
$
2
 
See note (1) below
       
 
(1)
 
Income Tax Expense
Net of income tax
$
$
1
   
                       
Total reclassifications for the period, net of tax
$
$
1
         
(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, 2015 and 2014, Other Comprehensive Income, excluding amounts attributable to noncontrolling interests, at SoCalGas was negligible, and reclassifications out of Accumulated Other Comprehensive Income (Loss) to Net Income were also negligible for SoCalGas.
 


SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
 

The following tables provide reconciliations of changes in Sempra Energy’s, SDG&E’s and SoCalGas’ shareholders’ equity and noncontrolling interests for the six months ended June 30, 2015 and 2014.
 


SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS ― SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
     
Sempra Energy
 
Non-
   
     
shareholders’
 
controlling
 
Total
     
equity
 
interests
 
equity
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)
Issuance of common stock
 
59
 
 
59
Repurchase of common stock
 
(66)
 
 
(66)
Tax benefit related to share-based compensation
 
52
 
 
52
Equity contributed by noncontrolling interest
 
 
1
 
1
Distributions to noncontrolling interests
 
 
(16)
 
(16)
Balance at June 30, 2015
$
11,683
$
792
$
12,475
Balance at December 31, 2013
$
11,008
$
842
$
11,850
Comprehensive income
 
472
 
39
 
511
Preferred dividends of subsidiary
 
(1)
 
 
(1)
Share-based compensation expense
 
21
 
 
21
Common stock dividends declared
 
(324)
 
 
(324)
Issuance of common stock
 
42
 
 
42
Repurchase of common stock
 
(37)
 
 
(37)
Tax benefit related to share-based compensation
 
13
 
 
13
Equity contributed by noncontrolling interest
 
 
1
 
1
Distributions to noncontrolling interests
 
 
(25)
 
(25)
Balance at June 30, 2014
$
11,194
$
857
$
12,051



SHAREHOLDER'S EQUITY AND NONCONTROLLING INTEREST ― SDG&E
(Dollars in millions)
   
SDG&E
 
Non-
   
   
shareholder’s
 
controlling
 
Total
   
equity
 
interest
 
equity
Balance at December 31, 2014
$
4,932
$
60
$
4,992
Comprehensive income
 
273
 
9
 
282
Distributions to noncontrolling interest
 
 
(8)
 
(8)
Balance at June 30, 2015
$
5,205
$
61
$
5,266
Balance at December 31, 2013
$
4,628
$
91
$
4,719
Comprehensive income
 
223
 
7
 
230
Distributions to noncontrolling interest
 
 
(13)
 
(13)
Balance at June 30, 2014
$
4,851
$
85
$
4,936



SHAREHOLDERS' EQUITY ― SOCALGAS
(Dollars in millions)
   
SoCalGas
   
shareholders'
   
equity
Balance at December 31, 2014
$
2,781
Comprehensive income
 
285
Preferred stock dividends declared
 
(1)
Balance at June 30, 2015
$
3,065
Balance at December 31, 2013
$
2,549
Comprehensive income
 
159
Preferred stock dividends declared
 
(1)
Balance at June 30, 2014
$
2,707

Ownership interests that are held by owners other than Sempra Energy and SDG&E in subsidiaries or entities consolidated by them are accounted for and reported as noncontrolling interests. As a result, noncontrolling interests are reported as a separate component of equity on the Condensed Consolidated Balance Sheets. Earnings or losses attributable to noncontrolling interests are separately identified on the Condensed Consolidated Statements of Operations, and comprehensive income or loss attributable to noncontrolling interests is separately identified on the Condensed Consolidated Statements of Comprehensive Income.
 


 
Preferred Stock
 

At Sempra Energy, the preferred stock of SoCalGas is presented as a noncontrolling interest and preferred stock dividends are charges against income related to noncontrolling interests. We provide additional information concerning preferred stock in Note 11 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Other Noncontrolling Interests
 

At June 30, 2015 and December 31, 2014, we reported the following noncontrolling ownership interests held by others (not including preferred shareholders) recorded in Other Noncontrolling Interests in Total Equity on Sempra Energy’s Condensed Consolidated Balance Sheets:
 


OTHER NONCONTROLLING INTERESTS
(Dollars in millions)
   
   
Percent ownership held by others
         
   
June 30,
 
December 31,
   
June 30,
 
December 31,
   
2015
 
2014
   
2015
 
2014
SDG&E:
               
   Otay Mesa VIE
100
%
100
%
$
61
$
60
Sempra South American Utilities:
               
   Chilquinta Energía subsidiaries(1)
23.5 – 43.4
 
23.6 – 43.4
   
22
 
23
   Luz del Sur
16.4
 
16.4
   
171
 
177
   Tecsur
9.8
 
9.8
   
3
 
4
Sempra Mexico:
               
   IEnova, S.A.B. de C.V.
18.9
 
18.9
   
476
 
452
Sempra Natural Gas:
               
   Bay Gas Storage Company, Ltd.
9.1
 
9.1
   
24
 
23
   Liberty Gas Storage, LLC
25.0
 
25.0
   
14
 
14
   Southern Gas Transmission Company
49.0
 
49.0
   
1
 
1
      Total Sempra Energy
       
$
772
$
754
(1)
Chilquinta Energía has four subsidiaries with noncontrolling interests held by others. Percentage range reflects the highest and lowest ownership percentages amongst these subsidiaries.


 
TRANSACTIONS WITH AFFILIATES
 

Current and noncurrent amounts due from unconsolidated affiliates on the Sempra Energy Condensed Consolidated Balance Sheets are as follows:

DUE FROM UNCONSOLIDATED AFFILIATES(1)
(Dollars in millions)
     
June 30, 2015
 
December 31, 2014
Sempra South American Utilities:
       
    Eletrans S.A.:
       
        4% Note(2)
$
61
$
41
Sempra Mexico:
       
    Affiliates of joint venture with PEMEX:
       
        Note due November 13, 2017(3)(4)
 
3
 
44
        Note due November 14, 2018(3)
 
41
 
40
        Note due November 14, 2018(3)
 
33
 
33
        Note due November 14, 2018(3)
 
8
 
8
    Energía Sierra Juárez:
       
        Note due June 15, 2018(5)
 
23
 
22
Other(6)
 
4
 
38
Total
$
173
$
226
(1)
Amounts include principal balances plus accumulated interest outstanding.
(2)
U.S. dollar-denominated loan, at a fixed interest rate with no stated maturity date, to provide project financing for the construction of transmission lines at Eletrans S.A., an affiliate of Chilquinta Energía.
(3)
U.S. dollar-denominated loan, at a variable interest rate based on a 30-day LIBOR plus 450 basis points (4.68 percent at June 30, 2015), to finance the Los Ramones Norte pipeline project.
(4)
In May 2015, approximately $41 million was paid with proceeds from project financing at the joint venture.
(5)
U.S. dollar-denominated loan, at a variable interest rate based on a 30-day LIBOR plus 637.5 basis points (6.56 percent at June 30, 2015), to finance the first phase of the Energía Sierra Juárez wind project.
(6)
Amounts represent accounts receivable from various Sempra Renewables and Sempra Mexico joint venture investments.

 
Service Agreements
 

Sempra Energy, SDG&E and SoCalGas provide certain services to each other and are charged an allocable share of the cost of such services. Also, from time-to-time, SDG&E and SoCalGas may loan surplus cash to Sempra Energy at interest rates based on one-month commercial paper rates. Amounts due to/from affiliates are as follows:
 


AMOUNTS DUE TO AND FROM AFFILIATES AT SDG&E AND SOCALGAS
(Dollars in millions)
   
June 30, 2015
 
December 31, 2014
SDG&E:
         
Current:
         
    Due from various affiliates
$
1
 
$
1
           
             
    Due to Sempra Energy
$
7
 
$
17
    Due to SoCalGas
 
   
4
 
$
7
 
$
21
             
Income taxes due from Sempra Energy(1)
$
97
 
$
16
SoCalGas:
         
Current:
         
    Due from Sempra Energy(2)
$
273
 
$
    Due from SDG&E
 
   
4
   
$
273
 
$
4
             
           
    Due to Sempra Energy
$
 
$
13
           
             
Income taxes due (to) from Sempra Energy(1)
$
(19)
 
$
9
(1)
SDG&E and SoCalGas are included in the consolidated income tax return of Sempra Energy and are allocated income tax expense from Sempra Energy in an amount equal to that which would result from each company having always filed a separate return.
(2)
Net receivable includes a loan to Sempra Energy of $279 million at June 30, 2015 at an interest rate of 0.08 percent.

 
Revenues from unconsolidated affiliates at SDG&E and SoCalGas are as follows:
 


REVENUES FROM UNCONSOLIDATED AFFILIATES AT SDG&E AND SOCALGAS
       
(Dollars in millions)
       
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
 
2014
SDG&E
$
2
$
3
$
5
$
6
SoCalGas
 
17
 
16
 
36
 
34

 
 
OTHER INCOME, NET
 

Other Income, Net on the Condensed Consolidated Statements of Operations consists of the following:
 


OTHER INCOME, NET
           
(Dollars in millions)
           
   
Three months ended June 30,
Six months ended June 30,
     
2015
 
2014
 
2015
 
2014
Sempra Energy Consolidated:
               
Allowance for equity funds used during construction
$
31
$
24
$
58
$
49
Investment (losses) gains(1)
 
(2)
 
15
 
7
 
23
(Losses) gains on interest rate and foreign exchange instruments, net
 
(3)
 
11
 
(3)
 
16
Electrical infrastructure relocation income(2)
 
4
 
3
 
4
 
3
Regulatory interest, net(3)
 
1
 
2
 
2
 
3
Foreign currency (losses) gains
 
(2)
 
1
 
(3)
 
1
Sundry, net
 
8
 
(7)
 
11
 
(6)
   Total
$
37
$
49
$
76
$
89
SDG&E:
               
Allowance for equity funds used during construction
$
10
$
7
$
18
$
18
Regulatory interest, net(3)
 
1
 
2
 
2
 
3
Sundry, net
 
(2)
 
(2)
 
(2)
 
(1)
   Total
$
9
$
7
$
18
$
20
SoCalGas:
               
Allowance for equity funds used during construction
$
10
$
6
$
19
$
11
Sundry, net
 
(1)
 
(3)
 
(2)
 
(4)
   Total
$
9
$
3
$
17
$
7
(1)
Represents investment (losses) gains on dedicated assets in support of our executive retirement and deferred compensation plans. These amounts are partially offset by corresponding changes in compensation expense related to the plans.
(2)
Income at Luz del Sur associated with the relocation of electrical infrastructure.
(3)
Interest on regulatory balancing accounts.


 
INCOME TAXES
 


INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
         
Effective
       
Effective
 
     
Income tax
 
income
   
Income tax
 
income
 
     
expense
 
tax rate
   
expense
 
tax rate
 
     
Three months ended June 30,
     
2015
2014
Sempra Energy Consolidated
$
98
 
25
%
$
93
 
25
%
SDG&E
 
54
 
29
   
69
 
35
 
SoCalGas
 
16
 
18
   
28
 
26
 
     
Six months ended June 30,
     
2015
2014
Sempra Energy Consolidated
$
261
 
26
%
$
220
 
29
%
SDG&E
 
142
 
34
   
152
 
40
 
SoCalGas
 
111
 
28
   
66
 
29
 


 
Changes in Income Tax Expense and Effective Income Tax Rates
 
Sempra Energy Consolidated
 
The increase in income tax expense in the three months ended June 30, 2015 was mainly due to higher pretax income.
 
The increase in income tax expense in the six months ended June 30, 2015 was mainly due to higher pretax income, offset by a lower effective income tax rate. The lower effective income tax rate was primarily due to:
 
§  
a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in the San Onofre Nuclear Generating Station (SONGS) that we discuss in Note 9; and
 
§  
favorable resolution of prior years’ income tax items in 2015.
 
Sempra Energy, SDG&E and SoCalGas record income taxes for interim periods utilizing a forecasted effective tax rate anticipated for the full year, as required by U.S. GAAP. The income tax effect of items that can be reliably forecasted are factored into the forecasted effective tax rate and their impact is recognized proportionately over the year. The forecasted items, anticipated on a full year basis, may include, among others:
 
§  
utility self-developed software expenditures
 
§  
repairs to certain utility plant assets
 
§  
renewable energy income tax credits
 
§  
deferred income tax benefits related to renewable energy projects
 
§  
exclusions from taxable income of the equity portion of AFUDC
 
§  
depreciation on a certain portion of utility plant assets
 
§  
U.S. tax on repatriation of current year earnings from non-U.S. subsidiaries
 
Items that cannot be reliably forecasted (e.g., adjustments related to prior years’ income tax items, remeasurement of deferred tax asset valuation allowances, Mexican currency translation and inflation adjustments, and deferred income tax benefit associated with the impairment of a book investment) are recorded in the interim period in which they actually occur, which can result in variability to income tax expense.
 
SDG&E
 
The decrease in SDG&E’s income tax expense in the three months ended June 30, 2015 was due to lower pretax income and a lower effective income tax rate, which was primarily from the favorable resolution of prior years’ income tax items in 2015.
 
The decrease in SDG&E’s income tax expense in the six months ended June 30, 2015 was due to a lower effective income tax rate, offset by higher pretax income. The lower effective income tax rate was primarily due to:
 
§  
a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS that we discuss in Note 9; and
 
§  
favorable resolution of prior years’ income tax items in 2015.
 
The results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is not included in Sempra Energy’s federal or state income tax returns but is consolidated for financial statement purposes, and therefore, Sempra Energy Consolidated’s and SDG&E’s effective income tax rates are impacted by the VIE’s stand-alone effective income tax rate. We discuss Otay Mesa VIE above in “Variable Interest Entities.”
 
SoCalGas
 
The decrease in SoCalGas’ income tax expense in the three months ended June 30, 2015 was due to lower pretax income and a lower effective income tax rate. The lower pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10. The lower effective income tax rate was primarily due to:
 
§  
favorable resolution of prior years’ income tax items in 2015;
 
§  
higher exclusions from taxable income of the equity portion of AFUDC; and
 
§  
higher favorable impact of deductions for self-developed software expenditures.
 
The increase in SoCalGas’ income tax expense in the six months ended June 30, 2015 was mainly due to higher pretax income, offset by a lower effective income tax rate. The higher pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10. The lower effective income tax rate was primarily due to the favorable resolution of prior years’ income tax items in 2015.
 
For SDG&E and SoCalGas, the CPUC requires flow-through rate-making treatment for the current income tax benefit or expense arising from certain property-related and other temporary differences between the treatment for financial reporting and income tax, which will reverse over time. Under the regulatory accounting treatment required for these flow-through temporary differences, deferred income tax assets and liabilities are not recorded to deferred income tax expense, but rather to a regulatory asset or liability, which impacts the current effective income tax rate. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the effective income tax rate. The following items are subject to flow-through treatment:
 
§  
repairs expenditures related to a certain portion of utility plant assets
 
§  
the equity portion of AFUDC
 
§  
a portion of the cost of removal of utility plant assets
 
§  
utility self-developed software expenditures
 
§  
depreciation on a certain portion of utility plant assets
 
The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico and Sempra Natural Gas has similar flow-through treatment.
 
We provide additional information about our accounting for income taxes in Notes 1 and 6 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 
 

NOTE 6. DEBT AND CREDIT FACILITIES
 


 
LINES OF CREDIT
 

At June 30, 2015, Sempra Energy Consolidated had an aggregate of $4.1 billion in three primary committed lines of credit for Sempra Energy, Sempra Global and the California Utilities to provide liquidity and to support commercial paper, the major components of which we detail below. Available unused credit on these lines at June 30, 2015 was approximately $3.5 billion. Some of Sempra Energy’s subsidiaries, primarily our foreign operations, have additional general purpose credit facilities, aggregating $848 million at June 30, 2015. Available unused credit on these lines totaled $576 million at June 30, 2015.
 


 
Sempra Energy
 

Sempra Energy has a $1.067 billion, five-year syndicated revolving credit agreement expiring in March 2017. Citibank, N.A. serves as administrative agent for the syndicate of 24 lenders. No single lender has greater than a 7-percent share.
 
Borrowings bear interest at benchmark rates plus a margin that varies with market index rates and Sempra Energy’s credit ratings. The facility requires Sempra Energy to maintain a ratio of total indebtedness to total capitalization (as defined in the agreement) of no more than 65 percent at the end of each quarter. At June 30, 2015 and December 31, 2014, Sempra Energy was in compliance with this and all other financial covenants under the credit facility. The facility also provides for issuance of up to $635 million of letters of credit on behalf of Sempra Energy with the amount of borrowings otherwise available under the facility reduced by the amount of outstanding letters of credit.
 
At June 30, 2015, Sempra Energy had no outstanding borrowings or letters of credit supported by the facility.
 


 
Sempra Global
 

Sempra Global has a $2.189 billion, five-year syndicated revolving credit agreement expiring in March 2017. Citibank, N.A. serves as administrative agent for the syndicate of 25 lenders. No single lender has greater than a 7-percent share.
 
Sempra Energy guarantees Sempra Global’s obligations under the credit facility. Borrowings bear interest at benchmark rates plus a margin that varies with market index rates and Sempra Energy’s credit ratings. The facility requires Sempra Energy to maintain a ratio of total indebtedness to total capitalization (as defined in the agreement) of no more than 65 percent at the end of each quarter. At June 30, 2015 and December 31, 2014, Sempra Energy was in compliance with this and all other financial covenants under the credit facility.
 
At June 30, 2015, Sempra Global had $600 million of commercial paper outstanding supported by the facility.
 


 
California Utilities
 

SDG&E and SoCalGas have a combined $877 million, five-year syndicated revolving credit agreement expiring in March 2017. JPMorgan Chase Bank, N.A. serves as administrative agent for the syndicate of 24 lenders. No single lender has greater than a 7-percent share. The agreement permits each utility to individually borrow up to $658 million, subject to a combined limit of $877 million for both utilities. It also provides for the issuance of letters of credit on behalf of each utility subject to a combined letter of credit commitment of $300 million for both utilities. The amount of borrowings otherwise available under the facility is reduced by the amount of outstanding letters of credit.
 
Borrowings under the facility bear interest at benchmark rates plus a margin that varies with market index rates and the borrowing utility’s credit ratings. The agreement requires each utility to maintain a ratio of total indebtedness to total capitalization (as defined in the agreement) of no more than 65 percent at the end of each quarter. At June 30, 2015 and December 31, 2014, the California Utilities were in compliance with this and all other financial covenants under the credit facility.
 
Each utility’s obligations under the agreement are individual obligations, and a default by one utility would not constitute a default by the other utility or preclude borrowings by, or the issuance of letters of credit on behalf of, the other utility.
 
At June 30, 2015, SDG&E had $40 million of commercial paper outstanding, supported by the facility. SoCalGas had no outstanding borrowings supported by the facility. Available unused credit on the line at June 30, 2015 was $618 million and $658 million at SDG&E and SoCalGas, respectively, subject to the $877 million maximum combined credit limit.
 


 
Sempra Mexico
 

In 2014, IEnova entered into an agreement for a $200 million, U.S. dollar-denominated, three-year corporate revolving credit facility to finance working capital and for general corporate purposes. The lender is Banco Santander, (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander Mexico. At June 30, 2015, IEnova had $50 million of outstanding borrowings supported by the facility, and available unused credit on the line was $150 million.
 
Also in 2014, IEnova entered into an agreement for a $100 million, U.S. dollar-denominated, three-year corporate revolving credit facility to finance working capital and for general corporate purposes. The lender is Sumitomo Mitsui Banking Corporation. At June 30, 2015, IEnova had $25 million of outstanding borrowings supported by the facility, and available unused credit on the line was $75 million.
 


 
WEIGHTED AVERAGE INTEREST RATES
 

The weighted average interest rates on the total short-term debt at Sempra Energy Consolidated were 0.78 percent and 0.70 percent at June 30, 2015 and December 31, 2014, respectively. The weighted average interest rate on total short-term debt at SDG&E was 0.18 percent at June 30, 2015. At December 31, 2014, the weighted average interest rates on total short-term debt at SDG&E and SoCalGas were 0.27 percent and 0.25 percent, respectively.
 


 
LONG-TERM DEBT
 

Sempra Energy
 
In March 2015, Sempra Energy publicly offered and sold $500 million of 2.40-percent, fixed-rate notes maturing in 2020. Sempra Energy used the proceeds from this offering to repay outstanding commercial paper.
 
SDG&E
 
In March 2015, SDG&E publicly offered and sold $140 million of first mortgage bonds maturing in 2017 at a variable rate of three-month LIBOR plus 0.20 percent (0.48 percent at June 30, 2015) and $250 million of 1.914-percent amortizing first mortgage bonds maturing in 2022. SDG&E used the proceeds from the offering to repay outstanding commercial paper and for other general corporate purposes.
 
SDG&E will redeem, prior to maturity, certain outstanding long-term debt instruments with a total principal amount of $169 million. Accordingly, the debt is classified as current portion of long-term debt at June 30, 2015 on Sempra Energy’s and SDG&E’s Condensed Consolidated Balance Sheets. The coupon rate of these instruments ranges from 4.9 percent to 5.5 percent, with maturities from 2021 to 2027. The redemption is anticipated to occur during the third quarter of 2015.
 


SoCalGas
 
In June 2015, SoCalGas publicly offered and sold $250 million of 1.55-percent and $350 million of 3.20-percent first mortgage bonds maturing in 2018 and 2025, respectively. SoCalGas used the proceeds from the offering to repay outstanding commercial paper and for other general corporate purposes.
 
South American Utilities
 
In May and June 2015, Luz del Sur borrowed $13 million and $22 million, respectively, under a bank loan facility. The loans accrue interest at 5.18 percent and mature on May 18, 2018 and June 1, 2018, respectively.
 
Sempra Natural Gas
 
In June 2015, Sempra Natural Gas reduced its other long-term debt by $79 million through redemption of its investment in industrial development bonds at Mississippi Hub.
 


 
INTEREST RATE SWAPS
 

We discuss our fair value interest rate swaps and interest rate swaps to hedge cash flows in Note 7.
 


 
 

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
 

We use derivative instruments primarily to manage exposures arising in the normal course of business. Our principal exposures are commodity market risk and benchmark interest rate risk. We may also manage foreign exchange rate exposures using derivatives. Our use of derivatives for these risks is integrated into the economic management of our anticipated revenues, anticipated expenses, assets and liabilities. Derivatives may be effective in mitigating these risks (1) that could lead to declines in anticipated revenues or increases in anticipated expenses, or (2) that our asset values may fall or our liabilities increase. Accordingly, our derivative activity summarized below generally represents an impact that is intended to offset associated revenues, expenses, assets or liabilities that are not presented below.
 
We record all derivatives at fair value on the Condensed Consolidated Balance Sheets. We designate each derivative as (1) a cash flow hedge, (2) a fair value hedge, or (3) undesignated. Depending on the applicability of hedge accounting and, for the California Utilities and other operations subject to regulatory accounting, the requirement to pass impacts through to customers, the impact of derivative instruments may be offset in other comprehensive income (loss) (cash flow hedge), on the balance sheet (fair value hedges and regulatory offsets), or recognized in earnings. We classify cash flows from the settlements of derivative instruments as operating activities on the Condensed Consolidated Statements of Cash Flows.
 
In certain cases, we apply the normal purchase or sale exception to derivative accounting and have other commodity contracts that are not derivatives. These contracts are not recorded at fair value and are therefore excluded from the disclosures below.
 


 
HEDGE ACCOUNTING
 

We may designate a derivative as a cash flow hedging instrument if it effectively converts anticipated revenues or expenses to a fixed dollar amount. We may utilize cash flow hedge accounting for derivative commodity instruments, foreign currency instruments and interest rate instruments. Designating cash flow hedges is dependent on the business context in which the instrument is being used, the effectiveness of the instrument in offsetting the risk that a given future revenue or expense item may vary, and other criteria.
 
We may designate an interest rate derivative as a fair value hedging instrument if it effectively converts our own debt from a fixed interest rate to a variable rate. The combination of the derivative and debt instrument results in fixing that portion of the fair value of the debt that is related to benchmark interest rates. Designating fair value hedges is dependent on the instrument being used, the effectiveness of the instrument in offsetting changes in the fair value of our debt instruments, and other criteria.
 

 
ENERGY DERIVATIVES
 
Our market risk is primarily related to natural gas and electricity price volatility and the specific physical locations where we transact. We use energy derivatives to manage these risks. The use of energy derivatives in our various businesses depends on the particular energy market, and the operating and regulatory environments applicable to the business.
 
§  
The California Utilities use energy derivatives, both natural gas and electricity, for the benefit of customers, with the objective of managing price risk and basis risks, and lowering natural gas and electricity costs. These derivatives include fixed price natural gas and electricity positions, options, and basis risk instruments, which are either exchange-traded or over-the-counter financial instruments, or bilateral physical transactions. This activity is governed by risk management and transacting activity plans that have been filed with and approved by the CPUC. Natural gas and electricity derivative activities are recorded as commodity costs that are offset by regulatory account balances and are recovered in rates. Net commodity cost impacts on the Condensed Consolidated Statements of Operations are reflected in Cost of Electric Fuel and Purchased Power or in Cost of Natural Gas.
 
§  
SDG&E is allocated and may purchase congestion revenue rights (CRRs), which serve to reduce the regional electricity price volatility risk that may result from local transmission capacity constraints. Unrealized gains and losses do not impact earnings, as they are offset by regulatory account balances. Realized gains and losses associated with CRRs are recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Condensed Consolidated Statements of Operations.
 
§  
Sempra Mexico and Sempra Natural Gas may use natural gas and electricity derivatives, as appropriate, to optimize the earnings of their assets which support the following businesses: liquefied natural gas (LNG), natural gas transportation, power generation, and Sempra Natural Gas’ storage. Gains and losses associated with undesignated derivatives are recognized in Energy-Related Businesses Revenues or in Cost of Natural Gas, Electric Fuel and Purchased Power on the Condensed Consolidated Statements of Operations. Certain of these derivatives may also be designated as cash flow hedges. Sempra Mexico also uses natural gas energy derivatives with the objective of managing price risk and lowering natural gas prices at its Mexican distribution operations. These derivatives, which are recorded as commodity costs that are offset by regulatory account balances and recovered in rates, are recognized in Cost of Natural Gas on the Condensed Consolidated Statements of Operations.
 
§  
From time to time, our various businesses, including the California Utilities, may use other energy derivatives to hedge exposures such as the price of vehicle fuel.
 
 
We summarize net energy derivative volumes at June 30, 2015 and December 31, 2014 as follows:
 

NET ENERGY DERIVATIVE VOLUMES
 
Segment and Commodity
June 30, 2015
December 31, 2014
 
California Utilities:
     
    SDG&E:
     
        Natural gas
57 million MMBtu
55 million MMBtu
(1)
        Electricity
1 million MWh
 ―   
(2)
        Congestion revenue rights
23 million MWh
27 million MWh
 
    SoCalGas - natural gas
 ―   
1 million MMBtu
 
           
Energy-Related Businesses:
     
    Sempra Natural Gas - natural gas
29 million MMBtu
29 million MMBtu
 
(1)
Million British thermal units
(2)
Megawatt hours

In addition to the amounts noted above, we frequently use commodity derivatives to manage risks associated with the physical locations of contractual obligations and assets, such as natural gas purchases and sales.
 


 
INTEREST RATE DERIVATIVES
 

We are exposed to interest rates primarily as a result of our current and expected use of financing. We periodically enter into interest rate derivative agreements intended to moderate our exposure to interest rates and to lower our overall costs of borrowing. We utilize interest rate swaps typically designated as fair value hedges, as a means to achieve our targeted level of variable rate debt as a percent of total debt. In addition, we may utilize interest rate swaps, typically designated as cash flow hedges, to lock in interest rates on outstanding debt or in anticipation of future financings.
 
Interest rate derivatives are utilized by the California Utilities as well as by other Sempra Energy subsidiaries. Although the California Utilities generally recover borrowing costs in rates over time, the use of interest rate derivatives is subject to certain regulatory constraints, and the impact of interest rate derivatives may not be recovered from customers as timely as described above with regard to energy derivatives. Interest rate derivatives are generally accounted for as hedges at the California Utilities, as well as at the rest of Sempra Energy’s subsidiaries. Separately, Otay Mesa VIE has entered into interest rate swap agreements to moderate its exposure to interest rate changes. This activity was designated as a cash flow hedge as of April 1, 2011.
 
At June 30, 2015 and December 31, 2014, the net notional amounts of our interest rate derivatives, excluding the cross-currency swaps discussed below, were:
 


INTEREST RATE DERIVATIVES
(Dollars in millions)
   
June 30, 2015
December 31, 2014
 
Notional debt
Maturities
Notional debt
Maturities
Sempra Energy Consolidated:
           
    Cash flow hedges(1)
$
392
2015-2028
$
399
2015-2028
    Fair value hedges
 
300
2016
 
300
2016
SDG&E:
           
    Cash flow hedge(1)
 
320
2015-2019
 
325
2015-2019
(1)
Includes Otay Mesa VIE. All of SDG&E’s interest rate derivatives relate to Otay Mesa VIE.

 
 
FOREIGN CURRENCY DERIVATIVES
 

We are exposed to exchange rate movements at our Mexican subsidiaries, which have U.S. dollar denominated cash balances, receivables and payables (monetary assets and liabilities) that give rise to Mexican currency exchange rate movements for Mexican income tax purposes. These subsidiaries also have deferred income tax assets and liabilities that are denominated in the Mexican peso, which must be translated into U.S. dollars for financial reporting purposes. From time to time, we may utilize foreign currency derivatives at our subsidiaries and at the consolidated level as a means to manage the risk of exposure to significant fluctuations in our income tax expense from these impacts. We may also utilize cross-currency swaps to hedge exposure related to Mexican peso-denominated debt at our Mexican subsidiaries and joint ventures.
 
In addition, Sempra South American Utilities may utilize foreign currency derivatives at its subsidiaries and joint ventures as a means to manage foreign currency rate risk. We discuss such swaps at Chilquinta Energía’s Eletrans joint venture investment in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
FINANCIAL STATEMENT PRESENTATION
 

Each Condensed Consolidated Balance Sheet reflects the offsetting of net derivative positions and cash collateral with the same counterparty when a legal right of offset exists. The following tables provide the fair values of derivative instruments on the Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, including the amount of cash collateral receivables that were not offset, as the cash collateral is in excess of liability positions.
 


DERIVATIVE INSTRUMENTS ON THE CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
June 30, 2015
                 
Deferred
                 
credits
     
Current
     
Current
 
and other
     
assets:
     
liabilities:
 
liabilities:
     
Fixed-price
 
Investments
 
Fixed-price
 
Fixed-price
     
contracts
 
and other
 
contracts
 
contracts
     
and other
 
assets:
 
and other
 
and other
   
derivatives(1)
 
Sundry
 
derivatives(2)
 
derivatives
Sempra Energy Consolidated:
               
Derivatives designated as hedging instruments:
               
    Interest rate and foreign exchange instruments(3)
$
9
$
2
$
(17)
$
(129)
    Commodity contracts not subject to rate recovery
 
1
 
 
 
Derivatives not designated as hedging instruments:
               
    Interest rate and foreign exchange instruments
 
8
 
24
 
(6)
 
(20)
    Commodity contracts not subject to rate recovery
 
78
 
24
 
(76)
 
(16)
        Associated offsetting commodity contracts
 
(69)
 
(15)
 
69
 
15
        Associated offsetting cash collateral
 
 
 
5
 
1
    Commodity contracts subject to rate recovery
 
15
 
75
 
(37)
 
(64)
        Associated offsetting commodity contracts
 
(1)
 
(1)
 
1
 
1
        Associated offsetting cash collateral
 
 
 
21
 
21
    Net amounts presented on the balance sheet
 
41
 
109
 
(40)
 
(191)
    Additional cash collateral for commodity contracts
               
        not subject to rate recovery
 
17
 
 
 
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
27
 
 
 
    Total(4)
$
85
$
109
$
(40)
$
(191)
SDG&E:
               
Derivatives designated as hedging instruments:
               
    Interest rate instruments(3)
$
$
$
(15)
$
(28)
Derivatives not designated as hedging instruments:
               
    Commodity contracts not subject to rate recovery
 
 
 
(1)
 
        Associated offsetting cash collateral
 
 
 
1
 
    Commodity contracts subject to rate recovery
 
14
 
75
 
(37)
 
(64)
        Associated offsetting commodity contracts
 
(1)
 
(1)
 
1
 
1
        Associated offsetting cash collateral
 
 
 
21
 
21
    Net amounts presented on the balance sheet
 
13
 
74
 
(30)
 
(70)
    Additional cash collateral for commodity contracts
               
        not subject to rate recovery
 
1
 
 
 
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
26
 
 
 
    Total(4)
$
40
$
74
$
(30)
$
(70)
SoCalGas:
               
Derivatives not designated as hedging instruments:
               
    Commodity contracts not subject to rate recovery
$
$
$
(1)
$
        Associated offsetting cash collateral
 
 
 
1
 
    Commodity contracts subject to rate recovery
 
1
 
 
 
    Net amounts presented on the balance sheet
 
1
 
 
 
    Additional cash collateral for commodity contracts
               
        not subject to rate recovery
 
2
 
 
 
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
1
 
 
 
    Total
$
4
$
$
$
(1)
Included in Current Assets: Other for SoCalGas.
               
(2)
Included in Current Liabilities: Other for SoCalGas.
               
(3)
Includes Otay Mesa VIE. All of SDG&E’s amounts relate to Otay Mesa VIE.
           
(4)
Normal purchase contracts previously measured at fair value are excluded.
           



DERIVATIVE INSTRUMENTS ON THE CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
   
December 31, 2014
                 
Deferred
                 
credits
     
Current
     
Current
 
and other
     
assets:
     
liabilities:
 
liabilities:
     
Fixed-price
 
Investments
 
Fixed-price
 
Fixed-price
     
contracts
 
and other
 
contracts
 
contracts
     
and other
 
assets:
 
and other
 
and other
   
derivatives(1)
 
Sundry
 
derivatives(2)
 
derivatives
Sempra Energy Consolidated:
               
Derivatives designated as hedging instruments:
               
    Interest rate and foreign exchange instruments(3)
$
10
$
3
$
(17)
$
(109)
    Commodity contracts not subject to rate recovery
 
25
 
 
 
Derivatives not designated as hedging instruments:
               
    Interest rate instruments
 
8
 
27
 
(7)
 
(22)
    Commodity contracts not subject to rate recovery
 
143
 
32
 
(135)
 
(29)
        Associated offsetting commodity contracts
 
(129)
 
(27)
 
129
 
27
        Associated offsetting cash collateral
 
(11)
 
 
 
    Commodity contracts subject to rate recovery
 
36
 
76
 
(36)
 
(20)
        Associated offsetting commodity contracts
 
(3)
 
(1)
 
3
 
1
        Associated offsetting cash collateral
 
 
 
23
 
13
    Net amounts presented on the balance sheet
 
79
 
110
 
(40)
 
(139)
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
14
 
 
 
    Total(4)
$
93
$
110
$
(40)
$
(139)
SDG&E:
               
Derivatives designated as hedging instruments:
               
    Interest rate instruments(3)
$
$
$
(16)
$
(31)
Derivatives not designated as hedging instruments:
               
    Commodity contracts subject to rate recovery
 
32
 
76
 
(32)
 
(20)
        Associated offsetting commodity contracts
 
 
(1)
 
 
1
        Associated offsetting cash collateral
 
 
 
23
 
13
    Net amounts presented on the balance sheet
 
32
 
75
 
(25)
 
(37)
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
12
 
 
 
    Total(4)
$
44
$
75
$
(25)
$
(37)
SoCalGas:
               
Derivatives not designated as hedging instruments:
               
    Commodity contracts subject to rate recovery
$
4
$
$
(4)
$
        Associated offsetting commodity contracts
 
(3)
 
 
3
 
    Net amounts presented on the balance sheet
 
1
 
 
(1)
 
    Additional cash collateral for commodity contracts
               
        subject to rate recovery
 
2
 
 
 
    Total
$
3
$
$
(1)
$
(1)
Included in Current Assets: Other for SoCalGas.
               
(2)
Included in Current Liabilities: Other for SoCalGas.
               
(3)
Includes Otay Mesa VIE. All of SDG&E’s amounts relate to Otay Mesa VIE.
           
(4)
Normal purchase contracts previously measured at fair value are excluded.
           


The effects of derivative instruments designated as hedges on the Condensed Consolidated Statements of Operations and in Other Comprehensive Income (Loss) (OCI) and Accumulated Other Comprehensive Income (Loss) (AOCI) for the three months and six months ended June 30 were:
 


FAIR VALUE HEDGE IMPACT ON THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
       
     
Gain (loss) on derivatives recognized in earnings
     
Three months ended June 30,
Six months ended June 30,
 
Location
2015
2014
2015
2014
Sempra Energy Consolidated:
                 
    Interest rate instruments
Interest Expense
$
2
$
2
$
4
$
5
    Interest rate instruments
Other Income, Net
 
(3)
 
5
 
(2)
 
1
    Total(1)
 
$
(1)
$
7
$
2
$
6
(1)
There was no hedge ineffectiveness on these swaps in the three months or six months ended June 30, 2015, respectively, and $7 million and $9 million in the three months and six months ended June 30, 2014, respectively. All other changes in the fair value of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt and are recorded in Other Income, Net.
 

 
CASH FLOW HEDGE IMPACT ON THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
   
Pretax gain (loss) recognized
   
Pretax gain (loss) reclassified from
   
in OCI (effective portion)
   
 AOCI into earnings (effective portion)
   
Three months ended June 30,
   
Three months ended June 30,
 
2015
2014
 
Location
2015
2014
Sempra Energy Consolidated:
                   
    Interest rate and foreign
                   
         exchange instruments(1)
$
6
$
(7)
 
Interest Expense
$
(3)
$
(6)
           
Equity Earnings,
       
    Interest rate instruments
 
89
 
(15)
 
    Before Income Tax
 
(3)
 
(2)
    Commodity contracts not subject
         
Revenues: Energy-Related
       
        to rate recovery
 
1
 
 
    Businesses
 
 
    Total(2)
$
96
$
(22)
   
$
(6)
$
(8)
SDG&E:
                   
    Interest rate instruments(1)(2)
$
$
(3)
 
Interest Expense
$
(3)
$
(2)
                       
   
Six months ended June 30,
   
Six months ended June 30,
 
2015
2014
 
Location
2015
2014
Sempra Energy Consolidated:
                   
    Interest rate and foreign
                   
         exchange instruments(1)
$
(12)
$
(10)
 
Interest Expense
$
(9)
$
(9)
             
Gain on Sale of Equity Interest
       
    Interest rate instruments
 
 
(2)
 
    and Assets
 
 
(2)
             
Equity Earnings,
       
    Interest rate instruments
 
11
 
(30)
 
    Before Income Tax
 
(6)
 
(5)
    Commodity contracts not subject
         
Revenues: Energy-Related
       
        to rate recovery
 
 
(6)
 
    Businesses
 
7
 
(10)
    Total(2)
$
(1)
$
(48)
   
$
(8)
$
(26)
SDG&E:
                   
    Interest rate instruments(1)(2)
$
(5)
$
(6)
 
Interest Expense
$
(6)
$
(5)
(1)
Amounts include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE.
(2)
There was a negligible amount of ineffectiveness related to these hedges in 2015 and 2014.

 
For Sempra Energy Consolidated we expect that losses of $22 million, which are net of income tax benefit, that are currently recorded in AOCI (including $13 million in noncontrolling interests, of which $12 million is related to Otay Mesa VIE at SDG&E) related to cash flow hedges will be reclassified into earnings during the next twelve months as the hedged items affect earnings. Actual amounts ultimately reclassified into earnings depend on the interest rates in effect when derivative contracts that are currently outstanding mature.
 

SoCalGas expects that negligible losses, which are net of income tax benefit, currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next twelve months as the hedged items affect earnings.
 
For all forecasted transactions, the maximum term over which we are hedging exposure to the variability of cash flows at June 30, 2015 is approximately 14 years and 4 years for Sempra Energy Consolidated and SDG&E, respectively. The maximum term of hedged interest rate variability is 20 years, and is related to debt at Sempra Renewables’ equity method investees.
 
The effects of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Operations for the three months and six months ended June 30 were:
 


UNDESIGNATED DERIVATIVE IMPACT ON THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
     
Gain (loss) on derivatives recognized in earnings
     
Three months ended
June 30,
Six months ended
June 30,
 
Location
2015
2014
2015
2014
Sempra Energy Consolidated:
                 
    Interest rate and foreign exchange
                 
         instruments
Other Income, Net
$
(3)
$
4
$
(3)
$
7
    Foreign exchange instruments
Equity Earnings,
               
   
    Net of Income Tax
 
 
 
(1)
 
(2)
    Commodity contracts not subject
Revenues: Energy-Related
               
        to rate recovery
    Businesses
 
9
 
4
 
12
 
(1)
    Commodity contracts not subject
Cost of Natural Gas, Electric Fuel
               
        to rate recovery
    and Purchased Power
 
 
1
 
 
2
    Commodity contracts not subject
                 
        to rate recovery
Operation and Maintenance
 
1
 
 
1
 
    Commodity contracts subject
Cost of Electric Fuel
               
        to rate recovery
    and Purchased Power
 
(53)
 
8
 
(73)
 
20
    Commodity contracts subject
                 
        to rate recovery
Cost of Natural Gas
 
 
(1)
 
1
 
1
    Total
 
$
(46)
$
16
$
(63)
$
27
SDG&E:
                 
    Commodity contracts subject
Cost of Electric Fuel
               
        to rate recovery
    and Purchased Power
$
(53)
$
8
$
(73)
$
20
SoCalGas:
                 
    Commodity contracts not subject
   
 
           
        to rate recovery
Operation and Maintenance
$
1
$
$
1
$
    Commodity contracts subject
                 
        to rate recovery
Cost of Natural Gas
 
 
(1)
 
1
 
1
    Total
 
$
1
$
(1)
$
2
$
1

 
 
CONTINGENT FEATURES
 

For Sempra Energy Consolidated and SDG&E, certain of our derivative instruments contain credit limits which vary depending on our credit ratings. Generally, these provisions, if applicable, may reduce our credit limit if a specified credit rating agency reduces our ratings. In certain cases, if our credit ratings were to fall below investment grade, the counterparty to these derivative liability instruments could request immediate payment or demand immediate and ongoing full collateralization. 
 
For Sempra Energy Consolidated, the total fair value of this group of derivative instruments in a net liability position at June 30, 2015 and December 31, 2014 is $5 million and $9 million, respectively. At June 30, 2015, if the credit ratings of Sempra Energy were reduced below investment grade, $5 million of additional assets could be required to be posted as collateral for these derivative contracts.
 
For SDG&E, the total fair value of this group of derivative instruments in a net liability position was $4 million and $2 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, if the credit ratings of SDG&E were reduced below investment grade, $4 million of additional assets could be required to be posted as collateral for these derivative contracts.
 
For Sempra Energy Consolidated, SDG&E and SoCalGas, some of our derivative contracts contain a provision that would permit the counterparty, in certain circumstances, to request adequate assurance of our performance under the contracts. Such additional assurance, if needed, is not material and is not included in the amounts above.
 


 
 

NOTE 8. FAIR VALUE MEASUREMENTS
 

We discuss the valuation techniques and inputs we use to measure fair value and the definition of the three levels of the fair value hierarchy in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We have not changed the valuation techniques or inputs we use to measure fair value during the six months ended June 30, 2015.
 

 
Recurring Fair Value Measures
 
The three tables below, by level within the fair value hierarchy, set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2015 and December 31, 2014. We classify financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities, and their placement within the fair value hierarchy levels.
 
The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 7 under “Financial Statement Presentation.”
 
The determination of fair values, shown in the tables below, incorporates various factors, including but not limited to, the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests).
 
Our financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2015 and December 31, 2014 in the tables below include the following:
 
§  
Nuclear decommissioning trusts reflect the assets of SDG&E’s nuclear decommissioning trusts, excluding cash balances. A third party trustee values the trust assets using prices from a pricing service based on a market approach. We validate these prices by comparison to prices from other independent data sources. Equity and certain debt securities are valued using quoted prices listed on nationally recognized securities exchanges or based on closing prices reported in the active market in which the identical security is traded (Level 1). Other debt securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2).
 
§  
We enter into commodity contracts and interest rate derivatives primarily as a means to manage price exposures. We may also manage foreign exchange rate exposures using derivatives. We primarily use a market approach with market participant assumptions to value these derivatives. Market participant assumptions include those about risk, and the risk inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable. We have exchange-traded derivatives that are valued based on quoted prices in active markets for the identical instruments (Level 1). We also may have other commodity derivatives that are valued using industry standard models that consider quoted forward prices for commodities, time value, current market and contractual prices for the underlying instruments, volatility factors, and other relevant economic measures (Level 2). Level 3 recurring items relate to CRRs and long-term, fixed-price electricity positions at SDG&E, as we discuss below under “Level 3 Information.” We record commodity derivative contracts that are subject to rate recovery as commodity costs that are offset by regulatory account balances and are recovered in rates.
 
§  
Investments include marketable securities that we value using a market approach based on closing prices reported in the active market in which the identical security is traded (Level 1).
 
There were no transfers into or out of Level 1, Level 2 or Level 3 for Sempra Energy Consolidated, SDG&E or SoCalGas during the periods presented, nor any changes in valuation techniques used in recurring fair value measurements.
 

RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Fair value at June 30, 2015
   
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Nuclear decommissioning trusts:
                   
          Equity securities
$
665
$
$
$
$
665
          Debt securities:
                   
              Debt securities issued by the U.S. Treasury and other
                   
                   U.S. government corporations and agencies
 
50
 
48
 
 
 
98
              Municipal bonds
 
 
152
 
 
 
152
              Other securities
 
 
209
 
 
 
209
          Total debt securities
 
50
 
409
 
 
 
459
    Total nuclear decommissioning trusts(2)
 
715
 
409
 
 
 
1,124
    Interest rate and foreign exchange instruments
 
 
43
 
 
 
43
    Commodity contracts not subject to rate recovery
 
6
 
13
 
 
17
 
36
    Commodity contracts subject to rate recovery
 
 
1
 
87
 
27
 
115
Total
$
721
$
466
$
87
$
44
$
1,318
Liabilities:
                   
    Interest rate and foreign exchange instruments
$
$
172
$
$
$
172
    Commodity contracts not subject to rate recovery
 
4
 
4
 
 
(6)
 
2
    Commodity contracts subject to rate recovery
 
 
54
 
45
 
(42)
 
57
Total
$
4
$
230
$
45
$
(48)
$
231
                     
 
Fair value at December 31, 2014
   
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Nuclear decommissioning trusts:
                   
          Equity securities
$
655
$
$
$
$
655
          Debt securities:
                   
              Debt securities issued by the U.S. Treasury and other
                   
                   U.S. government corporations and agencies
 
62
 
47
 
 
 
109
              Municipal bonds
 
 
129
 
 
 
129
              Other securities
 
 
207
 
 
 
207
          Total debt securities
 
62
 
383
 
 
 
445
    Total nuclear decommissioning trusts(2)
 
717
 
383
 
 
 
1,100
    Interest rate and foreign exchange instruments
 
 
48
 
 
 
48
    Commodity contracts not subject to rate recovery
 
28
 
16
 
 
(11)
 
33
    Commodity contracts subject to rate recovery
 
 
1
 
107
 
14
 
122
Total
$
745
$
448
$
107
$
3
$
1,303
Liabilities:
                   
    Interest rate and foreign exchange instruments
$
$
155
$
$
$
155
    Commodity contracts not subject to rate recovery
 
3
 
9
 
 
(4)
 
8
    Commodity contracts subject to rate recovery
 
 
52
 
 
(36)
 
16
Total
$
3
$
216
$
$
(40)
$
179
(1)
Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
(2)
Excludes cash balances and cash equivalents.
                   



RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
 
Fair value at June 30, 2015
   
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Nuclear decommissioning trusts:
                   
          Equity securities
$
665
$
$
$
$
665
          Debt securities:
                   
              Debt securities issued by the U.S. Treasury and other
                   
                   U.S. government corporations and agencies
 
50
 
48
 
 
 
98
              Municipal bonds
 
 
152
 
 
 
152
              Other securities
 
 
209
 
 
 
209
          Total debt securities
 
50
 
409
 
 
 
459
    Total nuclear decommissioning trusts(2)
 
715
 
409
 
 
 
1,124
    Commodity contracts not subject to rate recovery
 
 
 
 
1
 
1
    Commodity contracts subject to rate recovery
 
 
 
87
 
26
 
113
Total
$
715
$
409
$
87
$
27
$
1,238
Liabilities:
                   
    Interest rate instruments
$
$
43
$
$
$
43
    Commodity contracts not subject to rate recovery
 
1
 
 
 
(1)
 
    Commodity contracts subject to rate recovery
 
 
54
 
45
 
(42)
 
57
Total
$
1
$
97
$
45
$
(43)
$
100
                     
 
Fair value at December 31, 2014
   
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Nuclear decommissioning trusts:
                   
          Equity securities
$
655
$
$
$
$
655
          Debt securities:
                   
              Debt securities issued by the U.S. Treasury and other
                   
                   U.S. government corporations and agencies
 
62
 
47
 
 
 
109
              Municipal bonds
 
 
129
 
 
 
129
              Other securities
 
 
207
 
 
 
207
          Total debt securities
 
62
 
383
 
 
 
445
    Total nuclear decommissioning trusts(2)
 
717
 
383
 
 
 
1,100
    Commodity contracts subject to rate recovery
 
 
 
107
 
12
 
119
Total
$
717
$
383
$
107
$
12
$
1,219
Liabilities:
                   
    Interest rate instruments
$
$
47
$
$
$
47
    Commodity contracts not subject to rate recovery
 
1
 
 
 
(1)
 
    Commodity contracts subject to rate recovery
 
 
51
 
 
(36)
 
15
Total
$
1
$
98
$
$
(37)
$
62
(1)
Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
(2)
Excludes cash balances and cash equivalents.
                   



RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
   
Fair value at June 30, 2015
     
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Commodity contracts not subject to rate recovery
$
$
$
$
2
$
2
    Commodity contracts subject to rate recovery
 
 
1
 
 
1
 
2
Total
$
$
1
$
$
3
$
4
Liabilities:
                   
    Commodity contracts not subject to rate recovery
$
1
$
$
$
(1)
$
Total
$
1
$
$
$
(1)
$
                       
   
Fair value at December 31, 2014
     
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
Assets:
                   
    Commodity contracts subject to rate recovery
$
$
1
$
$
2
$
3
Total
$
$
1
$
$
2
$
3
Liabilities:
                   
    Commodity contracts not subject to rate recovery
$
2
$
$
$
(2)
$
    Commodity contracts subject to rate recovery
 
 
1
 
 
 
1
Total
$
2
$
1
$
$
(2)
$
1
 (1)
Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.


 
Level 3 Information
 

The following table sets forth reconciliations of changes in the fair value of Congestion Revenue Rights (CRRs) and long-term, fixed-price electricity positions classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated and SDG&E:
 


LEVEL 3 RECONCILIATIONS
(Dollars in millions)
 
Three months ended June 30,
 
2015
2014
Balance as of April 1
$
102
$
95
    Realized and unrealized (losses) gains
 
(60)
 
5
    Allocated transmission instruments
 
1
 
    Settlements
 
(1)
 
(15)
Balance as of June 30
$
42
$
85
Change in unrealized gains or losses relating to
       
    instruments still held at June 30
$
45
$

 
Six months ended June 30,
 
2015
2014
Balance as of January 1
$
107
$
99
    Realized and unrealized (losses) gains
 
(54)
 
6
    Allocated transmission instruments
 
1
 
1
    Settlements
 
(12)
 
(21)
Balance as of June 30
$
42
$
85
Change in unrealized gains or losses relating to
       
    instruments still held at June 30
$
46
$

SDG&E’s Energy and Fuel Procurement department, in conjunction with SDG&E’s finance group, is responsible for determining the appropriate fair value methodologies used to value and classify CRRs and long-term, fixed-price electricity positions on an ongoing basis. Inputs used to determine the fair value of CRRs and fixed-priced electricity positions are reviewed and compared with market conditions to determine reasonableness. SDG&E expects all costs related to these instruments to be recoverable through customer rates. As such, there is no impact to earnings from changes in the fair value of these instruments.
 
CRRs are recorded at fair value based almost entirely on the most current auction prices published by the California Independent System Operator (CAISO), an objective source. Annual auction prices are published once a year, typically in the middle of November, and remain in effect for the following calendar year. The impact associated with discounting is negligible. Because auction prices are a less observable input, these instruments are classified as Level 3. From January 1, 2015 to December 31, 2015 the auction prices range from $(16) per MWh to $8 per MWh at a given location, and from January 1, 2014 to December 31, 2014 the auction prices ranged from $(6) per MWh to $12 per MWh at a given location. The fair value of these instruments is derived from auction price differences between two locations. Positive values between two locations represent expected future reductions in congestion costs, whereas negative values between two locations represent expected future charges. Valuation of our CRRs is sensitive to a change in auction price. If auction prices at one location increase (decrease) relative to another location, this could result in a higher (lower) fair value measurement. We summarize CRR volumes in Note 7.
 
Long-term electricity positions that are valued using significant unobservable data are classified as Level 3 because the contract terms relate to a delivery location or tenor for which observable market rate information is not available. The fair value of the net electricity positions classified as Level 3 is derived from a discounted cash flow model using market electricity forward price inputs that range from $26.75 per MWh to $63.33 per MWh. A significant increase or decrease in market electricity forward prices would result in a significantly higher or lower fair value, respectively.
 
Realized gains and losses associated with CRRs and long-term electricity positions are recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Condensed Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities and therefore also do not affect earnings.
 


 
Fair Value of Financial Instruments
 

The fair values of certain of our financial instruments (cash, temporary investments, accounts and notes receivable, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts. Investments in life insurance contracts that we hold in support of our Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans are carried at cash surrender values, which represent the amount of cash that could be realized under the contracts. The following table provides the carrying amounts and fair values of certain other financial instruments at June 30, 2015 and December 31, 2014:
 


FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
   
June 30, 2015
   
Carrying
 
Fair value
   
amount
 
Level 1
Level 2
Level 3
Total
Sempra Energy Consolidated:
                     
Total long-term debt(1)(2)
$
13,569
 
$
$
13,772
$
725
$
14,497
Preferred stock of subsidiary
 
20
   
 
23
 
 
23
SDG&E:
                     
Total long-term debt(2)(3)
$
4,747
 
$
$
4,772
$
320
$
5,092
SoCalGas:
                     
Total long-term debt(4)
$
2,512
 
$
$
2,608
$
$
2,608
Preferred stock
 
22
   
 
24
 
 
24
                         
   
December 31, 2014
   
Carrying
 
Fair value
   
amount
 
Level 1
Level 2
Level 3
Total
Sempra Energy Consolidated:
                     
Total long-term debt(1)(2)
$
12,347
 
$
$
12,782
$
917
$
13,699
Preferred stock of subsidiary
 
20
   
 
23
 
 
23
SDG&E:
                     
Total long-term debt(2)(3)
$
4,461
 
$
$
4,563
$
425
$
4,988
SoCalGas:
                     
Total long-term debt(4)
$
1,913
 
$
$
2,124
$
$
2,124
Preferred stock
 
22
   
 
25
 
 
25
(1)
Before reductions for unamortized discount (net of premium) of $21 million at both June 30, 2015 and December 31, 2014, and excluding build-to-suit and capital leases of $351 million and $310 million at June 30, 2015 and December 31, 2014, respectively. We discuss our long-term debt in Note 6 above and in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report.
(2)
Level 3 instruments include $320 million and $325 million at June 30, 2015 and December 31, 2014, respectively, related to Otay Mesa VIE.
(3)
Before reductions for unamortized discount of $10 million and $11 million at June 30, 2015 and December 31, 2014, respectively, and excluding capital leases of $231 million and $234 million at June 30, 2015 and December 31, 2014, respectively.
(4)
Before reductions for unamortized discount of $7 million and $8 million at June 30, 2015 and December 31, 2014, respectively, and excluding capital leases of $2 million and $1 million at June 30, 2015 and December 31, 2014, respectively.

We base the fair value of certain long-term debt and preferred stock on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value other long-term debt using an income approach based on the present value of estimated future cash flows discounted at rates available for similar securities (Level 3).
 
We provide the fair values for the securities held in the nuclear decommissioning trust funds related to SONGS in Note 9 below.
 


 
 

NOTE 9. SAN ONOFRE NUCLEAR GENERATING STATION (SONGS)
 

SDG&E has a 20-percent ownership interest in SONGS, a nuclear generating facility near San Clemente, California, which ceased operations in June 2013. On June 6, 2013, Southern California Edison Company (Edison), the majority owner and operator of SONGS, notified SDG&E that it had reached a decision to permanently retire SONGS and seek approval from the Nuclear Regulatory Commission (NRC) to start the decommissioning activities for the entire facility. SONGS is subject to the jurisdiction of the NRC and the CPUC.
 
SDG&E, and each of the other owners, holds its undivided interest as a tenant in common in the property. Each owner is responsible for financing its share of expenses and capital expenditures. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Condensed Consolidated Statements of Operations.
 


 
SONGS Outage and Retirement
 

Background
 
As part of the Steam Generator Replacement Project (SGRP), the steam generators were replaced in SONGS Units 2 and 3, and the Units returned to service in 2010 and 2011, respectively. Both Units were shut down in early 2012 after a water leak occurred in the Unit 3 steam generator. Edison concluded that the leak was due to unexpected wear from tube-to-tube contact. At the time the leak was identified, Edison also inspected and tested Unit 2 and subsequently found unexpected tube wear in Unit 2’s steam generator. In March 2012, in response to the shutdown of SONGS, the NRC issued a Confirmatory Action Letter (CAL) which, among other things, outlined the requirements for Edison to meet before the NRC would approve a restart of either of the Units.
 
In October 2012, Edison submitted a restart plan to the NRC proposing to operate Unit 2 at a reduced power level for a period of five months, at which time the Unit would be brought down for further inspection. Edison did not file a restart plan for Unit 3, pending further inspection and analysis of what repairs or modifications would be required to return the Unit to service in a safe manner. The NRC was reviewing the restart plan for Unit 2 proposed by Edison when in May 2013, the Atomic Safety and Licensing Board (ASLB), an adjudicatory arm of the NRC, concluded that the CAL process constituted a de facto license amendment proceeding that was subject to a public hearing. This conclusion by the ASLB resulted in further uncertainty regarding when a final decision might be made on restarting Unit 2.
 
The replacement steam generators were designed and provided by Mitsubishi Heavy Industries, Ltd., Mitsubishi Nuclear Energy Systems, Inc., and Mitsubishi Heavy Industries America, Inc. (collectively MHI). In July 2013, SDG&E filed a lawsuit against MHI seeking to recover damages SDG&E has incurred and will incur related to the design defects in the steam generators. In October 2013, Edison instituted arbitration proceedings against MHI seeking damages as well. We discuss these proceedings in Note 11.
 


 
Settlement Agreement to Resolve the CPUC’s Order Instituting Investigation (OII) into the SONGS Outage (SONGS OII)
 

SONGS OII
 
In November 2012, in response to the outage, the CPUC issued the SONGS OII, pursuant to California Public Utilities’ Code Section 455.5, which applies to cost recovery issues resulting from long-term outages of operating assets. The SONGS OII consolidated most SONGS outage-related issues into a single proceeding. The SONGS OII, among other things, designated all revenues associated with the investment in, and operation of, SONGS since January 1, 2012 as subject to refund to customers, pending the outcome of all phases of the proceeding. The SONGS OII proceeding was intended to determine the ultimate recovery of the investment in SONGS and the costs incurred since the commencement of this outage, including purchased replacement power costs, which are typically recovered through the Energy Resource Recovery Account (ERRA).
 
Entry Into Settlement Agreement
 
Pursuant to CPUC rules concerning settlements, SDG&E, Edison, The Utility Reform Network (TURN), and the CPUC Office of Ratepayer Advocates (ORA) held a settlement conference in March 2014 to discuss the terms to resolve the SONGS OII, and in April 2014, SDG&E, along with Edison, TURN, ORA and two other intervenors who joined the Settlement Agreement to the SONGS OII proceeding (collectively, the Settling Parties), filed a Settlement Agreement with the CPUC. On September 5, 2014, the CPUC issued a ruling proposing specific changes that included, as they relate to SDG&E, greater ratepayer benefit from third party cost recoveries and funding of a research program to reduce greenhouse gas emissions at a shareholder cost of $1 million per year for 5 years.
 
On September 23, 2014, the Settling Parties executed an Amended and Restated Settlement Agreement (Amended Settlement Agreement), which amended the Settlement Agreement to adopt all of the modifications and clarifications requested in the CPUC ruling. On October 9, 2014, the CPUC issued a proposed decision approving the Amended Settlement Agreement, which was adopted by the CPUC as a final decision on November 20, 2014.
 
As approved by the CPUC, the Amended Settlement Agreement constitutes a complete and final resolution of the SONGS OII and related CPUC proceedings regarding the SGRP at SONGS and the related outage and subsequent shutdown of SONGS. This resolution also required the compliance filing referenced below under “Accounting and Financial Impacts.” The Amended Settlement Agreement does not affect on-going or future proceedings before the NRC, or litigation or arbitration related to potential future recoveries from third parties (except for the allocation to ratepayers of any recoveries as described below) or proceedings addressing decommissioning activities and costs.
 
In November 2014, in accordance with the Amended Settlement Agreement, SDG&E filed an advice letter seeking authority from the CPUC, among other things, to implement the terms and establish the revenue requirement in accordance with the Amended Settlement Agreement in rates starting January 1, 2015. In December 2014, the CPUC approved the advice letter and authorized SDG&E to update rates accordingly, subject to revision pending the results of a CPUC review of the changes to the revenue requirement proposed by SDG&E for consistency with the terms of the approved settlement decision. In March 2015, SDG&E received a final disposition letter from the CPUC confirming that SDG&E’s proposed rate changes were in compliance with the approved settlement decision.
 
In April 2015, a petition for modification (PFM) was filed with the CPUC by Alliance for Nuclear Responsibility (A4NR), an intervenor in the SONGS OII proceeding, asking the CPUC to set aside its decision approving the Amended Settlement Agreement and reopen the SONGS OII proceeding. In June 2015, TURN, a party to the Amended Settlement Agreement, filed a response supporting the A4NR petition. TURN does not question the merits of the Amended Settlement Agreement, but is concerned that certain allegations regarding Edison raised by A4NR have undermined the public’s confidence in the regulatory process. SDG&E has responded that TURN’s concerns regarding public perception do not impact the reasonableness of the Amended Settlement Agreement and are insufficient to overturn it. SDG&E is unable to determine what actions the CPUC will take, if any, in response to the PFM.
 
We discuss the terms of the Amended Settlement Agreement in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Accounting and Financial Impacts
 
Through June 30, 2015, the cumulative after-tax loss from plant closure recorded by Sempra Energy and SDG&E is $127 million, including a reduction in the after-tax loss of $13 million recorded in the first quarter of 2015 based on the CPUC’s approval in March 2015 of SDG&E’s compliance filing and establishment of the SONGS settlement revenue requirement.
 
In the second quarter of 2013, based on an initial assessment of the financial impact of the outcome of the SONGS OII proceeding, SDG&E reported an after-tax loss from plant closure of $119 million. In the first quarter of 2014, after entering into the Settlement Agreement, SDG&E recorded a $9 million increase in the after-tax loss. In the fourth quarter of 2014, based on the compliance filing regarding SDG&E’s annual revenue requirement and the timing of refunds to ratepayers, SDG&E recorded a $12 million increase to the after-tax loss.
 
The regulatory asset for the expected recovery of SONGS costs, consistent with the Amended Settlement Agreement, is $284 million ($41 million current and $243 million long-term) at June 30, 2015 and is recorded on the Condensed Consolidated Balance Sheets in Other Current Assets and Regulatory Assets Noncurrent, respectively, at Sempra Energy, and in Regulatory Assets Current and Other Regulatory Assets Noncurrent, respectively, at SDG&E.
 


 
NRC Proceedings
 

In December 2013, Edison received a final NRC Inspection Report that identified a violation for the failure to verify the adequacy of the thermal-hydraulic and flow-induced vibration design of the Unit 3 replacement steam generator. In January 2014, Edison provided a response to the NRC Inspection Report stating that MHI, as contracted by Edison to prepare the SONGS replacement steam generator design, was the party responsible for validating the design of the steam generators.
 
In addition, the NRC issued an Inspection Report to MHI containing a Notice of Nonconformance for its flawed computer modeling in the design of the replacement steam generators.
 
Because SONGS has ceased operation, NRC inspection oversight of SONGS will now be continued through the NRC’s Decommissioning Power Reactor Inspection Program to verify that decommissioning activities are being conducted safely, that spent fuel is safely stored onsite or transferred to another licensed location, and that the site operations and licensee termination activities conform to applicable regulatory requirements, licensee commitments and management controls.
 


 
Nuclear Decommissioning and Funding
 

As a result of Edison’s decision to permanently retire SONGS Units 2 and 3, Edison has begun the decommissioning phase of the plant. We discuss the process of decommissioning SONGS in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.
 
In accordance with state and federal requirements and regulations, SDG&E has assets held in trusts, referred to as the Nuclear Decommissioning Trusts (NDT), to fund decommissioning costs for SONGS Units 1, 2 and 3. Decommissioning of Unit 1, removed from service in 1992, is largely complete. The remaining work will be done when Units 2 and 3 are decommissioned. At June 30, 2015, the fair value of SDG&E’s NDT assets was $1.1 billion. Except for the use of funds for the planning of decommissioning activities or NDT administrative costs, CPUC approval is required for SDG&E to access the NDT assets to fund SONGS decommissioning costs for Units 2 and 3. In February 2014, SDG&E filed a request with the CPUC for such authorization for costs incurred in 2013. In April 2015, SDG&E withdrew its pending request and filed a new request based on updated decommissioning cost information, seeking authorization to access trust funds for up to $55 million in decommissioning costs incurred in 2013. The CPUC authorized the request in July 2015. SDG&E intends to withdraw $37 million of the authorized amount, $34 million of which will be funded to customers through the ERRA balancing account. Another $3 million of the amount withdrawn will be used to refund regulatory assets and certain costs pursuant to the SONGS OII Settlement Agreement. The remaining $18 million of the CPUC authorization is expected to be withdrawn pending satisfactory clarification by the Internal Revenue Service (IRS) that certain spent fuel costs and other costs are eligible decommissioning costs, payable from qualified nuclear decommissioning trusts. We do not know when such clarification will be provided. SDG&E will continue to use working capital to pay for any SONGS Units 2 and 3 decommissioning costs incurred, and file periodic requests with the CPUC seeking authorization to access funds for reimbursement from the NDT for incurred decommissioning costs.
 
We discuss the NDT and matters related to its funding and the funding of decommissioning costs by the NDT further in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Nuclear Decommissioning Trusts
 

The amounts collected in rates for SONGS’ decommissioning are invested in externally managed trust funds. Amounts held by the trusts are invested in accordance with CPUC regulations. These trusts are shown on the Sempra Energy and SDG&E Condensed Consolidated Balance Sheets at fair value with the offsetting credits recorded in Regulatory Liabilities Arising from Removal Obligations.
 
The following table shows the fair values and gross unrealized gains and losses for the securities held in the NDT:
 


NUCLEAR DECOMMISSIONING TRUSTS
(Dollars in millions)
         
Gross
 
Gross
 
Estimated
         
unrealized
 
unrealized
 
fair
     
Cost
 
gains
 
losses
 
value
At June 30, 2015:
               
Debt securities:
               
    Debt securities issued by the U.S. Treasury and other
               
         U.S. government corporations and agencies(1)
$
94
$
4
$
$
98
    Municipal bonds(2)
 
147
 
6
 
(1)
 
152
    Other securities(2)
 
214
 
4
 
(9)
 
209
Total debt securities
 
455
 
14
 
(10)
 
459
Equity securities
 
218
 
450
 
(3)
 
665
Cash and cash equivalents
 
21
 
 
 
21
Total
$
694
$
464
$
(13)
$
1,145
At December 31, 2014:
               
Debt securities:
               
    Debt securities issued by the U.S. Treasury and other
               
         U.S. government corporations and agencies
$
103
$
6
$
$
109
    Municipal bonds
 
121
 
8
 
 
129
    Other securities
 
206
 
7
 
(6)
 
207
Total debt securities
 
430
 
21
 
(6)
 
445
Equity securities
 
215
 
444
 
(4)
 
655
Cash and cash equivalents
 
30
 
1
 
 
31
Total
$
675
$
466
$
(10)
$
1,131
(1)
Maturity dates are 2016-2060.
(2)
Maturity dates are 2015-2115.

The following table shows the proceeds from sales of securities in the NDT and gross realized gains and losses on those sales:
 


SALES OF SECURITIES
(Dollars in millions)
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
Proceeds from sales(1)
$
127
$
155
$
221
$
350
Gross realized gains
 
4
 
 
6
 
4
Gross realized losses
 
(3)
 
(1)
 
(7)
 
(5)
(1)
Excludes securities that are held to maturity.

Net unrealized gains (losses) are included in Regulatory Liabilities Arising from Removal Obligations on Sempra Energy’s and SDG&E’s Condensed Consolidated Balance Sheets. We determine the cost of securities in the trusts on the basis of specific identification.
 
We provide additional information about SONGS in Note 11.
 


 
 

NOTE 10. CALIFORNIA UTILITIES' REGULATORY MATTERS
 

We discuss regulatory matters affecting our California Utilities in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report, and provide updates to those discussions and details of any new matters below.
 


 
JOINT MATTERS
 


 
CPUC General Rate Case (GRC)
 

The CPUC uses a general rate case proceeding to prospectively set rates sufficient to allow the California Utilities to recover their reasonable cost of operations and maintenance and to provide the opportunity to realize their authorized rates of return on their investment.
 
The California Utilities filed their 2016 General Rate Case (2016 GRC) applications in November 2014. These filings requested revenue requirement increases of $133 million and $256 million for SDG&E and SoCalGas, respectively, over their 2015 revenue requirements. In February 2015, the CPUC issued a scoping memo setting the schedule for the proceeding, including the issuance of a proposed decision by the end of 2015. In March 2015, the California Utilities revised their requests to make various updates and reflect the impact of the Tax Increase Prevention Act signed into law in December 2014. At SoCalGas, this resulted in a reduction of $10 million compared to its original request, or a total revenue requirement in 2016 of $2.342 billion. This is an increase of $246 million or 12 percent over 2015, excluding the impact of the 2015 revenue requirement increase discussed below under “SoCalGas Matters — Increase to CPUC-Authorized Annual Revenue Requirement.” At SDG&E, the March 2015 revised request resulted in a reduction of $6 million compared to its original request, or a total revenue requirement in 2016 of $1.905 billion. This is an increase of $111 million or 6 percent over 2015. This increase includes an adjustment of $16 million to the comparable 2015 estimated revenue requirement since the November 2014 filings.
 
The ORA served its report and testimony in the 2016 GRC in April 2015. In May 2015, ORA revised its testimony and corrected a number of inconsistencies in its report. The ORA’s revised report recommends an increase of $49 million (2.3 percent over 2015) in 2016 compared to SoCalGas’ request of a $246 million increase. The ORA further recommended increases for SoCalGas of $75 million (3.5 percent) and $78 million (3.5 percent) in 2017 and 2018, respectively. With regard to SDG&E, the ORA recommends a decrease of $84 million (4.7 percent less than 2015) in 2016 compared to SDG&E’s request for a $111 million increase. In 2017 and 2018, the ORA recommends increases for SDG&E of $60 million (3.5 percent) and $62 million (3.5 percent), respectively. In addition, the ORA recommends that SDG&E and SoCalGas continue a four-year rate case cycle (2016-2019), rather than adopt a three-year cycle. Testimony from other intervening parties was served on May 15, 2015 with ten days of public participation hearings from May 12 through June 10, 2015. The California Utilities filed rebuttal testimony to the ORA’s and other intervenors’ testimony in June 2015. Evidentiary hearings before the CPUC began in June and concluded in July 2015.
 
We provide additional information regarding the 2016 GRC in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 
Natural Gas Pipeline Operations Safety Assessments
 
In June 2014, the CPUC issued a final decision in the Triennial Cost Allocation Proceeding (TCAP) addressing SDG&E’s and SoCalGas’ Pipeline Safety Enhancement Plan (PSEP). Specifically, the decision:
 
§  
approved the utilities’ model for implementing PSEP;
 
§  
approved a process, including a reasonableness review, to determine the amount that the utilities will be authorized to recover from ratepayers for the interim costs incurred through the date of the final decision to implement PSEP, which is recorded in the regulatory accounts authorized by the CPUC as noted above;
 
§  
approved balancing account treatment, subject to a reasonableness review, for incremental costs yet to be incurred to implement PSEP; and
 
§  
established the criteria to determine the amounts that would not be eligible for cost recovery, including:
 
□  
certain costs incurred or to be incurred searching for pipeline test records,
 
□  
the cost of pressure testing pipelines installed after July 1, 1961 for which the company has not found sufficient records of testing, and
 
□  
any undepreciated balances for pipelines installed after 1961 that were replaced due to insufficient documentation of pressure testing.
 
As a result of this decision, SoCalGas recorded an after-tax earnings charge of $5 million in 2014 for costs incurred in prior periods for which SoCalGas was disallowed recovery. After taking the amounts disallowed for recovery into consideration, as of June 30, 2015, SDG&E and SoCalGas have recorded PSEP costs of $5 million and $137 million, respectively, in the CPUC-authorized regulatory account. In regard to requesting recovery from customers for PSEP costs incurred and recorded in accordance with the TCAP decision, SDG&E and SoCalGas are authorized to file an application with the CPUC for recovery of such costs up to the date of the TCAP decision and then annually for costs incurred through the end of each calendar year beginning with the period ending December 31, 2015. SoCalGas and SDG&E currently expect to file such applications no later than the third quarter of the year following and would expect a decision from the CPUC approximately 12 to 18 months following the date of the application (i.e., a decision on the recovery of costs recorded in the PSEP regulatory accounts as of December 31, 2015 would be expected by mid-2017).
 
In October 2014, SDG&E and SoCalGas filed a petition for modification with the CPUC requesting authority to begin to recover PSEP costs from customers in the year in which the costs are incurred, subject to refund pending the results of a reasonableness review by the CPUC, instead of in a subsequent year. This request is pending at the CPUC.
 
In December 2014, SDG&E and SoCalGas filed an application with the CPUC for recovery of $0.1 million and $46 million, respectively, in costs recorded in the regulatory account through June 11, 2014. In June 2015, SDG&E and SoCalGas agreed to remove certain projects from the filing and defer their review to future proceedings and, as a result, are now requesting recovery of $0.1 million and $26.8 million, respectively. We expect a decision on this application in the first half of 2016.
 
In July 2014, the ORA and TURN filed a joint application for rehearing of the CPUC’s June 2014 final decision. The ORA and TURN alleged that the CPUC made a legal error in directing that ratepayers, not shareholders, be responsible for the costs associated with testing or replacing transmission pipelines that were installed between January 1, 1956 and July 1, 1961 for which the California Utilities do not have a record of a pressure test. In November 2014, the CPUC denied the ORA and TURN request for rehearing of the decision adopting the PSEP. In December 2014, ORA and TURN sought rehearing of the CPUC’s decision on rehearing. In late December 2014, SoCalGas and SDG&E filed their opposition to this second application for rehearing, and are continuing to implement PSEP in accordance with the June 2014 CPUC decision. In March 2015, the CPUC issued a decision denying ORA’s and TURN’s second request for rehearing, but keeping the record in the proceeding open to admit additional evidence on the limited issue of pressure testing of pipelines installed between January 1, 1956 and July 1, 1961. As part of this review, the CPUC will allow parties to submit additional evidence relevant to this narrow issue to ensure a complete record, with no additional discovery allowed. The ORA and TURN filed their responses on May 1, 2015. A draft decision is expected in the second half of 2015.
 
We provide additional information regarding these rulemaking proceedings and the California Utilities’ PSEP in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 
Southern Gas System Reliability Project
 

In December 2013, SoCalGas and SDG&E filed a joint application with the CPUC seeking authority to recover the full cost of the Southern Gas System Reliability Project. Also known as the North-South Gas Project, the project will enhance reliability on the southern portions of the California Utilities’ integrated natural gas transmission system (Southern System). The estimated cost of the project, as originally filed, is between $800 million to $850 million. As originally proposed, the project consisted of three components: 1) constructing an approximately 60-mile, 36-inch natural gas transmission pipeline between the SoCalGas Adelanto compressor station and the Moreno pressure limiting station; 2) upgrading the Adelanto compressor station; and 3) constructing an approximately 31-mile, 36-inch pipeline from the Moreno pressure limiting station to a pressure limiting station in Whitewater. In November 2014, the California Utilities revised the scope of the proposed project to only include connecting the Adelanto compressor station and Moreno pressure limiting station with approximately 65 miles of 36-inch pipeline and upgrading the Adelanto compressor station, and eliminating the Moreno-Whitewater pipeline. In March 2015, the CPUC issued a revised scoping ruling establishing a schedule, directing that the Moreno-Whitewater portion of the original project be excluded from scope and that any other future projects would be addressed separately. The estimated cost of the revised project, including updated cost estimates, remains unchanged from the original cost estimate of between $800 million and $850 million, while providing comparable benefits for customers. If approved by the CPUC and subject to environmental permitting, given the revised project scope and updated schedule in this proceeding, the project could commence construction in 2017 and be in service by the end of 2019.
 
We provide additional information about the project in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Utility Incentive Mechanisms
 

The CPUC applies performance-based measures and incentive mechanisms to all California investor-owned utilities, under which the California Utilities have earnings potential above authorized base margins if they achieve or exceed specific performance and operating goals.
 
We provide additional information regarding these incentive mechanisms in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report, and below.
 
Natural Gas Procurement
 
In February 2015, the CPUC issued a final decision approving SoCalGas’ application for a gas cost incentive mechanism (GCIM) award of $13.7 million for natural gas procured for its core customers during the 12-month period ending March 31, 2014. SoCalGas recorded this award in the first quarter of 2015.
 
In June 2015, SoCalGas filed an application for a GCIM award of $7.25 million for natural gas procured for its core customers during the 12-month period ending March 31, 2015. We expect a CPUC decision in the first half of 2016.
 


 
SDG&E MATTERS
 


 
SONGS
 

We discuss regulatory and other matters related to SONGS in Note 9.
 


 
Power Procurement and Resource Planning
 

Cleveland National Forest Transmission Projects
 
SDG&E filed an application with the CPUC in October 2012 for a permit to construct various transmission line replacement projects in and around the Cleveland National Forest (CNF). The proposed projects will replace and fire-harden five existing transmission lines and six existing distribution lines at an estimated cost of between $400 million and $450 million. As directed by the CPUC, SDG&E filed an amended application in June 2013 to provide notice of certain alternatives proposed by the United States Forest Service (USFS) in connection with SDG&E’s request for a Master Special Use Permit (MSUP). USFS approval of the MSUP will establish land rights and conditions for SDG&E’s continued operation and maintenance of facilities located within the CNF. CPUC approval is not required for the MSUP, even though construction of the projects is subject to review by both the USFS and CPUC. A final environmental impact report (EIR/EIS), developed jointly by the CPUC and USFS, was issued in July 2015. SDG&E currently expects separate USFS and CPUC decisions on the transmission projects in the second half of 2015 and then expects the various phases of this project to be placed in service starting in 2016 and continuing through the end of the project in 2019.
 
Sycamore-Peñasquitos Transmission Project
 
In March 2014, the CAISO selected SDG&E, as a result of a competitive bid process, to construct the Sycamore-Peñasquitos 230-kilovolt (kV) transmission project, which will provide a 16.7-mile transmission connection between SDG&E’s Sycamore Canyon and Peñasquitos substations. In July 2014, the CPUC notified SDG&E that the application requesting a Certificate of Public Convenience and Necessity (CPCN) to construct the line, which was filed with the CPUC in April 2014, is complete. The estimated $120 million to $150 million project was identified by the CAISO and a state task force as necessary to ensure grid reliability given the closure of SONGS. The project will also serve to strengthen renewable energy infrastructure in the region. In October 2014, SDG&E filed a request with the Federal Energy Regulatory Commission (FERC) seeking, among other things, a 100 basis point return on equity (ROE) adder for this project. In April 2015, FERC issued an order granting SDG&E’s request for 100 percent abandoned plant cost recovery, but denying an ROE adder for the project. SDG&E expects a CPUC decision on the project in the first half of 2016, with the line expected to be in service in mid-2017.
 
South Orange County Reliability Enhancement
 
SDG&E filed an application with the CPUC in May 2012 requesting a CPCN for the South Orange County Reliability Enhancement project, as we discuss in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. A draft environmental report was issued in the first quarter of 2015, and SDG&E expects a final CPUC decision on the estimated $350 million to $400 million project in the first half of 2016. As the project is planned in phases, SDG&E currently expects the entire project to be in service in 2020.
 
Electric Vehicle Charging Program
 
In April 2014, SDG&E filed a proposal with the CPUC requesting approval of a program under which SDG&E would build and own a total of 5,500 electric vehicle charging stations at an estimated cost of $103 million, of which $59 million is capital. Under the program, SDG&E will provide an hourly Vehicle-to-Grid Integration (VGI) rate that will help incent participants to charge their vehicles during times of the day that benefit the power grid. In June 2015, SDG&E and fifteen other parties filed a settlement agreement proposing a modified program that still allows SDG&E to build and own a total of 5,500 charging stations. The settlement is opposed by certain consumer advocates and other parties. SDG&E expects a CPUC decision in the fourth quarter of 2015.
 
Distribution Resource Plan
 
In July 2015, SDG&E filed an application with the CPUC submitting its Distribution Resource Plan. Distributed energy resources (DER) are typically smaller power sources, including advanced renewable and energy storage technologies, that are connected to the distribution grid and located near load centers. The distribution resource plan sets out a planning and investment framework comprised of three basic categories: 1) capital investments that can be potentially deferred or replaced by DER solutions; 2) capital investment needed to accommodate higher DER deployment levels; and 3) traditional distribution investments that cannot be deferred or displaced by DER. SDG&E’s planning framework would be used to determine future capital investment needs, which would then be addressed through its GRC process. The Distribution Resource Plan also proposes a number of demonstration projects and describes potential projects and investment that would support higher DER deployment. SDG&E expects a CPUC decision in the first half of 2016.
 


 
SOCALGAS MATTERS
 


 
Triennial Cost Allocation Proceeding (TCAP)Adoption of Seasonal Factors
 

The TCAP decision issued by the CPUC in June 2014 for SoCalGas included, among other matters, the requirement for SoCalGas to apply seasonal factors throughout the year to SoCalGas’ annual authorized revenue for its core natural gas customers effective January 1, 2015. Core customers are primarily residential and small commercial and industrial customers. The seasonal factors adopted are based on the core demand forecast provided by SoCalGas in the TCAP application. Prior to this decision, this annual authorized revenue was recognized ratably over the year. While this “seasonalization” will not impact SoCalGas’ total calendar year revenue or earnings for 2015 or beyond, and does not change the annual total authorized revenue or our earnings from that revenue, it will cause variability in revenue and earnings from quarter to quarter. We expect that as a result of applying the seasonal factors during interim periods to the annual authorized revenue requirement, the core natural gas customer authorized revenue recognized in the first and fourth quarters of each year beginning with 2015 will be higher (approximately 34 percent in the first quarter and 29 percent in the fourth quarter) than that recognized in the second and third quarters of each year (approximately 21 percent in the second quarter and 16 percent in the third quarter). This compares to recognizing 25 percent of the annual authorized revenue in each quarter in prior years. As a result, beginning in 2015, substantially all of SoCalGas’ annual earnings will be recognized in the first and fourth quarters of the year.
 
Seasonalization will not impact interim period cash flows or customers’ bills. However, it should reduce the interim period variability in regulatory balancing accounts, as we expect customer billings to more closely align with interim period revenue recognition. This seasonalization is consistent with SDG&E’s natural gas and power distribution authorized revenue treatment.
 
The CPUC regulatory framework authorizes SoCalGas to recover the actual cost of natural gas procured and delivered to its core customers in rates substantially as incurred. The regulatory framework also permits SoCalGas to recover its cost of operations, including depreciation of its fixed assets, in authorized revenue based on estimated annual natural gas demand forecasts approved in the TCAP, and any difference between actual gas demand and the annual natural gas demand approved in the TCAP is recovered in authorized revenue in the subsequent year. This design, commonly known as “decoupling,” is intended to minimize any impact on SoCalGas’ earnings of changes in the cost of natural gas procured and any variability in customer demand for natural gas. The adoption of applying seasonal factors to authorized annual revenue requirement for interim periods does not change the application of decoupling.
 


 
Increase to CPUC-Authorized Annual Revenue Requirement
 

In July 2011, SoCalGas updated its testimony in the 2012 GRC to reflect the impact of the extension of temporary bonus depreciation by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act). The 2010 Tax Act’s extension of bonus depreciation for U.S. federal income tax purposes for years 2010 through 2012 resulted in significant additional tax depreciation deductions. These additional deductions generated U.S. federal net operating losses (NOLs) and the creation of an NOL-based deferred tax asset. The 2012 GRC decision denied recovery of any return associated with the NOL-based deferred tax asset unless an IRS Private Letter Ruling (PLR) was obtained, at which point SoCalGas would be authorized to file an advice letter seeking an increase to its revenue requirement. In February 2015, the IRS issued a PLR that agreed with SoCalGas’ position that the denial of any return on the NOL-based deferred tax asset was a violation of tax normalization rules.
 
In March 2015, SoCalGas filed an advice letter to provide the PLR to the CPUC and request an increase to its authorized GRC revenue requirement for 2012 through 2015 to comply with the normalization requirements as interpreted by the IRS in the PLR. In April 2015, the CPUC approved SoCalGas’ advice letter. The approved increases to the pretax annual revenue requirements are $6.4 million for 2012, $6.3 million for 2013, $6.4 million for 2014 and $6.6 million for 2015. The resulting increase to after-tax earnings of an aggregate of $11.3 million for years 2012 through 2014 and $1.4 million and $0.8 million related to the first and second quarters of 2015, respectively, was recorded in the second quarter of 2015, with the remaining 2015 after-tax earnings of $1.8 million resulting from this revenue increase being recognized over the last two quarters of the year.
 


 
 

NOTE 11. COMMITMENTS AND CONTINGENCIES
 


 
LEGAL PROCEEDINGS
 

We accrue losses for a legal proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, the uncertainties inherent in legal proceedings make it difficult to estimate with reasonable certainty the costs and effects of resolving these matters. Accordingly, actual costs incurred may differ materially from amounts accrued, may exceed applicable insurance coverage and could materially adversely affect our business, cash flows, results of operations, financial condition and prospects. Unless otherwise indicated, we are unable to estimate reasonably possible losses in excess of any amounts accrued.
 
At June 30, 2015, Sempra Energy’s accrued liabilities for material legal proceedings, including associated legal fees and costs of litigation, on a consolidated basis, were $62 million. At June 30, 2015, accrued liabilities for material legal proceedings for SDG&E and SoCalGas were $39 million and $15 million, respectively.
 


 
SDG&E
 
 
2007 Wildfire Litigation
 

In October 2007, San Diego County experienced several catastrophic wildfires. Reports issued by the California Department of Forestry and Fire Protection (Cal Fire) concluded that two of these fires (the Witch and Rice fires) were SDG&E “power line caused” and that a third fire (the Guejito fire) occurred when a wire securing a Cox Communications’ (Cox) fiber optic cable came into contact with an SDG&E power line “causing an arc and starting the fire.”
 
A September 2008 staff report issued by the CPUC’s Consumer Protection and Safety Division, now known as the Safety and Enforcement Division, reached substantially the same conclusions as the Cal Fire reports, but also contended that the power lines involved in the Witch and Rice fires and the lashing wire involved in the Guejito fire were not properly designed, constructed and maintained. In April 2010, proceedings initiated by the CPUC to determine if any of its rules were violated were settled with SDG&E’s payment of $14.75 million.
 
Numerous parties sued SDG&E and Sempra Energy in San Diego County Superior Court seeking recovery of unspecified amounts of damages, including punitive damages, from the three fires. They asserted various bases for recovery, including inverse condemnation based upon a California Court of Appeal decision finding that another California investor-owned utility was subject to strict liability, without regard to foreseeability or negligence, for property damages resulting from a wildfire ignited by power lines. SDG&E has resolved almost all of these lawsuits. One case remains subject to a damages-only trial, where the value of any compensatory damages resulting from the fires will be determined. Two plaintiffs have filed appeals after judgment in the trial court.
 
SDG&E’s settled claims and defense costs have exceeded its $1.1 billion of liability insurance coverage for the covered period and the $824 million recovered from third party contractors and Cox. SDG&E has settled all of the approximately 19,000 claims brought by homeowner insurers for damage to insured property relating to the three fires. Under the settlement agreements, SDG&E agreed to pay 57.5 percent of the approximately $1.6 billion paid or reserved for payment by the insurers to their policyholders and received an assignment of the insurers’ claims against other parties potentially responsible for the fires. Through June 30, 2015, SDG&E has expended $494 million in excess of amounts covered by insurance and amounts recovered from third parties to pay for the settlement of wildfire claims and related costs.
 
The wildfire litigation also includes claims of non-insurer plaintiffs for damage to uninsured and underinsured structures, business interruption, evacuation expenses, agricultural damage, emotional harm, personal injuries and other losses. SDG&E has now resolved almost all of these claims of the approximately 6,500 plaintiffs for a total of approximately $1.3 billion. SDG&E does not expect additional plaintiffs to file lawsuits given the applicable statutes of limitation, but could receive additional settlement demands and damage estimates from the remaining plaintiff until the case is resolved. SDG&E has established reserves for the wildfire litigation as we discuss below.
 
SDG&E has concluded that it is probable that it will be permitted to recover in rates a substantial portion of the costs incurred to resolve wildfire claims in excess of its liability insurance coverage and the amounts recovered from third parties. Accordingly, although such recovery will require future regulatory approval, at June 30, 2015, Sempra Energy and SDG&E have recorded assets of $373 million in Other Regulatory Assets (long-term) on their Condensed Consolidated Balance Sheets, including $367 million related to CPUC-regulated operations, which represents the amount substantially equal to the aggregate amount it has paid and reserved for payment for the resolution of wildfire claims and related costs in excess of its liability insurance coverage and amounts recovered from third parties.
 
SDG&E will continue to gather information to evaluate and assess the remaining wildfire claim and the likelihood, amount and timing of related recoveries in rates and will make appropriate adjustments to wildfire reserves and the related regulatory assets as additional information becomes available. Should SDG&E conclude that recovery in rates is no longer probable, SDG&E will record a charge against earnings at the time such conclusion is reached. If SDG&E had concluded that the recovery of regulatory assets related to CPUC-regulated operations was no longer probable or was less than currently estimated at June 30, 2015, the resulting after-tax charge against earnings would have been up to approximately $218 million. Recovery of these costs from customers will require future regulatory actions, and a failure to obtain substantial or full recovery, or any negative assessment of the likelihood of recovery, would likely have a material adverse effect on Sempra Energy’s and SDG&E’s results of operations and cash flows.
 
We provide additional information about excess wildfire claims cost recovery and related CPUC actions in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report and discuss how we assess the probability of recovery of our regulatory assets in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Sunrise Powerlink Electric Transmission Line
 
In February 2011, opponents of the Sunrise Powerlink, a 500-kV electric transmission line between the Imperial Valley and the San Diego region that was energized and placed in service in June 2012, filed a lawsuit in Sacramento County Superior Court against the State Water Resources Control Board and SDG&E alleging that the water quality certification issued by the Board under the Federal Clean Water Act violated the California Environmental Quality Act. The Superior Court denied the plaintiffs’ petition in July 2012, and the plaintiffs appealed. On May 19, 2015 the California Court of Appeals affirmed the lower court’s decision and, on June 16, 2015, denied plaintiffs’ request for rehearing. Plaintiffs did not seek review by the California Supreme Court within the prescribed time, so the Court of Appeals decision is final.
 
Smart Meters Patent Infringement Lawsuit
 
In October 2011, SDG&E was sued by a Texas design and manufacturing company in Federal District Court, Southern District of California, and later transferred to the Federal District Court, Western District of Oklahoma, alleging that SDG&E’s recently installed smart meters infringed certain patents. The meters were purchased from a third party vendor that has agreed to defend and indemnify SDG&E. The lawsuit seeks injunctive relief and recovery of unspecified amounts of damages.
 
Lawsuit Against Mitsubishi Heavy Industries, Ltd.
 
On July 18, 2013, SDG&E filed a lawsuit in the Superior Court of California in the County of San Diego against Mitsubishi Heavy Industries, Ltd., Mitsubishi Nuclear Energy Systems, Inc., and Mitsubishi Heavy Industries America, Inc. (collectively MHI). The lawsuit seeks to recover damages SDG&E has incurred and will incur related to the design defects in the steam generators MHI provided to the SONGS nuclear power plant. The lawsuit asserts a number of causes of action, including fraud, based on the representations MHI made about its qualifications and ability to design generators free from defects of the kind that resulted in the permanent shutdown of the plant and further seeks to set aside the contractual limitation of damages that MHI has asserted. On July 24, 2013, MHI removed the lawsuit to the United States District Court for the Southern District of California and on August 8, 2013, MHI moved to stay the proceeding pending resolution of the dispute resolution process involving MHI and Edison arising from their contract for the purchase and sale of the steam generators. On October 16, 2013, Edison initiated an arbitration proceeding against MHI seeking damages stemming from the failure of the replacement steam generators. In late December 2013, MHI answered and filed a counterclaim against Edison. On March 14, 2014, MHI’s motion to stay the United States District Court proceeding was granted with instructions that require the parties to allow SDG&E to participate in the ongoing Edison/MHI arbitration. As a result, SDG&E is now participating in the arbitration as a claimant and respondent. 
 
Investment in Wind Farm
 
In 2011, the CPUC and FERC approved SDG&E’s estimated $285 million tax equity investment in a wind farm project and its purchase of renewable energy credits from that project. SDG&E’s contractual obligations to both invest in the Rim Rock wind farm and to purchase renewable energy credits from the wind farm under the power purchase agreement are subject to the satisfaction of certain conditions which, if not achieved, would allow SDG&E to terminate the power purchase agreement and not make the investment. In December 2013, SDG&E received a closing notice from the project developer indicating that all such conditions had been met. SDG&E responded to the closing notice asserting that the contractual conditions had not been satisfied. On December 19, 2013, SDG&E filed a complaint against the project developer in San Diego Superior Court, asking that the court determine that SDG&E is entitled to terminate both the investment contract and the power purchase agreement due to the project developer’s failure to satisfy certain conditions. The project developer filed a separate complaint against SDG&E in Montana state court asking that court to determine that SDG&E breached the investment contract and the power purchase agreement, and asking for several categories of relief, including requiring SDG&E to invest in the project, requiring SDG&E to continue performing under the power purchase agreement, and payment of damages.
 
On January 27, 2014, the Montana court ordered SDG&E to continue making payments under the power purchase agreement pending a hearing on the project developer’s preliminary injunction motion. On March 14, 2014, SDG&E notified the project developer that the investment agreement expired by its own terms because a closing had not occurred by that date. The project developer is disputing SDG&E’s position. On March 28, 2014, SDG&E filed an amended complaint against the project developer in San Diego seeking damages and declaratory relief that SDG&E was entitled to terminate the power purchase agreement and to permit the investment agreement to expire. On April 25, 2014, the Montana court granted the project developer’s preliminary injunction motion to prevent SDG&E from terminating the power purchase agreement on the grounds that the project developer would be irreparably harmed if the payments were not made while the parties’ respective rights were being determined in the litigation. The court did not rule on the merits of the parties’ claims. On July 18, 2014, the Montana Supreme Court determined that the parties’ contractual agreement to resolve any disputes in San Diego was mandatory, and ordered that the Montana action be dismissed. The San Diego court has scheduled a trial in January 2016.
 


 
SoCalGas
 

SoCalGas, along with Monsanto Co., Solutia, Inc., Pharmacia Corp. and Pfizer, Inc., are defendants in seven Los Angeles County Superior Court lawsuits filed beginning in April 2011 seeking recovery of unspecified amounts of damages, including punitive damages, as a result of plaintiffs’ exposure to PCBs (polychlorinated biphenyls). The lawsuits allege plaintiffs were exposed to PCBs not only through the food chain and other various sources but from PCB-contaminated natural gas pipelines owned and operated by SoCalGas. This contamination allegedly caused plaintiffs to develop cancer and other serious illnesses. Plaintiffs assert various bases for recovery, including negligence and products liability. SoCalGas has settled five of the seven lawsuits for an amount that is not significant.
 


 
Sempra Mexico
 

Permit Challenges and Property Disputes
 

Sempra Mexico has been engaged in a long-running land dispute relating to property adjacent to its Energía Costa Azul LNG terminal near Ensenada, Mexico. Ownership of the adjacent property is not required by any of the environmental or other regulatory permits issued for the operation of the terminal. A claimant to the adjacent property has nonetheless asserted that his health and safety are endangered by the operation of the facility, and filed an action in the Federal Court challenging the permits. In February 2011, based on a complaint by the claimant, the municipality of Ensenada opened an administrative proceeding and sought to temporarily close the terminal based on claims of irregularities in municipal permits issued six years earlier. This attempt was promptly countermanded by Mexican federal and Baja California state authorities. No terminal permits or operations were affected as a result of these proceedings or events and the terminal has continued to operate normally. In the second quarter of 2014, the municipality of Ensenada dismissed the administrative proceeding, this proceeding was appealed and in the second quarter of 2015, the Administrative Court of Baja California confirmed the municipality of Ensenada’s ruling and dismissed the proceeding. Sempra Mexico expects additional Mexican court proceedings and governmental actions regarding the claimant’s assertions as to whether the terminal’s permits should be modified or revoked in any manner.
 
The claimant also filed complaints in the federal Agrarian Court challenging the refusal of the Secretaría de la Reforma Agraria (now the Secretaría de Desarrollo Agrario, Territorial y Urbano, or SEDATU) in 2006 to issue a title to him for the disputed property. In November 2013, the Agrarian Court ordered that SEDATU issue the requested title and cause it to be registered. Both SEDATU and Sempra Mexico have challenged the rulings. Sempra Mexico expects additional proceedings regarding the claims, although such proceedings are not related to the permit challenges referenced above. The property claimant also filed a lawsuit in July 2010 against Sempra Energy in Federal District Court in San Diego seeking compensatory and punitive damages as well as the earnings from the Energía Costa Azul LNG terminal based on his allegations that he was wrongfully evicted from the adjacent property and that he has been harmed by other allegedly improper actions. Sempra Energy has disputed the claims and allegations in this lawsuit.
 
Additionally, several administrative challenges are pending in Mexico before the Mexican environmental protection agency (SEMARNAT) and the Federal Tax and Administrative Courts seeking revocation of the environmental impact authorization (EIA) issued to Energía Costa Azul in 2003. These cases generally allege that the conditions and mitigation measures in the EIA are inadequate and challenge findings that the activities of the terminal are consistent with regional development guidelines. The Mexican Supreme Court decided to exercise jurisdiction over one such case, and in March 2014, issued a resolution denying the relief sought by the plaintiff on the grounds its action was not timely presented. A similar administrative challenge seeking to revoke the port concession for our marine operations at our Energía Costa Azul LNG terminal was filed with and rejected by the Mexican Communications and Transportation Ministry. In April 2015, the Federal court confirmed the Mexican Communications and Transportation Ministry’s ruling denying the request to revoke the port concession and decided in favor of Energía Costa Azul.
 
Two real property cases have been filed against Energía Costa Azul in which the plaintiffs seek to annul the recorded property titles for parcels on which the Energía Costa Azul LNG terminal is situated and to obtain possession of different parcels that allegedly sit in the same place; one of these cases was dismissed in September 2013 at the direction of the state appellate court. A third complaint was served in April 2013 seeking to invalidate the contract by which Energía Costa Azul purchased another of the terminal parcels, on the grounds the purchase price was unfair. Sempra Mexico expects further proceedings on the remaining two matters.
 


 
Sempra Natural Gas
 

Liberty Gas Storage, LLC (Liberty) received a demand for arbitration from Williams Midstream Natural Gas Liquids, Inc. (Williams) in February 2011 related to a sublease agreement. Williams alleges that Liberty was negligent in its attempt to convert certain salt caverns to natural gas storage and seeks damages of $56.7 million. Liberty filed a counterclaim alleging breach of contract in the inducement and seeks damages of more than $215 million.
 
Since April 2012, a total of 13 lawsuits have been filed against Mobile Gas in Mobile County Circuit Court alleging that in the first half of 2008 Mobile Gas spilled tert-butyl mercaptan, an odorant added to natural gas for safety reasons, in Eight Mile, Alabama. Six of the lawsuits have been settled. The remaining seven lawsuits, which include more than 1,000 individual plaintiffs, allege nuisance and negligence causes of action, and seek unspecified compensatory and punitive damages. An initial trial involving approximately ten plaintiffs is expected to be scheduled for January 2016.
 


 
Other Litigation
 

Sempra Energy holds a noncontrolling interest in RBS Sempra Commodities LLP (RBS Sempra Commodities), a limited liability partnership in the process of being liquidated. The Royal Bank of Scotland plc (RBS), our partner in the joint venture, was notified by the United Kingdom’s Revenue and Customs Department (HMRC) that it was investigating value-added tax (VAT) refund claims made by various businesses in connection with the purchase and sale of carbon credit allowances. HMRC advised RBS that it had determined that it had grounds to deny such claims by RBS related to transactions by RBS Sempra Energy Europe (RBS SEE), a former indirect subsidiary of RBS Sempra Commodities that was sold to JP Morgan. HMRC asserted that RBS was not entitled to reduce its VAT liability by VAT paid during 2009 because RBS knew or should have known that certain vendors in the trading chain did not remit their own VAT to HMRC. In September 2012, HMRC issued a protective assessment of £86 million for the VAT paid in connection with these transactions. In October 2014, RBS filed a Notice of Appeal of the September 2012 assessment with the First-tier Tribunal. As a condition of the appeal, RBS was required to pay the assessed amount. The payment also stops the accrual of interest that could arise should it ultimately be determined that RBS has a liability for some of the tax. In June 2015, liquidators for three companies that engaged in carbon credit trading via chains that included a company that RBS SEE traded with directly filed a claim in the High Court of Justice against RBS and RBS Sempra Commodities alleging that RBS Sempra Commodities’ and RBS SEE’s participation in transactions involving the sale and purchase of carbon credit transactions resulted in the companies’ incurring VAT liability they were unable to pay. Our remaining balance in RBS Sempra Commodities is accounted for under the equity method. The investment balance of $71 million at June 30, 2015 reflects remaining distributions expected to be received from the partnership as it is liquidated. The timing and amount of distributions may be impacted by these matters. We discuss RBS Sempra Commodities further in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 
In August 2007, the U.S. Court of Appeals for the Ninth Circuit issued a decision reversing and remanding certain FERC orders declining to provide refunds regarding short-term bilateral sales up to one month in the Pacific Northwest for the January 2000 to June 2001 time period. In December 2010, the FERC approved a comprehensive settlement previously reached by Sempra Energy and RBS Sempra Commodities with the State of California. The settlement resolved all issues with regard to sales between the California Department of Water Resources and Sempra Commodities in the Pacific Northwest, but potential claims may exist regarding sales in the Pacific Northwest between Sempra Commodities and other parties. The FERC is in the process of addressing these potential claims on remand. Pursuant to the agreements related to the formation of RBS Sempra Commodities, we have indemnified RBS should the liability from the final resolution of these matters be greater than the reserves related to Sempra Commodities. Pursuant to our agreement with the Noble Group Ltd., one of the buyers of RBS Sempra Commodities’ businesses, we have also indemnified Noble Americas Gas & Power Corp. and its affiliates for all losses incurred by such parties resulting from these proceedings as related to Sempra Commodities.
 
We are also defendants in ordinary routine litigation incidental to our businesses, including personal injury, employment litigation, product liability, property damage and other claims. Juries have demonstrated an increasing willingness to grant large awards, including punitive damages, in these types of cases.
 


 
CONTRACTUAL COMMITMENTS
 

We discuss below significant changes in the first six months of 2015 to contractual commitments discussed in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Natural Gas Contracts
 

SoCalGas’ natural gas purchase and pipeline capacity commitments have decreased by $79 million since December 31, 2014, primarily due to fulfillment of payment obligations and changes to forward natural gas prices in the first six months of 2015. Net future payments are expected to decrease by $77 million in 2015, and $2 million thereafter compared to December 31, 2014.
 

Sempra Natural Gas’ natural gas purchase and transportation commitments have decreased by $227 million since December 31, 2014, primarily due to payments on existing contracts and changes to forward natural gas prices in the first six months of 2015. Net future payments are expected to decrease by $156 million in 2015, $21 million in 2016, $20 million in 2017, $15 million in 2018, and $15 million in 2020 and thereafter compared to December 31, 2014.

 
LNG Purchase Agreement
 

Sempra Natural Gas has a purchase agreement for the supply of LNG to the Energía Costa Azul terminal. The agreement is priced using a predetermined formula based on natural gas market indices. Although this contract specifies a number of cargoes to be delivered, under its terms, the customer may divert certain cargoes, which would reduce amounts paid under the contracts by Sempra Natural Gas.
 
Sempra Natural Gas’ commitment under the LNG purchase agreement, reflecting changes in forward prices since December 31, 2014 and actual transactions for the first six months of 2015, are expected to decrease by $212 million in 2015, $65 million in 2016, $97 million in 2017, $121 million in 2018, $123 million in 2019, and $997 million thereafter (through contract termination in 2029) compared to December 31, 2014. These amounts are based on forward prices of the index applicable to the contract from 2015 to 2024 and an estimated one percent escalation per year beyond 2024. The LNG commitment amounts above are based on the requirement for Sempra Natural Gas to accept the maximum possible delivery of cargoes under the agreement. Actual LNG purchases in the current and prior years have been significantly lower than the maximum amounts possible due to the customer electing to divert cargoes as allowed by the agreement.
 


 
Purchased-Power Contracts
 

SDG&E’s commitments under purchased-power contracts have decreased by $385 million since December 31, 2014. Net future payments are therefore expected to decrease by $15 million in 2015, increase by $2 million in 2016, decrease by $12 million each year in 2017 and 2018, $18 million in 2019 and $330 million thereafter compared to December 31, 2014.
 


 
Operating Leases
 

Sempra Renewables’ commitments under operating leases have increased by $47 million since December 31, 2014. The increase is primarily due to land leases associated with renewable energy development projects. Net future payments are expected to decrease by $1 million in 2015, and increase by $1 million in 2016, $2 million each year in 2017 through 2019 and $41 million thereafter compared to December 31, 2014.
 


 
Capital Leases – Power Purchase Agreements
 

In the first quarter of 2015, SDG&E entered into a CPUC-approved 25-year power purchase agreement with a peaker plant facility that is under construction. Beginning with the initial delivery of the contracted power, scheduled in June 2017, the power purchase agreement will be accounted for as a capital lease. Future minimum lease payments under the new power purchase agreement are as follows:
 

FUTURE MINIMUM PAYMENTS – POWER PURCHASE AGREEMENT
(Dollars in millions)
2015
 
$
2016
   
2017
   
38
2018
   
65
2019
   
65
Thereafter
 
1,460
Total minimum lease payments(1)
 
1,628
Less: estimated executory costs
 
(392)
Less: interest(2)
 
(736)
Present value of net minimum lease payments
$
500
(1)
This amount will be recorded over the life of the lease as Cost of Electric Fuel and Purchased Power on Sempra Energy’s and SDG&E’s Condensed Consolidated Statements of Operations. This expense will receive ratemaking treatment consistent with purchased-power costs, which are recovered in rates.
(2)
Amount necessary to reduce net minimum lease payments to estimated present value at the inception of the lease.

 
Construction and Development Projects
 

In the first six months of 2015, significant net decreases to contractual commitments at SDG&E were $64 million primarily due to fulfillment of payment obligations, partially offset by an increase in commitments. Net future payments under these contractual commitments are expected to decrease by $125 million in 2015, increase by $35 million in 2016, decrease by $5 million in 2017, and increase by $2 million in 2018, $25 million in 2019 and $4 million thereafter compared to December 31, 2014.
 
In the first six months of 2015, significant net decreases to contractual commitments at SoCalGas were $108 million primarily due to payments on existing contracts, partially offset by an increase in commitments in the first six months of 2015. Net future payments under these contractual commitments are expected to decrease by $127 million in 2015, and increase by $12 million in 2016 and $7 million in 2017, compared to December 31, 2014.
 
In the first six months of 2015, significant increases to contractual commitments at Sempra Mexico were $99 million, primarily related to pipeline projects. Net future payments under these contractual commitments are expected to increase by $42 million in 2015, $56 million in 2016, and $1 million thereafter compared to December 31, 2014.
 
In the first six months of 2015, significant increases to contractual commitments at Sempra Renewables were $275 million for contracts related to the construction of renewable energy projects. The future payments under these contractual commitments are expected to be $41 million in 2015 and $234 million in 2016.
 
In the first six months of 2015, significant increases to contractual commitments at Sempra Natural Gas were $38 million, primarily for natural gas transportation projects. The future payments under these contractual commitments are all expected to be made in 2015.
 


 
OTHER COMMITMENTS
 

Sempra Natural Gas’ other commitments have decreased by $31 million since December 31, 2014. The decrease is due to a long-term operations and maintenance agreement that was assumed by the purchaser of the remaining 625-MW block of the Mesquite Power plant. We provide additional information about the agreement in Notes 3 and 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
GUARANTEES
 

We discuss guarantees related to Sempra Energy in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
NUCLEAR INSURANCE
 

SDG&E and the other owners of SONGS have insurance to cover claims from nuclear liability incidents arising at SONGS. This insurance provides $375 million in coverage limits, the maximum amount available, including coverage for acts of terrorism. In addition, the Price-Anderson Act provides for up to $13.2 billion of secondary financial protection (SFP). If a nuclear liability loss occurring at any U.S. licensed/commercial reactor exceeds the $375 million insurance limit, all nuclear reactor owners could be required to contribute to the SFP. SDG&E’s contribution could be up to $50.93 million. This amount is subject to an annual maximum of $7.6 million, unless a default occurs by any other SONGS owner. If the SFP is insufficient to cover the liability loss, SDG&E could be subject to an additional assessment.
 
The SONGS owners, including SDG&E, also have $2.75 billion of nuclear property, decontamination, and debris removal insurance, subject to a $2.5 million deductible for “each and every loss.” This insurance coverage is provided through Nuclear Electric Insurance Limited (NEIL). The NEIL policies have specific exclusions and limitations that can result in reduced or eliminated coverage. Insured members as a group are subject to retrospective premium assessments to cover losses sustained by NEIL under all issued policies. SDG&E could be assessed up to $9.7 million of retrospective premiums based on overall member claims. Edison, on behalf of itself and the minority owners of SONGS (including SDG&E), has placed NEIL on notice of claims under both the property damage and outage insurance policies as a result of SONGS’ Units 2 and 3 outages in early 2012 and the resultant plant closure in June 2013.
 
The nuclear property insurance program includes an industry aggregate loss limit for non-certified acts of terrorism (as defined by the Terrorism Risk Insurance Act). The industry aggregate loss limit for property claims arising from non-certified acts of terrorism is $3.24 billion. This is the maximum amount that will be paid to insured members who suffer losses or damages from these non-certified terrorist acts.
 


 
U.S. DEPARTMENT OF ENERGY (DOE) NUCLEAR FUEL DISPOSAL
 

The Nuclear Waste Policy Act of 1982 made the DOE responsible for the disposal of spent nuclear fuel. However, it is uncertain when the DOE will begin accepting spent nuclear fuel from SONGS. This delay will lead to increased costs for spent fuel storage. SDG&E will seek recovery for these costs from the appropriate sources, including, but not limited to, SDG&E’s Nuclear Decommissioning Trust. SDG&E will also continue to support Edison in its pursuit of legal claims on behalf of the SONGS co-owners against the DOE for its failure to timely accept the spent nuclear fuel.
 
We provide additional information about SONGS in Note 9 herein and in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.
 



 
 

NOTE 12. SEGMENT INFORMATION
 

We have six separately managed reportable segments, as follows:
 
1.  
SDG&E provides electric service to San Diego and southern Orange counties and natural gas service to San Diego County.
 
2.  
SoCalGas is a natural gas distribution utility, serving customers throughout most of Southern California and part of central California.
 
3.  
Sempra South American Utilities operates electric transmission and distribution utilities in Chile and Peru.
 
4.  
Sempra Mexico develops, owns and operates, or holds interests in, natural gas transmission pipelines and propane and ethane systems, a natural gas distribution utility, electric generation facilities (including wind), a terminal for the import of LNG, and marketing operations for the purchase of LNG and the purchase and sale of natural gas in Mexico.
 
5.  
Sempra Renewables develops, owns and operates, or holds interests in, wind and solar energy projects in Arizona, California, Colorado, Hawaii, Indiana, Kansas, Minnesota, Nebraska, Nevada and Pennsylvania to serve wholesale electricity markets in the United States.
 
6.  
Sempra Natural Gas develops, owns and operates, or holds interests in, natural gas pipelines and storage facilities, natural gas distribution utilities and a terminal for the import and export of LNG and sale of natural gas, all within the United States. Sempra Natural gas also owned and operated the Mesquite Power plant, a natural gas-fired electric generation asset, the remaining 625-MW block of which was sold in April 2015, as we discuss in Note 3.

Sempra South American Utilities and Sempra Mexico comprise our Sempra International operating unit. Sempra Renewables and Sempra Natural Gas comprise our Sempra U.S. Gas & Power operating unit.
 
We evaluate each segment’s performance based on its contribution to Sempra Energy’s reported earnings. The California Utilities operate in essentially separate service territories, under separate regulatory frameworks and rate structures set by the CPUC. The California Utilities’ operations are based on rates set by the CPUC and the FERC. We describe the accounting policies of all of our segments in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Common services shared by the business segments are assigned directly or allocated based on various cost factors, depending on the nature of the service provided. Interest income and expense is recorded on intercompany loans. The loan balances and related interest are eliminated in consolidation.
 
The following tables show selected information by segment from our Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets. Amounts labeled as “All other” in the following tables consist primarily of parent organizations.
 
 
SEGMENT INFORMATION
                               
(Dollars in millions)
                               
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
REVENUES
                               
  SDG&E
$
972
41
%
$
1,063
40
%
$
1,938
38
%
$
2,050
37
%
  SoCalGas
 
780
33
   
917
34
   
1,828
36
   
2,002
37
 
  Sempra South American Utilities
 
389
16
   
390
15
   
778
15
   
768
14
 
  Sempra Mexico
 
152
6
   
186
7
   
315
6
   
387
7
 
  Sempra Renewables
 
10
1
   
9
   
18
1
   
15
 
  Sempra Natural Gas
 
155
7
   
236
9
   
352
7
   
496
9
 
  Adjustments and eliminations
 
(1)
   
(2)
   
(1)
   
(2)
 
  Intersegment revenues(1)
 
(90)
(4)
   
(121)
(5)
   
(179)
(3)
   
(243)
(4)
 
      Total
$
2,367
100
%
$
2,678
100
%
$
5,049
100
%
$
5,473
100
%
INTEREST EXPENSE
                               
  SDG&E
$
52
   
$
51
   
$
104
   
$
101
   
  SoCalGas
 
19
     
16
     
38
     
33
   
  Sempra South American Utilities
 
8
     
9
     
13
     
17
   
  Sempra Mexico
 
6
     
4
     
11
     
8
   
  Sempra Renewables
 
1
     
1
     
2
     
1
   
  Sempra Natural Gas
 
23
     
33
     
44
     
65
   
  All other
 
65
     
57
     
128
     
115
   
  Intercompany eliminations
 
(35)
     
(33)
     
(67)
     
(66)
   
      Total
$
139
   
$
138
   
$
273
   
$
274
   
INTEREST INCOME
                               
  SoCalGas
$
3
   
$
   
$
3
   
$
   
  Sempra South American Utilities
 
5
     
3
     
9
     
6
   
  Sempra Mexico
 
2
     
1
     
4
     
1
   
  Sempra Renewables
 
1
     
     
1
     
   
  Sempra Natural Gas
 
25
     
32
     
44
     
63
   
  All other
 
     
1
     
     
1
   
  Intercompany eliminations
 
(26)
     
(32)
     
(44)
     
(62)
   
      Total
$
10
   
$
5
   
$
17
   
$
9
   
DEPRECIATION AND AMORTIZATION
               
  SDG&E
$
149
48
%
$
131
45
%
$
294
48
%
$
261
45
%
  SoCalGas
 
113
37
   
107
37
   
226
37
   
212
37
 
  Sempra South American Utilities
 
12
4
   
13
5
   
25
4
   
27
5
 
  Sempra Mexico
 
17
6
   
15
5
   
34
6
   
31
5
 
  Sempra Renewables
 
1
   
2
1
   
3
   
3
1
 
  Sempra Natural Gas
 
12
4
   
16
6
   
24
4
   
33
6
 
  All other
 
3
1
   
4
1
   
4
1
   
7
1
 
      Total
$
307
100
%
$
288
100
%
$
610
100
%
$
574
100
%
INCOME TAX EXPENSE (BENEFIT)
               
  SDG&E
$
54
   
$
69
   
$
142
   
$
152
   
  SoCalGas
 
16
     
28
     
111
     
66
   
  Sempra South American Utilities
 
18
     
18
     
34
     
33
   
  Sempra Mexico
 
5
     
12
     
13
     
24
   
  Sempra Renewables
 
(11)
     
(13)
     
(28)
     
(19)
   
  Sempra Natural Gas
 
27
     
3
     
29
     
9
   
  All other
 
(11)
     
(24)
     
(40)
     
(45)
   
      Total
$
98
   
$
93
   
$
261
   
$
220
   
 
 

 
SEGMENT INFORMATION (CONTINUED)
                           
(Dollars in millions)
                               
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
EQUITY EARNINGS (LOSSES)
                               
 Earnings recorded before tax:
                               
   Sempra Renewables
$
10
   
$
9
   
$
12
   
$
11
   
   Sempra Natural Gas
 
17
     
14
     
34
     
29
   
       Total
$
27
   
$
23
   
$
46
   
$
40
   
 Earnings (losses) recorded net of tax:
                           
   Sempra South American Utilities
$
   
$
   
$
(1)
   
$
(2)
   
   Sempra Mexico
 
22
     
9
     
38
     
17
   
       Total
$
22
   
$
9
   
$
37
   
$
15
   
EARNINGS (LOSSES)
                               
   SDG&E
$
126
43
%
$
123
46
%
$
273
37
%
$
222
43
%
   SoCalGas(2)
 
70
24
   
80
30
   
284
39
   
158
31
 
   Sempra South American Utilities
 
45
15
   
42
15
   
86
12
   
77
15
 
   Sempra Mexico
 
50
17
   
34
13
   
97
13
   
76
15
 
   Sempra Renewables
 
19
6
   
18
7
   
32
4
   
46
9
 
   Sempra Natural Gas
 
40
14
   
4
1
   
42
6
   
13
2
 
   All other
 
(55)
(19)
   
(32)
(12)
   
(82)
(11)
   
(76)
(15)
 
       Total
$
295
100
%
$
269
100
%
$
732
100
%
$
516
100
%
     
Six months ended June 30,
       
2015
2014
EXPENDITURES FOR PROPERTY, PLANT & EQUIPMENT
                   
   SDG&E
               
$
600
41
%
$
543
36
%
   SoCalGas
                 
603
41
   
500
33
 
   Sempra South American Utilities
                 
66
5
   
89
6
 
   Sempra Mexico
                 
120
8
   
189
13
 
   Sempra Renewables
                 
22
1
   
122
8
 
   Sempra Natural Gas
                 
28
2
   
67
4
 
   All other
                 
27
2
   
3
 
       Total
               
$
1,466
100
%
$
1,513
100
%
     
June 30, 2015
December 31, 2014
ASSETS
                   
   SDG&E
               
$
16,633
42
%
$
16,296
41
%
   SoCalGas
                 
11,209
28
   
10,461
26
 
   Sempra South American Utilities
                 
3,312
8
   
3,379
9
 
   Sempra Mexico
                 
3,568
9
   
3,488
9
 
   Sempra Renewables
                 
1,312
3
   
1,338
3
 
   Sempra Natural Gas
                 
5,535
14
   
6,436
16
 
   All other
                 
893
2
   
895
2
 
   Intersegment receivables
                 
(2,456)
(6)
   
(2,561)
(6)
 
       Total
               
$
40,006
100
%
$
39,732
100
%
INVESTMENTS IN EQUITY METHOD INVESTEES
                   
   Sempra South American Utilities
               
$
(9)
   
$
(8)
   
   Sempra Mexico
                 
474
     
434
   
   Sempra Renewables
                 
868
     
911
   
   Sempra Natural Gas
                 
1,510
     
1,347
   
   All other
                 
86
     
164
   
       Total
               
$
2,929
   
$
2,848
   
(1)
Revenues for reportable segments include intersegment revenues of $3 million, $17 million, $24 million and $46 million for the three months ended June 30, 2015; $5 million, $36 million, $49 million and $89 million for the six months ended June 30, 2015; $2 million, $16 million, $23 million and $80 million for the three months ended June 30, 2014; and $5 million, $34 million, $45 million and $159 million for the six months ended June 30, 2014 for SDG&E, SoCalGas, Sempra Mexico and Sempra Natural Gas, respectively.
(2)
After preferred dividends.
                   



 
 

NOTE 13. SUBSEQUENT EVENT
 


 
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 (GdC). On July 31, 2015, IEnova entered into an agreement to purchase PEMEX’s 50-percent interest for $1.325 billion (excluding the assumption of approximately $170 million of net debt), increasing its interest from 50 percent to 100 percent. GdC develops and operates energy infrastructure in Mexico. The assets involved in the acquisition include three natural gas pipelines, an ethane pipeline, and a liquid petroleum gas pipeline and associated storage terminal. The transaction excludes the Los Ramones Norte pipeline that IEnova will continue to develop under a joint venture with PEMEX at the existing holding company for the project, through which IEnova’s interest in the project will remain at the current 25 percent. The transaction is subject to approval by IEnova shareholders, satisfactory completion of the Mexican anti-trust review and other customary closing conditions and is expected to close in the fourth quarter of 2015.
 
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 transaction is not expected to close until the fourth quarter of 2015, we are unable to estimate the gain at this time.
 
We expect the acquisition to be funded with a combination of debt and equity issuances at IEnova. Sempra Global has committed to IEnova to provide up to $1.325 billion of interim financing for the transaction. The commitment expires no later than the end of 2015. If IEnova elects to borrow money under this commitment, the loan will have a term of two months at an interest rate of one month LIBOR plus 120 basis points. The term may be extended, triggering a reevaluation of the interest rate. After financing at the IEnova level, we expect the acquisition to be accretive to Sempra Energy’s diluted earnings per share in 2016 and beyond, based on the joint venture’s strong historical performance and the expected benefits of the acquisition. These benefits include an ongoing relationship with PEMEX for joint development of new projects in the future; opportunities for asset optimization and expansion into areas such as the transportation and storage of refined products; and a larger platform and presence in Mexico to participate in energy sector reform.
 

 
 
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto contained in this Form 10-Q, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the Notes thereto contained in our 2014 Annual Report on Form 10-K (Annual Report) and “Risk Factors” contained in our Annual Report.
 

 
 

OVERVIEW
 

Sempra Energy is a Fortune 500 energy-services holding company whose operating units invest in, develop and operate energy infrastructure, and provide gas and electricity services to their customers in North and South America. Our operations are divided principally between our California Utilities, which are San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), and Sempra International and Sempra U.S. Gas & Power. SDG&E and SoCalGas are separate, reportable segments. Sempra International includes two reportable segments – Sempra South American Utilities and Sempra Mexico. Sempra U.S. Gas & Power also includes two reportable segments – Sempra Renewables and Sempra Natural Gas.
 
This report includes information for the following separate registrants:
 
§  
Sempra Energy and its consolidated entities
 
§  
SDG&E
 
§  
SoCalGas
 
References to “we,” “our” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, collectively, unless otherwise indicated by the context. All references to “Sempra International” and “Sempra U.S. Gas & Power,” and to their respective principal segments, are not intended to refer to any legal entity with the same or similar name.
 
Below are summary descriptions of our operating units and their reportable segments.
 
 
SEMPRA ENERGY OPERATING UNITS AND REPORTABLE SEGMENTS
 

CALIFORNIA UTILITIES
   
 
MARKET
SERVICE TERRITORY
SAN DIEGO GAS & ELECTRIC COMPANY (SDG&E)
A regulated public utility; infrastructure supports electric generation, transmission and distribution, and natural gas distribution
§ Provides electricity to a population of 3.5 million (1.4 million meters)
 
§ Provides natural gas to a population of 3.2 million (0.9 million meters)
 
Serves the county of San Diego, California and an adjacent portion of southern Orange County covering 4,100 square miles
SOUTHERN CALIFORNIA GAS COMPANY (SOCALGAS)
A regulated public utility; infrastructure supports natural gas distribution, transmission and storage
§ Residential, commercial, industrial, utility electric generation and wholesale customers
 
§ Covers a population of 21.4 million (5.9 million meters)
 
Southern California and portions of central California (excluding San Diego County, the city of Long Beach and the desert area of San Bernardino County) covering 20,000 square miles

 
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our Sempra International or Sempra U.S. Gas & Power operating units described below.
 
 
SEMPRA INTERNATIONAL
   
 
MARKET
GEOGRAPHIC REGION
SEMPRA SOUTH AMERICAN UTILITIES
Infrastructure supports electric transmission and distribution
§ Provides electricity to approximately 2.4 million consumers (approximately 657,000 meters) in Chile and approximately 4.8 million consumers (approximately 1,029,000 meters) in Peru
 
§ Chile
 
§ Peru
 
SEMPRA MEXICO
Develops, owns and operates, or holds interests in:
§ natural gas transmission pipelines and propane and ethane systems
 
§ a natural gas distribution utility
 
§ electric generation facilities, including wind
 
§ a terminal for the import of liquefied natural gas (LNG)
 
§ marketing operations for the purchase of LNG and the purchase and sale of natural gas
 
§ Natural gas
 
§ Wholesale electricity
 
§ Liquefied natural gas
 
§ Mexico
 

 

SEMPRA U.S. GAS & POWER
   
 
MARKET
GEOGRAPHIC REGION
SEMPRA RENEWABLES
Develops, owns, operates, or holds interests in renewable energy generation projects
§ Wholesale electricity
 
§ U.S.A.
 
SEMPRA NATURAL GAS
Develops, owns and operates, or holds interests in:
§ natural gas pipelines and storage facilities
 
§ natural gas distribution utilities
 
§ a terminal in the U.S. for the import and export of LNG and sale of natural gas
 
§ marketing operations
 
§ Natural gas
 
§ Liquefied natural gas
 
§ Wholesale electricity
 
§ U.S.A.
 

 

 
 

RESULTS OF OPERATIONS
 

We discuss the following in Results of Operations:
 
§  
Overall results of our operations and factors affecting those results
 
§  
Our segment results
 
§  
Significant changes in revenues, costs and earnings between periods
 
Our earnings increased by $26 million (10%) to $295 million in the three months ended June 30, 2015, while diluted earnings per share increased by $0.09 per share (8%) to $1.17 per share. For the six months ended June 30, 2015, our earnings increased by $216 million (42%) to $732 million, while diluted earnings per share increased by $0.84 per share (41%) to $2.91 per share.
 
The net increases in our earnings and diluted earnings per share for the three-month period were primarily due to the following increases (decreases), by segment:
 
SoCalGas
 
§  
$(48) million lower earnings due to SoCalGas recognizing annual core gas authorized revenue during interim periods based on seasonal factors starting in 2015 due to the adoption of a Triennial Cost Allocation Proceeding (TCAP) decision. Prior to 2015, SoCalGas recognized such revenue ratably over the year. While this “seasonalization” impacts quarterly and quarterly year-to-date comparisons of operating revenues and earnings for both Sempra Energy and SoCalGas, it will not impact full-year results. We discuss the TCAP decision further in Note 10 of the Notes to Condensed Consolidated Financial Statements herein
 
§  
$13 million of earnings from a California Public Utilities Commission (CPUC)-approved retroactive increase in authorized general rate case (GRC) revenue requirement for years 2012 through 2014 and the first quarter of 2015 due to increased rate base
 
§  
$6 million higher CPUC base operating margin authorized for 2015
 
§  
$6 million write-off in 2014 of certain costs incurred that were disallowed for recovery in the final Pipeline Safety Enhancement Plan (PSEP) decision
 
§  
$6 million from the favorable resolution of a legal settlement in 2015
 
Sempra Mexico
 
§  
$17 million higher pipeline earnings, primarily due to the start of operations of the Los Ramones I pipeline and a section of the Sonora pipeline in the fourth quarter of 2014
 
§  
$(5) million increase in earnings attributable to noncontrolling interests at Infraestructura Energética Nova, S.A.B. de C.V (IEnova)
 
Sempra Natural Gas
 
§  
$36 million gain on the April 2015 sale of the remaining 625-megawatt (MW) block of the Mesquite Power plant
 
Parent and Other
 
§  
$(1) million investment loss in 2015 compared to $(10) million investment gain in 2014 on dedicated assets in support of our executive retirement and deferred compensation plans, net of the decrease in deferred compensation liability associated with the investments
 

The net increases in our earnings and diluted earnings per share for the six-month period ended June 30, 2015 were primarily due to the following increases (decreases), by segment:
 
SDG&E
 
§  
$33 million higher earnings from CPUC base operations and from electric transmission
 
§  
$13 million reduction to the loss from plant closure in 2015 based on CPUC approval of a compliance filing related to SDG&E’s authorized recovery of its investment in San Onofre Nuclear Generating Station (SONGS) compared to a $9 million increase to the loss in 2014 as a result of reaching a preliminary settlement agreement on the closure, as we discuss in Note 9 of the Notes to Condensed Consolidated Financial Statements herein
 
SoCalGas
 
§  
$65 million incremental earnings due to SoCalGas recognizing annual core gas authorized revenue during interim periods based on seasonal factors starting in 2015 due to the adoption of a TCAP decision
 
§  
$16 million higher earnings from CPUC base operating margin authorized for 2015
 
§  
$11 million of earnings from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base
 
§  
$8 million from the gas cost incentive mechanism (GCIM) award approved by the CPUC in February 2015
 
Sempra South American Utilities
 
§  
$10 million higher earnings from operations mainly in Peru due to an increase in rates and volumes
 
Sempra Mexico
 
§  
$31 million higher pipeline earnings, primarily due to the start of operations of the Los Ramones I pipeline and a section of the Sonora pipeline in the fourth quarter of 2014
 
§  
$(6) million increase in earnings attributable to noncontrolling interests at IEnova
 
Sempra Renewables
 
§  
$(16) million gain in 2014 from the sale of a 50-percent equity interest in Copper Mountain Solar 3
 
Sempra Natural Gas
 
§  
$36 million gain on the April 2015 sale of the remaining 625-MW block of the Mesquite Power plant
 
The following table shows our earnings (losses) by segment, which we discuss below in “Segment Results.”
 

SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT
   
(Dollars in millions)
   
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
California Utilities:
                               
    SDG&E
$
126
43
%
$
123
46
%
$
273
37
%
$
222
43
%
    SoCalGas(1)
 
70
24
   
80
30
   
284
39
   
158
31
 
Sempra International:
                               
    Sempra South American Utilities
 
45
15
   
42
15
   
86
12
   
77
15
 
    Sempra Mexico
 
50
17
   
34
13
   
97
13
   
76
15
 
Sempra U.S. Gas & Power:
                               
    Sempra Renewables
 
19
6
   
18
7
   
32
4
   
46
9
 
    Sempra Natural Gas
 
40
14
   
4
1
   
42
6
   
13
2
 
Parent and other(2)
 
(55)
(19)
   
(32)
(12)
   
(82)
(11)
   
(76)
(15)
 
Earnings
$
295
100
%
$
269
100
%
$
732
100
%
$
516
100
%
(1)
After preferred dividends.
               
(2)
Includes after-tax interest expense ($39 million and $34 million for the three months ended June 30, 2015 and 2014, respectively, and $77 million and $69 million for the six months ended June 30, 2015 and 2014, respectively), intercompany eliminations recorded in consolidation and certain corporate costs.
 

SEGMENT RESULTS
 
The following section is a discussion of earnings (losses) by Sempra Energy segment, as presented in the table above. Variance amounts are the after-tax earnings impact (based on applicable statutory tax rates), unless otherwise noted.
 

EARNINGS BY SEGMENT – CALIFORNIA UTILITIES
(Dollars in millions)

[graph1.gif]





SDG&E
 
Our SDG&E segment recorded earnings of:
 
§  
$126 million in the three months ended June 30, 2015
 
§  
$123 million in the three months ended June 30, 2014
 
§  
$273 million for the first six months of 2015
 
§  
$222 million for the first six months of 2014
 
The increase in earnings of $3 million (2%) in the three months ended June 30, 2015 was primarily due to:
 
§  
$10 million favorable resolution of prior years’ income tax items;
 
§  
$8 million higher CPUC base operating margin authorized for 2015, net of higher non-refundable operating costs; and
 
§  
$7 million higher earnings from electric transmission operations primarily due to higher rate base; offset by
 
§  
$8 million higher earnings in 2014 associated with SDG&E’s annual Federal Energy Regulatory Commission (FERC) formulaic rate adjustment;
 
§  
$4 million favorable settlement in 2014 associated with a long-term service agreement (LTSA);
 
§  
$2 million higher generation major maintenance costs; and
 
§  
$2 million higher litigation expenses.
 

The increase in earnings of $51 million (23%) in the first six months of 2015 was primarily due to:
 
§  
$13 million reduction to the loss from plant closure in 2015 based on the CPUC approval of a compliance filing related to SDG&E’s authorized recovery of its investment in SONGS compared to a $9 million increase to the loss in 2014 as a result of reaching a preliminary settlement agreement on the closure;
 
§  
$21 million higher CPUC base operating margin authorized for 2015, and lower non-refundable operating costs;
 
§  
$12 million higher earnings from electric transmission operations primarily due to higher rate base; and
 
§  
$10 million favorable resolution of prior years’ income tax items; offset by
 
§  
$7 million higher earnings in 2014 associated with SDG&E’s FERC formulaic rate adjustment; and
 
§  
$3 million favorable settlement in 2014 associated with an LTSA.
 
 
SoCalGas
 
Our SoCalGas segment recorded earnings of:
 
§  
$70 million in the three months ended June 30, 2015 ($71 million before preferred dividends)
 
§  
$80 million in the three months ended June 30, 2014 ($81 million before preferred dividends)
 
§  
$284 million for the first six months of 2015 ($285 million before preferred dividends)
 
§  
$158 million for the first six months of 2014 ($159 million before preferred dividends)
 
The decrease in earnings of $10 million (13%) in the three months ended June 30, 2015 was primarily due to:
 
§  
$48 million lower earnings resulting from the seasonalization of interim period recognition of annual core gas authorized revenue starting in 2015 (after-tax impact is based on SoCalGas’ effective tax rate); offset by
 
§  
$13 million of earnings from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 and the first quarter of 2015 due to increased rate base, as we discuss in Note 10 of the Notes to Condensed Consolidated Financial Statements herein;
 
§  
$7 million due primarily to a lower effective tax rate, as we discuss under “Income Taxes” below, including $3 million favorable resolution of prior years’ income tax items in 2015;
 
§  
$6 million higher CPUC base operating margin authorized for 2015, and lower non-refundable operating costs;
 
§  
$6 million write-off in 2014 of certain costs incurred that were disallowed for recovery in the final PSEP decision, as we discuss in Note 10 of the Notes to Condensed Consolidated Financial Statements herein;
 
§  
$6 million from the favorable resolution of a legal settlement in 2015, including $2 million of related interest income; and
 
§  
$4 million increase in allowance for funds used during construction (AFUDC) related to equity.
 
The increase in earnings of $126 million (80%) in the first six months of 2015 was primarily due to:
 
§  
$65 million incremental earnings resulting from the seasonalization of interim period recognition of annual core gas authorized revenue starting in 2015 (after-tax impact is based on SoCalGas’ effective tax rate);
 
§  
$16 million higher CPUC base operating margin authorized for 2015, and lower non-refundable operating costs;
 
§  
$11 million of earnings from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base;
 
§  
$11 million due primarily to a lower effective tax rate, as we discuss under “Income Taxes” below, including $3 million favorable resolution of prior years’ income tax items in 2015;
 
§  
$8 million from the GCIM award approved by the CPUC in February 2015;
 
§  
$8 million increase in AFUDC related to equity;
 
§  
$6 million write-off in 2014 of certain costs incurred that were disallowed for recovery in the final PSEP decision; and
 
§  
$6 million from the favorable resolution of a legal settlement in 2015, including $2 million of related interest income.
 

 
EARNINGS BY SEGMENT – SEMPRA INTERNATIONAL
(Dollars in millions)

[graph2.gif]

 
 
Sempra South American Utilities
 
Our Sempra South American Utilities segment recorded earnings of:
 
§  
$45 million in the three months ended June 30, 2015
 
§  
$42 million in the three months ended June 30, 2014
 
§  
$86 million for the first six months of 2015
 
§  
$77 million for the first six months of 2014
 
The increase in earnings of $3 million (7%) in the three months ended June 30, 2015 was primarily due to:
 
§  
$6 million higher earnings from operations mainly in Peru due to an increase in rates and volumes; offset by
 
§  
$5 million lower earnings from foreign currency effects.
 
The increase in earnings of $9 million (12%) in the first six months of 2015 was primarily due to:
 
§  
$10 million higher earnings from operations mainly in Peru due to an increase in rates and volumes; and
 
§  
$4 million lower interest expense mainly in Chile related to inflationary effect on local bonds; offset by
 
§  
$9 million lower earnings from foreign currency effects.
 
 
Sempra Mexico
 
Our Sempra Mexico segment recorded earnings of:
 
§  
$50 million in the three months ended June 30, 2015
 
§  
$34 million in the three months ended June 30, 2014
 
§  
$97 million for the first six months of 2015
 
§  
$76 million for the first six months of 2014
 
The increase in earnings of $16 million (47%) in the three months ended June 30, 2015 was primarily due to:
 
§  
$17 million higher pipeline earnings, primarily due to the start of operations of the Los Ramones I pipeline and a section of the Sonora pipeline in the fourth quarter of 2014; and
 
§  
$6 million income tax variance primarily due to the effects from foreign currency and inflation; offset by
 
§  
$5 million increase in earnings attributable to noncontrolling interests at IEnova; and
 
§  
$3 million unfavorable translation effect primarily on Peso-denominated receivables.
 
The increase in earnings of $21 million (28%) in the first six months of 2015 was primarily due to:
 
§  
$31 million higher pipeline earnings, primarily due to the start of operations of the Los Ramones I pipeline and a section of the Sonora pipeline in the fourth quarter of 2014; and
 
§  
$9 million income tax variance primarily due to the effects from foreign currency and inflation; offset by
 
§  
$6 million increase in earnings attributable to noncontrolling interests at IEnova;
 
§  
$5 million lower earnings from LNG marketing operations;
 
§  
$5 million unfavorable translation effect primarily on Peso-denominated receivables; and
 
§  
$4 million lower earnings from operations at our Mexicali power plant from lower prices and volumes in 2015.
 

EARNINGS BY SEGMENT – SEMPRA U.S. GAS & POWER
(Dollars in millions)

[graph3.gif]

 
Sempra Renewables
 
Our Sempra Renewables segment recorded earnings of:
 
§  
$19 million in the three months ended June 30, 2015
 
§  
$18 million in the three months ended June 30, 2014
 
§  
$32 million for the first six months of 2015
 
§  
$46 million for the first six months of 2014
 
Earnings for the three months ended June 30, 2015 were consistent with earnings for the three months ended June 30, 2014.
 
The decrease in earnings of $14 million (30%) in the first six months of 2015 was primarily due to a $16 million gain in 2014 from the sale of a 50-percent equity interest in Copper Mountain Solar 3.
 
 
Sempra Natural Gas
 
Our Sempra Natural Gas segment recorded earnings of:
 
§  
$40 million in the three months ended June 30, 2015
 
§  
$4 million in the three months ended June 30, 2014
 
§  
$42 million for the first six months of 2015
 
§  
$13 million for the first six months of 2014
 
The increase in earnings of $36 million in the three months ended June 30, 2015 was primarily due to:
 
§  
$36 million gain on the April 2015 sale of the remaining 625-MW block of the Mesquite Power plant, net of related expenses;
 
§  
$5 million higher earnings from mark-to-market gains on commodity contracts and lower costs from the Mesquite Power plant due to the sale of the remaining block in April 2015; and
 
§  
$3 million improved results from midstream activities; offset by
 
§  
$14 million lower results from LNG marketing operations, including the effect of lower gas prices.
 
The increase in earnings of $29 million in the first six months of 2015 was primarily due to:
 
§  
$36 million gain on the April 2015 sale of the remaining 625-MW block of the Mesquite Power plant, net of related expenses;
 
§  
$6 million higher earnings from the power sales contract associated with the Mesquite Power plant and lower costs at the plant due to the sale of the remaining block in April 2015; and
 
§  
$5 million improved results from midstream activities; offset by
 
§  
$20 million lower results from LNG marketing operations, including the effect of lower gas prices; and
 
§  
$5 million in development expense associated with the potential expansion of our LNG business.
 
 
Parent and Other
 
Losses for Parent and Other were
 
§  
$55 million in the three months ended June 30, 2015
 
§  
$32 million in the three months ended June 30, 2014
 
§  
$82 million for the first six months of 2015
 
§  
$76 million for the first six months of 2014
 
The increase in losses of $23 million in the three months ended June 30, 2015 was primarily due to:
 
§  
$1 million investment loss in 2015 compared to $10 million investment gain in 2014 on dedicated assets in support of our executive retirement and deferred compensation plans, net of the decrease in deferred compensation liability associated with the investments; and
 
§  
$7 million lower income tax benefits, including $6 million of income tax expense associated with the resolution of prior years’ income tax items in 2015.
 
The increase in losses of $6 million (8%) in the first six months of 2015 was primarily due to:
 
§  
$8 million lower investment gains on dedicated assets in support of our executive retirement and deferred compensation plans, net of the decrease in deferred compensation liability associated with the investments; offset by
 
§  
$4 million higher income tax benefits, including
 
□  
$5 million in net state income tax refunds related to our former commodities-marketing businesses, offset by
 
□  
$6 million of income tax expense associated with the resolution of prior years’ income tax items in 2015.
 

 
CHANGES IN REVENUES, COSTS AND EARNINGS
 
This section contains a discussion of the differences between periods in the specific line items of the Condensed Consolidated Statements of Operations for Sempra Energy, SDG&E and SoCalGas.
 
 
Utilities Revenues
 
Our utilities revenues include
 
Natural gas revenues at:
 
§  
SDG&E
 
§  
SoCalGas
 
§  
Sempra Mexico’s Ecogas México, S. de R.L. de C.V. (Ecogas)
 
§  
Sempra Natural Gas’ Mobile Gas Service Corporation (Mobile Gas) and Willmut Gas Company (Willmut Gas)
 
Electric revenues at:
 
§  
SDG&E
 
§  
Sempra South American Utilities’ Chilquinta Energía S.A. (Chilquinta Energía) and Luz del Sur S.A.A. (Luz del Sur)
 
Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Condensed Consolidated Statements of Operations.
 
 
The California Utilities
 
The current regulatory framework for SoCalGas and SDG&E permits the cost of natural gas purchased for core customers (primarily residential and small commercial and industrial customers) to be passed through to customers in rates substantially as incurred. However, SoCalGas’ gas cost incentive mechanism provides SoCalGas the opportunity to share in the savings and/or costs from buying natural gas for its core customers at prices below or above monthly market-based benchmarks. This mechanism permits full recovery of costs incurred when average purchase costs are within a price range around the benchmark price. Any higher costs incurred or savings realized outside this range are shared between the core customers and SoCalGas. We provide further discussion in Notes 1 and 14 of the Notes to Consolidated Financial Statements in the Annual Report, and in Note 10 of the Notes to Condensed Consolidated Financial Statements herein.
 
The regulatory framework also permits SDG&E to recover the actual cost incurred to generate or procure electricity based on annual estimates of the cost of electricity supplied to customers. The differences in cost between estimates and actual are recovered in the next year through rates.
 

The table below summarizes revenues and cost of sales for our utilities, net of intercompany activity:
 

UTILITIES REVENUES AND COST OF SALES
       
(Dollars in millions)
       
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
Electric revenues:
               
  SDG&E
$
874
$
948
$
1,679
$
1,759
  Sempra South American Utilities
 
363
 
364
 
726
 
718
  Eliminations and adjustments
 
(2)
 
(3)
 
(4)
 
(5)
 
Total
 
1,235
 
1,309
 
2,401
 
2,472
Natural gas revenues:
               
  SoCalGas
 
780
 
917
 
1,828
 
2,002
  SDG&E
 
98
 
115
 
259
 
291
  Sempra Mexico
 
19
 
26
 
44
 
59
  Sempra Natural Gas
 
18
 
20
 
60
 
67
  Eliminations and adjustments
 
(17)
 
(17)
 
(37)
 
(36)
 
Total
 
898
 
1,061
 
2,154
 
2,383
    Total utilities revenues
$
2,133
$
2,370
$
4,555
$
4,855
Cost of electric fuel and purchased power:
               
  SDG&E
$
251
$
329
$
479
$
595
  Sempra South American Utilities
 
247
 
242
 
500
 
486
 
Total
$
498
$
571
$
979
$
1,081
Cost of natural gas:
               
  SoCalGas
$
196
$
321
$
463
$
829
  SDG&E
 
31
 
51
 
85
 
126
  Sempra Mexico
 
11
 
18
 
26
 
40
  Sempra Natural Gas
 
5
 
7
 
20
 
27
  Eliminations and adjustments
 
(4)
 
(2)
 
(9)
 
(7)
 
Total
$
239
$
395
$
585
$
1,015
 
 
Sempra Energy Consolidated
 
Electric Revenues
 
During the three months ended June 30, 2015, our electric revenues decreased by $74 million (6%) to $1.2 billion primarily due to:
 
§  
$74 million decrease at SDG&E, which included
 
□  
$78 million lower cost of electric fuel and purchased power, which we discuss below, and
 
□  
$14 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses, offset by
 
□  
$22 million higher revenues from CPUC-authorized 2015 attrition and, starting in 2015, authorized revenues for the recovery of the SONGS regulatory assets pursuant to an amended settlement agreement approved by the CPUC in 2014. The GRC decision for years 2012 through 2015 established a revenue attrition mechanism for the escalation of adopted revenue requirements based on fixed annual factors, and
 
□  
$4 million higher authorized revenues from electric transmission
 
Our utilities’ cost of electric fuel and purchased power decreased by $73 million (13%) to $498 million in the three months ended June 30, 2015 due to:
 
§  
$78 million decrease at SDG&E, which we discuss below; offset by
 
§  
$5 million increase at Sempra South American Utilities driven primarily by higher rates and volumes at both Luz del Sur and Chilquinta Energía, offset by foreign currency exchange rate effects.
 
During the six months ended June 30, 2015, our electric revenues decreased by $71 million (3%) to $2.4 billion primarily due to:
 
§  
$80 million decrease at SDG&E, which included
 
□  
$116 million lower cost of electric fuel and purchased power, which we discuss below, and
 
□  
$15 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses, offset by
 
□  
$43 million higher revenues from CPUC-authorized 2015 attrition and, starting in 2015, authorized revenues for the recovery of the SONGS regulatory assets pursuant to an amended settlement agreement approved by the CPUC in 2014, and
 
□  
$17 million higher authorized revenues from electric transmission, offset by
 
§  
$8 million increase at Sempra South American Utilities, primarily due to higher rates and volumes at both Luz del Sur and Chilquinta Energía, offset by foreign currency exchange rate effects.
 
Our utilities’ cost of electric fuel and purchased power decreased by $102 million (9%) to $979 million in the six months ended June 30, 2015 due to:
 
§  
$116 million decrease at SDG&E, which we discuss below; offset by
 
§  
$14 million increase at Sempra South American Utilities driven primarily by higher rates and volumes at both Luz del Sur and Chilquinta Energía, offset by foreign currency exchange rate effects.
 
We discuss the changes in electric revenues and the cost of electric fuel and purchased power for SDG&E in more detail below.
 
Natural Gas Revenues
 
During the three months ended June 30, 2015, Sempra Energy’s natural gas revenues decreased by $163 million (15%) to $898 million, and the cost of natural gas decreased by $156 million (39%) to $239 million. The decrease in natural gas revenues included
 
§  
decreases in cost of natural gas sold at SoCalGas and SDG&E, as we discuss below; and
 
§  
$72 million decrease resulting from the seasonalization of interim period recognition of annual core gas authorized revenue at SoCalGas starting in 2015; offset by
 
§  
$21 million higher revenues from CPUC-authorized 2015 attrition at the California Utilities;
 
§  
$21 million increase at SoCalGas from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 and the first quarter of 2015 due to increased rate base; and
 
§  
$18 million higher recovery of costs at SoCalGas associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses.
 
During the first six months of 2015, Sempra Energy’s natural gas revenues decreased by $229 million (10%) to $2.2 billion, and the cost of natural gas decreased by $430 million (42%) to $585 million. The decrease in natural gas revenues included
 
§  
decreases in cost of natural gas sold at SoCalGas and SDG&E, as we discuss below; offset by
 
§  
$91 million increase resulting from the seasonalization of interim period recognition of annual core gas authorized revenue at SoCalGas starting in 2015;
 
§  
$36 million higher revenues from CPUC-authorized 2015 attrition at the California Utilities;
 
§  
$31 million higher recovery of costs at SoCalGas associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses;
 
§  
$19 million increase at SoCalGas from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base; and
 
§  
$14 million GCIM award approved by the CPUC in February 2015 at SoCalGas.
 
We discuss the changes in natural gas revenues and the cost of natural gas individually for SDG&E and SoCalGas below.
 

 
SDG&E: Electric Revenues and Cost of Electric Fuel and Purchased Power
 

The table below shows electric revenues for SDG&E. Because the cost of electricity is substantially recovered in rates, changes in the cost are reflected in the changes in revenues. In addition to the change in cost, electric revenues recorded during a period are impacted by customer billing cycles causing a difference between customer billings and recorded or authorized costs. These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts. We discuss balancing accounts and their effects further in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 


SDG&E
ELECTRIC DISTRIBUTION AND TRANSMISSION
(Volumes in millions of kilowatt-hours, dollars in millions)
   
Six months ended
June 30, 2015
Six months ended
June 30, 2014
Customer class
Volumes
Revenue
Volumes
Revenue
Residential
3,227
$
610
3,383
$
581
Commercial
3,223
 
656
3,311
 
606
Industrial
985
 
162
986
 
147
Direct access(1)
1,696
 
106
1,704
 
88
Street and highway lighting
41
 
8
44
 
7
   
9,172
 
1,542
9,428
 
1,429
CAISO shared transmission revenue - net(2)
   
126
   
115
Other revenues
   
101
   
81
Balancing accounts
   
(90)
   
134
    Total(3)
 
$
1,679
 
$
1,759
(1)
The Direct Access (DA) program, which offered all customers the option to purchase their electric commodity services from a third-party Energy Service Provider instead of continuing to receive these services from SDG&E, was implemented in 1998 and suspended in 2001. In 2009, Senate Bill 695 required the CPUC to develop a process and rules for a limited re-opening of DA to be phased in over a period of time. In 2010, the CPUC adopted the process and rules for the limited re-opening of DA for non-residential customers under a 4-year phase-in schedule.
(2)
California Independent System Operator (CAISO).
(3)
Includes sales to affiliates of $4 million in 2015 and $5 million in 2014.

 
For the three months ended June 30, 2015, SDG&E’s electric revenues decreased by $74 million (8%) to $874 million compared to the corresponding period of 2014 primarily due to:
 
§  
$78 million decrease in cost of electric fuel and purchased power, including:
 
□  
a decrease in the cost of purchased power due to declining natural gas prices, and
 
□  
lower demand mainly due to cooler weather, and, to a lesser extent, an increase in rooftop solar use, in the second quarter of 2015 compared to the same period in 2014, offset by
 
□  
an increase from the incremental purchase of renewable energy at higher prices; and
 
§  
$14 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses; offset by
 
§  
$22 million higher revenues from CPUC-authorized 2015 attrition and, starting in 2015, authorized revenues for the recovery of the SONGS regulatory assets pursuant to an amended settlement agreement approved by the CPUC in 2014; and
 
§  
$4 million higher authorized revenues from electric transmission.
 
In the first six months of 2015, SDG&E’s electric revenues decreased by $80 million (5%) to $1.7 billion primarily due to:
 
§  
$116 million decrease in cost of electric fuel and purchased power, including:
 
□  
a decrease in the cost of purchased power due to declining natural gas prices, and
 
□  
lower demand mainly due to cooler weather, and, to a lesser extent, an increase in rooftop solar use, in 2015 compared to the same period in 2014, offset by
 
□  
an increase from the incremental purchase of renewable energy at higher prices; and
 
§  
$15 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses; offset by
 
§  
$43 million higher revenues from CPUC-authorized 2015 attrition and, starting in 2015, authorized revenues for the recovery of the SONGS regulatory assets pursuant to an amended settlement agreement approved by the CPUC in 2014; and
 
§  
$17 million higher authorized revenues from electric transmission.
 


 
SDG&E and SoCalGas: Natural Gas Revenues and Cost of Natural Gas
 

The tables below show natural gas revenues for SDG&E and SoCalGas. Because the cost of natural gas is recovered in rates, changes in the cost are reflected in the changes in revenues. In addition to the change in market prices, natural gas revenues recorded during a period are impacted by the difference between customer billings and recorded or CPUC-authorized costs. These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts. We discuss balancing accounts and their effects further in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 


SDG&E
NATURAL GAS SALES AND TRANSPORTATION
(Volumes in billion cubic feet, dollars in millions)
   
Natural gas sales
Transportation
Total
Customer class
Volumes
Revenue
Volumes
Revenue
Volumes
Revenue
Six months ended June 30, 2015:
                 
    Residential
14
$
175
$
2
14
$
177
    Commercial and industrial
8
 
53
4
 
7
12
 
60
    Electric generation plants
 
11
 
11
 
   
22
$
228
15
$
9
37
 
237
    Other revenues
               
21
    Balancing accounts
               
1
        Total(1)
             
$
259
Six months ended June 30, 2014:
                 
    Residential
15
$
188
$
15
$
188
    Commercial and industrial
8
 
61
4
 
6
12
 
67
    Electric generation plants
 
13
 
1
13
 
1
   
23
$
249
17
$
7
40
 
256
    Other revenues
               
22
    Balancing accounts
               
13
        Total(1)
             
$
291
(1)
Includes sales to affiliates of $1 million in each of 2015 and 2014.

 
During the three months ended June 30, 2015, SDG&E’s natural gas revenues decreased by $17 million (15%) to $98 million, while the cost of natural gas sold decreased by $20 million (39%) to $31 million. The decrease in revenues was primarily due to:
 
§  
lower cost of natural gas sold, as we discuss below; offset by
 
§  
$4 million increase in revenues from CPUC-authorized 2015 attrition.
 
SDG&E’s average cost of natural gas for the three months ended June 30, 2015 was $3.56 per thousand cubic feet (Mcf) compared to $5.83 per Mcf for the corresponding period in 2014, a 39-percent decrease of $2.27 per Mcf, resulting in lower revenues and cost of $20 million.
 
During the six months ended June 30, 2015, SDG&E’s natural gas revenues decreased by $32 million (11%) to $259 million, and the cost of natural gas sold decreased by $41 million (33%) to $85 million. The decrease in revenues was primarily due to:
 
§  
lower cost of natural gas sold, and lower demand, as we discuss below; offset by
 
§  
$5 million increase in revenues from CPUC-authorized 2015 attrition; and
 
§  
$5 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses.
 
SDG&E’s average cost of natural gas for the six months ended June 30, 2015 was $3.91 per Mcf compared to $5.50 per Mcf for the corresponding period in 2014, a 29-percent decrease of $1.59 per Mcf, resulting in lower revenues and cost of $35 million. The decrease in the cost of natural gas sold was also due to lower demand for natural gas primarily from a warmer winter in 2015 compared to the same period in 2014, which resulted in lower revenues and cost of $6 million.
 

SOCALGAS
NATURAL GAS SALES AND TRANSPORTATION
(Volumes in billion cubic feet, dollars in millions)
   
Natural gas sales
Transportation
Total
Customer class
Volumes
Revenue
Volumes
Revenue
Volumes
Revenue
Six months ended June 30, 2015:
                 
    Residential
102
$
1,036
2
$
10
104
$
1,046
    Commercial and industrial
48
 
324
141
 
126
189
 
450
    Electric generation plants
 
69
 
16
69
 
16
    Wholesale
 
73
 
13
73
 
13
   
150
$
1,360
285
$
165
435
 
1,525
    Other revenues
               
90
    Balancing accounts
               
213
        Total(1)
             
$
1,828
Six months ended June 30, 2014:
                 
    Residential
109
$
1,189
1
$
6
110
$
1,195
    Commercial and industrial
48
 
411
145
 
132
193
 
543
    Electric generation plants
 
85
 
20
85
 
20
    Wholesale
 
72
 
13
72
 
13
   
157
$
1,600
303
$
171
460
 
1,771
    Other revenues
               
49
    Balancing accounts
               
182
        Total(1)
             
$
2,002
(1)
Includes sales to affiliates of $36 million in 2015 and $34 million in 2014.

 
During the three months ended June 30, 2015, SoCalGas’ natural gas revenues decreased by $137 million (15%) to $780 million, and the cost of natural gas sold decreased by $125 million (39%) to $196 million. The revenue decrease included
 
§  
the decrease in the cost of natural gas sold, offset by higher sales volumes, as we discuss below; and
 
§  
$72 million decrease resulting from the seasonalization of interim period recognition of annual core gas authorized revenue starting in 2015; offset by
 
§  
$21 million increase from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 and the first quarter of 2015 due to increased rate base;
 
§  
$18 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses;
 
§  
$17 million increase in revenues from CPUC-authorized 2015 attrition; and
 
§  
$9 million write-off in 2014 of certain costs incurred that were disallowed for recovery in the final PSEP decision.
 
SoCalGas’ average cost of natural gas for the three months ended June 30, 2015 was $3.08 per Mcf compared to $5.28 per Mcf for the corresponding period in 2014, a 42-percent decrease of $2.20 per Mcf, resulting in lower revenues and cost of $140 million. The decrease in the average cost of natural gas sold was offset by higher sales volumes, which resulted in higher revenues and cost of $15 million. The higher sales volumes were mainly driven by cooler weather in the second quarter of 2015 compared to the same quarter in 2014.
 
During the six months ended June 30, 2015, SoCalGas’ natural gas revenues decreased by $174 million (9%) to $1.8 billion, and the cost of natural gas sold decreased by $366 million (44%) to $463 million. The revenue decrease included
 
§  
the decrease in the cost of natural gas sold, as we discuss below; offset by
 
§  
$91 million increase resulting from the seasonalization of interim period recognition of annual core gas authorized revenue starting in 2015;
 
§  
$31 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses;
 
§  
$31 million higher revenues from CPUC-authorized 2015 attrition;
 
§  
$19 million increase from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base;
 
§  
$14 million GCIM award approved by the CPUC in February 2015; and
 
§  
$9 million write-off in 2014 of certain costs incurred that were disallowed for recovery in the final PSEP decision.
 
For the first six months of 2015, SoCalGas’ average cost of natural gas was $3.09 per Mcf compared to $5.27 per Mcf for the corresponding period in 2014, a 41-percent decrease of $2.18 per Mcf, resulting in lower revenues and cost of $327 million. The decrease in the average cost of natural gas sold was also due to lower demand for natural gas primarily from a warmer winter in 2015 compared to the same period in 2014, which resulted in lower revenues and cost of $39 million.
 
 
Other Utilities: Revenues and Cost of Sales
 
Revenues generated by Chilquinta Energía and Luz del Sur are based on tariffs that are set by government agencies in their respective countries based on an efficient model distribution company defined by those agencies. The bases for the tariffs do not meet the requirements necessary for regulatory accounting treatment under applicable accounting principles generally accepted in the United States of America (U.S. GAAP). We discuss revenue recognition further for Chilquinta Energía and Luz del Sur in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Operations of Mobile Gas, Willmut Gas and Ecogas qualify for regulatory accounting treatment under applicable U.S. GAAP, similar to the California Utilities.
 
The table below summarizes natural gas and electric revenues for our utilities outside of California for the six-month periods ended June 30, 2015 and 2014:
 

OTHER UTILITIES
NATURAL GAS AND ELECTRIC REVENUES
           
(Dollars in millions)
   
Six months ended
June 30, 2015
Six months ended
June 30, 2014
 
Volumes
Revenue
Volumes
Revenue
Natural Gas Sales (billion cubic feet):
           
Sempra Mexico – Ecogas
13
$
44
11
$
59
Sempra Natural Gas:
           
   Mobile Gas (including transportation)
24
 
49
20
 
52
   Willmut Gas
2
 
11
2
 
15
   Total
39
$
104
33
$
126
               
Electric Sales (million kilowatt hours):
           
Sempra South American Utilities:
           
   Luz del Sur
3,841
$
440
3,668
$
428
   Chilquinta Energía
1,496
 
266
1,496
 
265
   
5,337
 
706
5,164
 
693
   Other service revenues
   
20
   
25
   Total
 
$
726
 
$
718

 

Energy-Related Businesses: Revenues and Cost of Sales
 

The table below shows revenues and cost of sales for our energy-related businesses:
 


ENERGY-RELATED BUSINESSES: REVENUES AND COST OF SALES
       
(Dollars in millions)
       
   
Three months ended June 30,
Six months ended June 30,
   
2015
2014
2015
2014
Energy-related businesses revenues:
               
  Sempra South American Utilities
$
26
$
26
$
52
$
50
  Sempra Mexico
 
133
 
160
 
271
 
328
  Sempra Renewables
 
10
 
9
 
18
 
15
  Sempra Natural Gas
 
137
 
216
 
292
 
429
  Intersegment revenues, adjustments
               
     and eliminations(1)
 
(72)
 
(103)
 
(139)
 
(204)
       Total energy-related businesses revenues
$
234
$
308
$
494
$
618
Cost of natural gas, electric fuel
               
   and purchased power(2):
               
  Sempra South American Utilities
$
7
$
4
$
16
$
7
  Sempra Mexico
 
45
 
81
 
96
 
164
  Sempra Natural Gas
 
87
 
143
 
192
 
294
  Adjustments and eliminations(1)
 
(66)
 
(102)
 
(133)
 
(201)
       Total cost of natural gas, electric fuel
               
         and purchased power
$
73
$
126
$
171
$
264
Other cost of sales(2):
               
  Sempra South American Utilities
$
18
$
19
$
29
$
33
  Sempra Mexico
 
4
 
2
 
9
 
5
  Sempra Natural Gas
 
23
 
23
 
43
 
46
  Adjustments and eliminations(1)
 
(3)
 
(2)
 
(4)
 
(4)
       Total other cost of sales
$
42
$
42
$
77
$
80
(1)
Includes eliminations of intercompany activity.
       
(2)
Excludes depreciation and amortization, which are shown separately on the Condensed Consolidated Statements of Operations.

 
During the three months ended June 30, 2015, revenues from our energy-related businesses decreased by $74 million (24%) to $234 million. The decrease included
 
§  
$79 million decrease at Sempra Natural Gas mainly from lower natural gas prices, as well as from the deconsolidation of Cameron LNG, LLC as of October 1, 2014; and
 
§  
$27 million lower revenues at Sempra Mexico primarily due to lower natural gas and power prices and volumes, offset by higher transportation revenues from a section of the Sonora natural gas pipeline that commenced operations in the fourth quarter of 2014; offset by
 
§  
$31 million primarily from lower intercompany eliminations associated with sales between Sempra Natural Gas and Sempra Mexico.
 
During the three months ended June 30, 2015, the cost of natural gas, electric fuel and purchased power for our energy-related businesses decreased by $53 million (42%) to $73 million primarily due to:
 
§  
$56 million decrease at Sempra Natural Gas primarily due to lower natural gas costs; and
 
§  
$36 million decrease at Sempra Mexico primarily due to lower natural gas costs and volumes; offset by
 
§  
$36 million primarily from lower intercompany eliminations of costs associated with sales between Sempra Natural Gas and Sempra Mexico.
 
For the first six months of 2015, revenues from our energy-related businesses decreased by $124 million (20%) to $494 million. The decrease included
 
§  
$137 million decrease at Sempra Natural Gas mainly from lower natural gas prices, as well as from the deconsolidation of Cameron LNG, LLC as of October 1, 2014; and
 
§  
$57 million lower revenues at Sempra Mexico primarily due to lower natural gas and power prices and volumes, offset by higher transportation revenues from a section of the Sonora natural gas pipeline that commenced operations in the fourth quarter of 2014; offset by
 
§  
$65 million primarily from lower intercompany eliminations associated with sales between Sempra Natural Gas and Sempra Mexico.
 
For the first six months of 2015, the cost of natural gas, electric fuel and purchased power for our energy-related businesses decreased by $93 million (35%) to $171 million primarily due to:
 
§  
$102 million decrease at Sempra Natural Gas primarily due to lower natural gas costs; and
 
§  
$68 million decrease at Sempra Mexico primarily due to lower natural gas costs and volumes; offset by
 
§  
$68 million from lower intercompany eliminations of costs associated with sales between Sempra Natural Gas and Sempra Mexico.
 
 
Operation and Maintenance
 
Sempra Energy Consolidated
 
Our operation and maintenance expenses decreased by $16 million (2%) to $713 million in the three months ended June 30, 2015 and decreased by $34 million (2%) but remained at $1.4 billion in the first six months of 2015.
 
SDG&E
 
For the three months ended June 30, 2015, SDG&E’s operation and maintenance expenses decreased by $1 million to $255 million primarily due to:
 
§  
$13 million lower expenses associated with CPUC-authorized refundable programs, for which all costs incurred are fully recovered in revenue (refundable program expenses); offset by
 
§  
$5 million higher litigation expense; and
 
§  
$5 million higher non-refundable operating costs, including labor, contract services and administrative and support costs.
 
In the first six months of 2015, SDG&E’s operation and maintenance expenses decreased by $36 million (7%) to $472 million primarily due to:
 
§  
$26 million lower non-refundable operating costs, including $12 million lower major maintenance costs at its electric generating facilities, as well as labor, contract services and administrative and support costs; and
 
§  
$10 million lower expenses associated with CPUC-authorized refundable programs, for which all costs incurred are fully recovered in revenue (refundable program expenses).
 
SoCalGas
 
For the three months ended June 30, 2015, SoCalGas’ operation and maintenance expenses increased by $9 million (3%) to $346 million primarily due to:
 
§  
$18 million higher expenses associated with CPUC-authorized refundable programs for which all costs incurred are fully recovered in revenue (refundable program expenses); offset by
 
§  
$7 million lower non-refundable operating costs, including labor, contract services and administrative and support costs; and
 
§  
$2 million lower litigation expense, including $6 million from the favorable resolution of a legal settlement in 2015, offset by $4 million higher other litigation expense.
 
In the first six months of 2015, SoCalGas’ operation and maintenance expenses increased by $18 million (3%) to $660 million primarily due to:
 
§  
$31 million higher expenses associated with CPUC-authorized refundable programs for which all costs incurred are fully recovered in revenue (refundable program expenses); offset by
 
§  
$11 million lower non-refundable operating costs, including labor, contract services and administrative and support costs; and
 
§  
$2 million lower litigation expense, including $6 million from the favorable resolution of a legal settlement in 2015, offset by $4 million higher other litigation expense.
 
 
Plant Closure Adjustment
 
SDG&E has a 20-percent ownership interest in SONGS, a nuclear generating facility near San Clemente, California. SONGS’ Units 2 and 3 were shut down in early 2012 due to steam generator issues, and, in June 2013, Southern California Edison, the majority owner and operator of SONGS, made a decision to permanently retire these two units. In the second quarter of 2013, SDG&E recorded a pretax charge of $200 million, which represents the portion of SDG&E’s investment in SONGS and associated costs that management estimated may not be recovered in rates based on prior CPUC precedent. In addition to the plant closure loss recorded in 2013, during the first quarter of 2014, SDG&E recorded a $13 million pretax reduction to the loss from plant closure. During the first quarter of 2015, SDG&E recorded a $21 million pretax reduction to the loss from plant closure. We discuss SONGS further in Note 9 of the Notes to Condensed Consolidated Financial Statements herein.
 
 
Gain on Sale of Equity Interest and Assets
 
In the second quarter of 2015, Sempra Natural Gas completed the sale of the remaining 625-MW block of the Mesquite Power plant for net cash proceeds of $347 million, resulting in a pretax gain on sale of the asset of $61 million ($36 million after-tax). In the first quarter of 2014, Sempra Renewables recorded a pretax gain of $27 million ($16 million after-tax) from the sale of a 50-percent equity interest in Copper Mountain Solar 3.
 
 
Other Income, Net
 
Sempra Energy Consolidated
 
For the three months and six months ended June 30, 2015, other income, net, decreased by $12 million and $13 million, respectively.
 
The decrease in the three-month period was primarily due to:
 
§  
$2 million investment losses in 2015 compared to $15 million gains in 2014 on dedicated assets in support of our executive retirement and deferred compensation plans; and
 
§  
$3 million losses on interest rate and foreign exchange instruments in 2015 compared to $11 million gains in 2014; offset by
 
§  
$7 million increase in equity-related AFUDC at the California Utilities; and
 
§  
$6 million income from the sale of other investments.
 
The decrease in the six-month period was primarily due to:
 
§  
$16 million lower investment gains on dedicated assets in support of our executive retirement and deferred compensation plans; and
 
§  
$3 million losses on interest rate and foreign exchange instruments in 2015 compared to $16 million gains in 2014; offset by
 
§  
$9 million increase in equity-related AFUDC, primarily at SoCalGas; and
 
§  
$6 million income from the sale of other investments.
 

 
Income Taxes
 
The table below shows the income tax expense and effective income tax rates for Sempra Energy, SDG&E and SoCalGas.
 

INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
         
Effective
       
Effective
 
     
Income tax
 
income
   
Income tax
 
income
 
     
expense
 
tax rate
   
expense
 
tax rate
 
     
Three months ended June 30,
     
2015
 
2014
Sempra Energy Consolidated
$
98
 
25
%
$
93
 
25
%
SDG&E
 
54
 
29
   
69
 
35
 
SoCalGas
 
16
 
18
   
28
 
26
 
     
Six months ended June 30,
     
2015
 
2014
Sempra Energy Consolidated
$
261
 
26
%
$
220
 
29
%
SDG&E
 
142
 
34
   
152
 
40
 
SoCalGas
 
111
 
28
   
66
 
29
 

Sempra Energy Consolidated
 
The increase in income tax expense in the three months ended June 30, 2015 was mainly due to higher pretax income.
 
The increase in income tax expense in the six months ended June 30, 2015 was mainly due to higher pretax income, offset by a lower effective income tax rate. The lower effective income tax rate was primarily due to:
 
§  
a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS that we discuss in Note 9 of the Notes to Condensed Consolidated Financial Statements herein; and
 
§  
favorable resolution of prior years’ income tax items in 2015.
 
As noted in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report, all repatriated earnings (reduced for previously taxed income) are subject to U.S. income tax (with credits for foreign income taxes), and repatriation from Peru is subject to local country withholding tax. We plan to repatriate a portion of current year earnings from certain of our non-U.S. subsidiaries in Mexico and Peru. Because this potential repatriation would only be from earnings since January 1, 2015, it does not change our current assertion that we intend to continue to indefinitely reinvest our cumulative undistributed non-U.S. earnings from prior years. Therefore, we do not intend to use these cumulative undistributed earnings as a source of funding for U.S. operations.
 
As we discuss in Note 5 of the Notes to Condensed Consolidated Financial Statements herein, Sempra Energy, SDG&E and SoCalGas record income taxes for interim periods utilizing a forecasted effective tax rate anticipated for the full year, as required by U.S. GAAP. The income tax effect of items that can be reliably forecasted on a full year basis are factored into the forecasted effective tax rate and their impact is recognized proportionately over the year. Items that cannot be reliably forecasted are recorded in the interim period in which they actually occur, which can result in variability to income tax expense.
 
Due to the extension of bonus depreciation, Sempra Energy generated a U.S. federal net operating loss (NOL) in 2011, 2012, 2013 and 2014. We further discuss the impact of NOLs on Sempra Energy in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report and in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report.
 
SDG&E
 
The decrease in SDG&E’s income tax expense in the three months ended June 30, 2015 was due to lower pretax income and a lower effective income tax rate, which was primarily from the favorable resolution of prior years’ income tax items in 2015.
 
The decrease in SDG&E’s income tax expense in the six months ended June 30, 2015 was due to a lower effective income tax rate, offset by higher pretax income. The lower effective income tax rate was primarily due to:
 
§  
a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS that we discuss in Note 9 of the Notes to Condensed Consolidated Financial Statements herein; and
 
§  
favorable resolution of prior years’ income tax items in 2015.
 
The results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is not included in Sempra Energy’s federal or state income tax returns but is consolidated for financial statement purposes, and therefore, Sempra Energy Consolidated’s and SDG&E’s effective income tax rates are impacted by the VIE’s stand-alone effective income tax rate. We discuss Otay Mesa VIE further in Note 5 of the Notes to Condensed Consolidated Financial Statements herein.
 
 
SoCalGas
 
The decrease in SoCalGas’ income tax expense in the three months ended June 30, 2015 was due to lower pretax income and a lower effective income tax rate. The lower pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10 of the Notes to Condensed Consolidated Financial Statements herein. The lower effective income tax rate was primarily due to:
 
§  
favorable resolution of prior years’ income tax items in 2015;
 
§  
higher exclusions from taxable income of the equity portion of AFUDC; and
 
§  
higher favorable impact of deductions for self-developed software expenditures.
 
The increase in SoCalGas’ income tax expense in the six months ended June 30, 2015 was mainly due to higher pretax income, offset by a lower effective income tax rate. The higher pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10 of the Notes to Condensed Consolidated Financial Statements herein. The lower effective income tax rate was primarily due to the favorable resolution of prior years’ income tax items in 2015.
 
SDG&E and SoCalGas both generated a U.S. federal NOL in 2011 and 2012, primarily due to bonus depreciation. We further discuss the impact of NOLs on SDG&E and SoCalGas in “Results of Operations – Changes in Revenues, Costs of Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report and in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Foreign Currency Exchange Rate and Inflation Impact on Income Taxes and Related Economic Hedging Activity
 
Our Mexican subsidiaries have U.S. dollar denominated cash balances, receivables and payables (monetary assets and liabilities) that give rise to Mexican currency exchange rate movements for Mexican income tax purposes. They also have deferred income tax assets and liabilities that are denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes.
 
The fluctuations in both the currency exchange rate for the Mexican peso against the U.S. dollar, with regard to Mexican monetary assets and liabilities, and Mexican inflation are subject to Mexican income tax and thus may expose us to fluctuations in our income tax expense. The income tax expense of Sempra Mexico is impacted by these factors. From time to time, we may utilize short-term foreign currency derivatives at our subsidiaries and at the consolidated level as a means to manage these exposures.
 
The income tax expense of our South American subsidiaries is similarly impacted by the factors we discuss above. Such impact was not material in either the three months or six months ended June 30, 2015 or 2014.
 

For Sempra Energy Consolidated, the impacts at Sempra Mexico related to the factors described above are as follows:
 

MEXICAN CURRENCY IMPACT ON INCOME TAXES AND RELATED ECONOMIC HEDGING ACTIVITY
   
(Dollars in millions)
       
     
    Three months ended June 30,
Six months ended June 30,
     
2015
2014
2015
2014
Income tax benefit on currency exchange
               
 
rate movement of monetary assets and liabilities
 
$
4
$
$
8
$
Translation of non-U.S. deferred income tax balances
 
2
 
 
4
 
Income tax expense on inflation
   
 
 
 
(1)
 
Total impact included in Income Tax Benefit (Expense)
   
6
 
 
12
 
(1)
After-tax losses on Mexican peso exchange rate
                 
 
instruments (included in Other Income, Net)
   
(1)
 
 
(1)
 
Net impacts on Sempra Energy Condensed
                 
 
Consolidated Statements of Operations
 
$
5
$
$
11
$
(1)


 
Equity Earnings, Net of Income Tax
 

For the three months and six months ended June 30, 2015, equity earnings, net of income tax, increased by $13 million and $22 million, respectively, primarily due to the start of operations of Los Ramones I, a pipeline project which Sempra Mexico owns through its joint venture with Petróleos Mexicanos (or PEMEX, the Mexican state-owned oil company).
 


 
Earnings Attributable to Noncontrolling Interests
 

Earnings attributable to noncontrolling interests increased by $2 million and $4 million in the three months and six months ended June 30, 2015, respectively. The changes included increases of $5 million and $6 million, respectively, attributable to noncontrolling interests of IEnova.
 


 
Earnings
 

We discuss variations in earnings by segment above in “Segment Results.”
 


 
 

CAPITAL RESOURCES AND LIQUIDITY
 

We expect our cash flows from operations to fund a substantial portion of our capital expenditures and dividends. In addition, we may meet our cash requirements through the issuance of securities, distributions from our equity method investments and project financing.
 
Our lines of credit provide liquidity and support commercial paper. As we discuss in Note 6 of the Notes to Condensed Consolidated Financial Statements herein, Sempra Energy, Sempra Global (the holding company for our subsidiaries not subject to California utility regulation) and the California Utilities each have five-year revolving credit facilities, expiring in 2017. At Sempra Energy and the California Utilities, the agreements are syndicated broadly among 24 different lenders and at Sempra Global, among 25 different lenders. No single lender has greater than a 7-percent share in any agreement. The table below shows the amount of available funds under these credit facilities at June 30, 2015:
 


AVAILABLE FUNDS AT JUNE 30, 2015
(Dollars in millions)
   
Sempra Energy
   
   
Consolidated
SDG&E
SoCalGas
Unrestricted cash and cash equivalents(1)
$
636
$
23
$
231
Available unused credit(2)
 
3,493
 
618
 
658
(1)
Amounts at Sempra Energy Consolidated include $372 million held in non-U.S. jurisdictions that are unavailable to fund U.S. operations unless repatriated, as we discuss below.
(2)
Available credit is the total available on Sempra Energy's, Sempra Global's and the California Utilities' credit facilities that we discuss in Note 6 of the Notes to Condensed Consolidated Financial Statements herein. Borrowings on the shared line of credit at SDG&E and SoCalGas are limited to $658 million for each utility and a combined total of $877 million. SDG&E's available funds reflect commercial paper outstanding of $40 million supported by the line. Some of Sempra Energy's subsidiaries, primarily our foreign operations, have additional general purpose credit facilities, aggregating $848 million at June 30, 2015. Available unused credit on these lines totaled $576 million at June 30, 2015.
 
 
Sempra Energy Consolidated
 
We believe that these available funds, combined with cash flows from operations, distributions from equity method investments, proceeds of securities issuances, project financing and partnering in joint ventures will be adequate to fund operations, including to:
 
§  
finance capital expenditures
 
§  
meet liquidity requirements
 
§  
fund shareholder dividends
 
§  
fund new business acquisitions or start-ups
 
§  
repay maturing long-term debt
 
In June 2015, SoCalGas issued $250 million of 1.55-percent and $350 million of 3.20-percent first mortgage bonds maturing in 2018 and 2025, respectively. In March 2015, Sempra Energy issued $500 million of 2.40-percent notes maturing in 2020. Also in March 2015, SDG&E issued $140 million of variable rate first mortgage bonds maturing in 2017 and $250 million of 1.914-percent amortizing first mortgage bonds maturing in 2022. In 2014, Sempra Energy and SoCalGas publicly offered and sold debt securities totaling $500 million and $750 million, respectively. Sempra Energy and the California Utilities currently have ready access to the long-term debt markets and are not currently constrained in their ability to borrow at reasonable rates. However, changing economic conditions could affect the availability and cost of both short-term and long-term financing. Also, cash flows from operations may be impacted by the timing of completion of large projects at Sempra International and Sempra U.S. Gas & Power. If cash flows from operations were to be significantly reduced or we were unable to borrow under acceptable terms, we would likely first reduce or postpone discretionary capital expenditures (not related to safety) and investments in new businesses. If these measures were necessary, they would primarily impact certain of our Sempra International and Sempra U.S. Gas & Power businesses before we would reduce funds necessary for the ongoing needs of our utilities. We monitor our ability to finance the needs of our operating, investing and financing activities in a manner consistent with our intention to maintain strong, investment-grade credit ratings and capital structure.
 
In addition to capital expenditures, changes in publicly traded debt securities and net changes to commercial paper borrowings on the Sempra Global and California Utilities credit facilities, the net increase in Sempra Energy Consolidated cash and cash equivalents at June 30, 2015 compared to December 31, 2014 of $66 million was primarily due to cash flows from operations, partially offset by common dividends paid and a decrease in foreign cash used to repay short-term debt. Proceeds received from Sempra Natural Gas’ sale of the remaining 625-MW block of its Mesquite Power plant were used to pay down commercial paper borrowings.
 
At June 30, 2015, our cash and cash equivalents held in non-U.S. jurisdictions that are unavailable to fund U.S. operations unless repatriated are $372 million. As we discuss in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” above, we plan to repatriate a portion of current year earnings from certain of our non-U.S. subsidiaries in Mexico and Peru. Because this potential repatriation would only be from earnings since January 1, 2015, it does not change our current assertion that we intend to continue to indefinitely reinvest our cumulative undistributed non-U.S. earnings from prior years. Therefore, we do not intend to use these cumulative undistributed earnings as a source of funding for U.S. operations.
 
We have significant investments in several trusts to provide for future payments of pensions and other postretirement benefits, and nuclear decommissioning. Changes in asset values, which are dependent on the activity in the equity and fixed income markets, have not affected the trust funds’ abilities to make required payments. However, changes in asset values may, along with a number of other factors such as changes to discount rates, assumed rates of return, mortality tables, and regulations, impact funding requirements for pension and other postretirement benefit plans and SDG&E’s nuclear decommissioning trusts. At the California Utilities, funding requirements are generally recoverable in rates.
 
We discuss our principal credit agreements more fully in Note 6 of the Notes to Condensed Consolidated Financial Statements herein.
 
Our short-term debt is primarily used to meet liquidity requirements, fund shareholder dividends, temporarily finance capital expenditures, and fund new business acquisitions or start-ups. Our corporate short-term, unsecured promissory notes, or commercial paper, were our primary sources of short-term debt funding in the first six months of 2015. At our California Utilities, short-term debt is used to meet working capital needs and temporarily finance capital expenditures.
 
 
Master Limited Partnership
 
In June 2015, we announced that our Board of Directors authorized us to pursue the formation and initial public offering of a master limited partnership (MLP) to be called Sempra Partners, LP. Initially, the MLP is expected to own one or more of the following assets: an interest in a U.S. entity with contracts related to deliveries of LNG at the Energía Costa Azul regasification facility; interests in certain of Sempra Energy’s contracted renewable energy projects; or other assets with attributes attractive for inclusion in the MLP. Further, we expect to grant the MLP a right of first offer on certain LNG-related infrastructure projects, including our 50-percent interest in the first three trains of the Cameron natural gas liquefaction terminal and our 100-percent interest in the Cameron Interstate Pipeline, as well as our interests in certain contracted wind and solar projects. We expect the MLP to file a registration statement with the Securities and Exchange Commission in the second half of 2015. The anticipated offering would be subject to the final approval of our Board of Directors and market conditions. There can be no assurance as to the timing or consummation of any MLP transaction. Our announcement of this plan did not, and this disclosure does not, constitute an offer to sell or the solicitation of an offer to buy any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.
 

 
California Utilities
 

SDG&E and SoCalGas expect that available funds, cash flows from operations and debt issuances will continue to be adequate to meet their working capital and capital expenditure requirements.
 
SoCalGas declared and paid $100 million in common dividends in 2014 and $50 million in 2013. As a result of an increase in SoCalGas’ capital investment programs over the next few years, and the increase in SoCalGas’ authorized common equity weighting effective January 1, 2013 as approved by the CPUC in the most recent cost of capital proceeding, SoCalGas’ dividends on common stock declared on an annual historical basis may not be indicative of future declarations, or may be temporarily suspended over the next few years to maintain SoCalGas’ authorized capital structure during the periods of high capital investments. We discuss the cost of capital proceeding in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 
SDG&E declared and paid common dividends of $200 million in 2014. As a result of SDG&E’s large capital investment program over the past few years, SDG&E did not pay common dividends to Sempra Energy in 2013. However, due to the completion of construction of the Sunrise Powerlink transmission power line in June 2012, SDG&E resumed the declaration and payment of dividends on its common stock in 2014.
 
SDG&E uses the Energy Resource Recovery Account (ERRA) balancing account to record the net of its actual cost incurred for electric fuel and purchased power and the amount billed to customers in rates. Primarily as a result of delays in the CPUC issuing final decisions on SDG&E’s ERRA-related filings, SDG&E’s ERRA balance at both June 30, 2015 and December 31, 2014 was undercollected by $280 million. We discuss CPUC decisions in 2014 regarding rate changes resulting from the approved revenue requirement for ERRA costs in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. We provide information on how the increasing undercollected balance in ERRA has impacted SDG&E in our discussion of “Cash Flows From Operating Activities” below.
 
SDG&E will redeem, prior to maturity, certain outstanding long-term debt instruments with a total principal amount of $169 million. Accordingly, the debt is classified as current portion of long-term debt at June 30, 2015 on Sempra Energy’s and SDG&E’s Condensed Consolidated Balance Sheets. The coupon rate of these instruments ranges from 4.9 percent to 5.5 percent, with maturities from 2021 to 2027. The redemption is anticipated to occur during the third quarter of 2015.
 


 
Sempra South American Utilities
 

We expect projects and loans to affiliates at Chilquinta Energía and Luz del Sur to be funded by available funds, funds internally generated by those businesses and by external borrowings.
 


 
Sempra Mexico
 

We expect projects, joint venture investments and dividends in Mexico to be funded through a combination of available funds, including credit facilities, funds internally generated by the Mexico businesses, securities issuances, project financing, interim funding from the parent, and partnering in joint ventures. We expect IEnova’s pending acquisition of its joint venture partner’s 50-percent interest in Gasoductos de Chihuahua (GdC) to be funded with a combination of debt and equity issuances at IEnova. Sempra Global has committed to IEnova to provide up to $1.325 billion of interim financing for the transaction. The commitment expires no later than the end of 2015. If IEnova elects to borrow money under this commitment, the loan will have a term of two months at an interest rate of one month LIBOR plus 120 basis points. The term may be extended, triggering a reevaluation of the interest rate. We expect to fund this commitment primarily with commercial paper under Sempra Global’s credit facility. We discuss this pending acquisition from Sempra Mexico’s joint venture partner, Petróleos Mexicanos (or PEMEX, the Mexican state-owned oil company) further in Note 13 of the Notes to Condensed Consolidated Financial Statements herein.
 


 
Sempra Renewables
 

We expect Sempra Renewables to require funds for the development of and investment in electric renewable energy projects. Projects at Sempra Renewables may be financed through a combination of operating cash flow, project financing, funds from the parent, partnering in joint ventures, and other forms of equity sales. The Sempra Renewables projects have planned in-service dates through 2016.
 


 
Sempra Natural Gas
 

We expect Sempra Natural Gas to require funding for the development and expansion of its portfolio of projects, which may be financed through a combination of operating cash flow, funding from the parent and project financing. In April 2015, Sempra Natural Gas invested $113 million in Rockies Express Pipeline LLC (Rockies Express) to repay project debt that matured in early 2015.
 
In April 2015, Sempra Natural Gas sold the remaining 625-MW block of the Mesquite Power plant, together with a related power sales contract, and received net cash proceeds of $347 million. The sale proceeds were used to pay down commercial paper at Sempra Energy. We discuss this sale further in Note 3 of the Notes to Condensed Consolidated Financial Statements herein.
 
Sempra Natural Gas, through the Cameron LNG Holdings, LLC (Cameron LNG Holdings or Cameron LNG JV) joint venture, is developing a natural gas liquefaction export facility at the Cameron LNG JV terminal. The majority of the liquefaction project is project-financed, with most or all of the remainder of the capital requirements to be provided by the project partners, including Sempra Energy, through equity contributions under a joint venture agreement. We expect that our remaining equity requirements to complete the project will be met by a combination of our share of cash generated from each liquefaction train as it comes on line and additional cash contributions. Under the financing agreements, Sempra Energy signed completion guarantees for 50.2 percent of the debt, which corresponds to $3.7 billion of the total $7.4 billion principal amount of the debt committed under the financing agreements. The project financing and completion guarantees became effective on October 1, 2014, the effective date of the joint venture formation. The completion guarantees will terminate upon satisfaction of certain conditions, including all three trains achieving commercial operation and meeting certain operational performance tests. The completion guarantees are anticipated to be terminated in the second half of 2019.
 
We discuss Cameron LNG JV and the joint venture financing further in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Some of Sempra Natural Gas’ long-term power sale contracts contain collateral requirements which require its affiliates and/or the counterparty to post cash or other acceptable collateral to the other party for exposure in excess of established thresholds. Sempra Natural Gas may be required to provide collateral when the fair value of the contract with our counterparty exceeds established thresholds. We have no collateral receivables or payables with our counterparties at June 30, 2015 pursuant to these requirements.
 


 
CASH FLOWS FROM OPERATING ACTIVITIES
 


CASH PROVIDED BY OPERATING ACTIVITIES
(Dollars in millions)
 
Six months ended
June 30, 2015
2015 Change
Six months ended
June 30, 2014
Sempra Energy Consolidated
$
1,219
$
185
18
%
$
1,034
SDG&E
 
550
 
142
35
   
408
SoCalGas
 
483
 
20
4
   
463
 

Sempra Energy Consolidated
 
Cash provided by operating activities at Sempra Energy increased in 2015 primarily due to:
 
§  
$300 million higher net income, adjusted for noncash items included in earnings, in 2015 compared to 2014, primarily due to improved operations and lower cost of electric fuel and purchased power at SDG&E, as well as the impact of the seasonalization during interim periods of authorized core customer revenue in 2015 at SoCalGas, as we discuss in “Results of Operations” above. The impact of seasonalization in net income is offset by working capital changes in regulatory balancing accounts;
 
§  
$37 million net increase in net undercollected regulatory balancing accounts in 2015 at the California Utilities (including long-term amounts included in regulatory assets) compared to a $289 million net increase in 2014. Over- and undercollected regulatory balancing accounts reflect the difference between customer billings and recorded or CPUC-authorized costs. These differences are required to be balanced over time. See further discussion of changes in regulatory balances at both SDG&E and SoCalGas below; and
 
§  
$124 million decrease in inventories in 2015 compared to a $16 million decrease in 2014, primarily due to higher net withdrawal and lower prices of natural gas at SoCalGas; offset by
 
§  
$198 million decrease in accounts payable in 2015 compared to a $29 million increase in 2014, primarily due to lower purchase volume and lower average cost of natural gas purchased at SoCalGas;
 
§  
$112 million increase in greenhouse gas allowances ($79 million at SDG&E and $33 million at SoCalGas);
 
§  
$41 million increase in the seasonal asset related to temporary LIFO liquidation in 2015 at SoCalGas, primarily due to changes in natural gas inventory value, as we discuss in Note 5 of the Notes to Condensed Consolidated Financial Statements herein; and
 
§  
$216 million decrease in accounts receivable in 2015 compared to a $260 million decrease in 2014.
 
 
SDG&E
 
Cash provided by operating activities at SDG&E increased in 2015 primarily due to:
 
§  
$102 million decrease in net undercollected regulatory balancing accounts in 2015 compared to a $152 million increase in 2014 (including long-term amounts included in regulatory assets). The impact of the change in the regulatory balancing accounts on cash provided by operating activities was primarily due to:
 
□  
$13 million increase in 2015 compared to a $200 million increase in 2014 in the undercollected balance for electric commodity costs and costs at SDG&E's electric generating facilities; and
 
□  
$31 million decrease in 2015 compared to a $44 million increase in 2014 in the undercollected balance in the electric rate design balancing account; and
 
§  
$63 million higher net income, adjusted for noncash items included in earnings, in 2015 compared to 2014, primarily due to improved operations and lower cost of electric fuel and purchased power; offset by
 
§  
$79 million increase in greenhouse gas allowances in 2015;
 
§  
$60 million increase in income taxes receivable in 2015; and
 
§  
$19 million decrease in accounts payable to affiliates in 2015.
 
 
SoCalGas
 
Cash provided by operating activities at SoCalGas increased in 2015 primarily due to:
 
§  
$144 million higher net income, adjusted for noncash items included in earnings, in 2015 compared to 2014, primarily due to improved operations and the impact of the seasonalization during interim periods of authorized core customer revenue in 2015;
 
§  
$124 million decrease in inventories in 2015 compared to a $5 million decrease in 2014, primarily due to higher net withdrawal and lower prices of natural gas in 2015; and
 
§  
$21 million increase in income taxes payable in 2015 compared to a $12 million decrease in 2014; offset by
 
§  
$224 million decrease in accounts payable in 2015 compared to a $31 million decrease in 2014. The decrease in 2015 was primarily due to lower volumes and average cost of natural gas purchased;
 
§  
$41 million increase in the seasonal asset related to temporary LIFO liquidation in 2015, primarily due to changes in natural gas inventory value;
 
§  
$33 million increase in greenhouse gas allowances in 2015; and
 
§  
$139 million increase in net undercollected regulatory balancing accounts in 2015 (including long-term amounts included in regulatory assets) compared to a $137 million increase in 2014, primarily due to:
 
□  
$127 million increase in 2015 compared to an $82 million increase in 2014 in the undercollected balance associated with the fixed cost balancing accounts, offset by
 
□  
$56 million decrease in 2015 compared to a $93 million decrease in 2014 in the overcollected balance associated with public purpose programs.
 
 
 
The table below shows the contributions to pension and other postretirement benefit plans.
 

CONTRIBUTIONS TO PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
(Dollars in millions)
 
Six months ended June 30, 2015
     
Other
 
Pension
postretirement
 
benefits
benefits
Sempra Energy Consolidated
$
17
$
1
SDG&E
 
2
 
SoCalGas
 
1
 

 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 


CASH USED IN INVESTING ACTIVITIES
(Dollars in millions)
 
Six months ended
 
Six months ended
 
June 30, 2015
2015 Change
June 30, 2014
Sempra Energy Consolidated
$
(1,201)
$
(420)
(26)
%
$
(1,621)
SDG&E
 
(606)
 
57
10
   
(549)
SoCalGas
 
(882)
 
382
76
   
(500)
 
 
Sempra Energy Consolidated
 
Cash used in investing activities at Sempra Energy decreased in 2015 primarily due to:
 
§  
$347 million of net proceeds received from Sempra Natural Gas’ sale of the remaining 625-MW block of its Mesquite Power plant; and
 
§  
$74 million repayments of advances to unconsolidated affiliates; offset by
 
§  
in 2014, $66 million, net of $2 million cash sold, of proceeds received from the sale of a 50-percent equity interest in Copper Mountain Solar 3.
 
 
SDG&E
 
Cash used in investing activities at SDG&E increased in 2015 due to a $57 million increase in capital expenditures.
 
 
SoCalGas
 
Cash used in investing activities at SoCalGas increased in 2015 due to:
 
§  
$279 million of advances to Sempra Energy; and
 
§  
$103 million increase in capital expenditures.
 

 
ANNUAL CONSTRUCTION EXPENDITURES AND INVESTMENTS
 
The amounts and timing of capital expenditures are generally subject to approvals by various regulatory and other governmental and environmental bodies, including the CPUC and the Federal Energy Regulatory Commission (FERC). However, in 2015, we expect to make capital expenditures and investments of approximately $3.5 billion. These expenditures include
 
§  
$2.4 billion at the California Utilities for capital projects and plant improvements ($1.1 billion at SDG&E and $1.3 billion at SoCalGas)
 
§  
$1.1 billion at our other subsidiaries for capital projects in Mexico and South America, and development of LNG, natural gas and renewable generation projects
 
The California Utilities’ 2015 planned capital expenditures and investments include
 
 
SDG&E
 
§  
$700 million for improvements to natural gas and electric distribution systems
 
§  
$400 million for improvements to electric transmission systems
 
 
SoCalGas
 
§  
$1.1 billion for improvements to distribution, transmission and storage systems, and for pipeline safety
 
§  
$210 million for advanced metering infrastructure
 
§  
$30 million for other natural gas projects
 
The California Utilities expect to finance these expenditures and investments with cash flows from operations and debt issuances.
 
In 2015, the expected capital expenditures and investments of approximately $1.1 billion (excluding amounts expended by joint ventures and net of anticipated project financing and joint venture structures as noted below) at our other subsidiaries include
 
 
Sempra South American Utilities
 
§  
approximately $210 million for capital projects in South America (approximately $160 million and $50 million in Peru and Chile, respectively), primarily related to improvements to electric transmission and distribution systems
 
 
Sempra Mexico
 
§  
approximately $430 million for capital projects in Mexico, net of project financing, including approximately $380 million for the development of the Sonora, Ojinaga, and San Isidro - Samalayuca pipeline projects, all developed solely by Sempra Mexico. These amounts exclude the pending acquisition of our joint venture partner’s 50-percent interest in GdC, as we discuss in Note 13 of the Notes to Condensed Consolidated Financial Statements herein. Also, following the pending acquisition, Sempra Mexico would fund 100 percent of the joint venture’s projects, excluding the Los Ramones Norte pipeline project
 
 
Sempra Renewables
 
§  
approximately $120 million for the development of wind and solar renewable projects, including the Black Oak Getty wind project, Mesquite Solar 2, Mesquite Solar 3 and Copper Mountain Solar 4
 
 
Sempra Natural Gas
 
§  
approximately $320 million for development of LNG and natural gas transportation projects, including
 
□  
approximately $160 million equity investment in Rockies Express
 
□  
approximately $50 million capitalized interest related to our investment in the Cameron LNG JV project, and $60 million for development of the Cameron Interstate Pipeline
 
 
Parent and Other
 
§  
approximately $40 million related to the build-to-suit lease for Sempra Energy’s new headquarters
 
Capital expenditure amounts include capitalized interest. At the California Utilities, the amounts also include the portion of AFUDC related to debt, but exclude the portion of AFUDC related to equity. At Sempra Mexico and Sempra Natural Gas, the amounts also exclude AFUDC related to equity. We provide further details about AFUDC in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 


CASH FLOWS FROM FINANCING ACTIVITIES
(Dollars in millions)
 
Six months ended
 
Six months ended
 
June 30, 2015
2015 Change
June 30, 2014
Sempra Energy Consolidated
$
50
$
(422)
 
$
472
SDG&E
 
71
 
(64)
   
135
SoCalGas
 
545
 
519
   
26
 
Sempra Energy Consolidated
 
Cash provided by financing activities at Sempra Energy decreased in 2015 primarily due to:
 
§  
$798 million lower issuances of debt, including a decrease in commercial paper and other short-term debt borrowings with maturities greater than 90 days of $1.2 billion ($19 million increase in 2015 compared to $1.2 billion in 2014), offset by an increase in issuances of long-term debt of $373 million ($1.5 billion in 2015 compared to $1.2 billion in 2014); and
 
§  
$339 million decrease in short-term debt in 2015 compared to a $54 million decrease in 2014; offset by
 
§  
$629 million lower payments on debt, including lower payments of long-term debt of $931 million ($172 million in 2015 compared to $1.1 billion in 2014), offset by higher payments of commercial paper and other short-term debt with maturities greater than 90 days of $302 million ($674 million in 2015 compared to $372 million in 2014).
 
 
SDG&E
 
Cash provided by financing activities at SDG&E decreased in 2015 primarily due to:
 
§  
$206 million decrease in short-term debt in 2015 compared to a $68 million increase in 2014; and
 
§  
$85 million higher payments on long-term debt in 2015; offset by
 
§  
$288 million higher issuances of long-term debt in 2015.
 
 
SoCalGas
 
Cash provided by financing activities at SoCalGas increased in 2015 primarily due to:
 
§  
$351 million higher issuances of long-term debt in 2015; and
 
§  
$250 million payments on long-term debt in 2014; offset by
 
§  
$50 million decrease in short-term debt in 2015 compared to a $31 million increase in 2014.
 

 
COMMITMENTS
 

We discuss significant changes to contractual commitments at Sempra Energy, SDG&E and SoCalGas in Note 11 of the Notes to Condensed Consolidated Financial Statements herein.
 


 
CREDIT RATINGS
 

The credit ratings of Sempra Energy, SDG&E and SoCalGas remained at investment grade levels during the first six months of 2015. Our credit ratings may affect the rates at which borrowings bear interest and of commitment fees on available unused credit. We provide additional information about our credit ratings at Sempra Energy, SDG&E and SoCalGas in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 


 
 

FACTORS INFLUENCING FUTURE PERFORMANCE
 


 
CALIFORNIA UTILITIES
 


 
Overview
 

The California Utilities’ operations have historically provided relatively stable earnings and liquidity.
 
The California Utilities’ performance will depend primarily on the ratemaking and regulatory process, environmental regulations, economic conditions, actions by the California legislature and the changing energy marketplace. Their performance will also depend on the successful completion of capital projects that we discuss in various sections of this report and below. We discuss certain regulatory matters below and in Notes 9 and 10 of the Notes to Condensed Consolidated Financial Statements herein and Notes 13 and 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
Joint Matters
 

Natural Gas Pipeline Operations Safety Assessments
 
Pending the outcome of the various regulatory agency evaluations of natural gas pipeline safety regulations, practices and procedures, Sempra Energy, including the California Utilities, may incur incremental expense and capital investment associated with their natural gas pipeline operations and investments. In August 2011, SoCalGas, SDG&E, Pacific Gas and Electric Company (PG&E) and Southwest Gas filed implementation plans with the CPUC to test or replace natural gas transmission pipelines located in populated areas that have not been pressure tested, as we discuss in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. The California Utilities’ current total estimated cost for Phase 1 (the 10-year period of 2012 to 2022) of a two-phase plan is $2.1 billion ($1.6 billion for SoCalGas and $500 million for SDG&E). The California Utilities requested that the incremental capital investment required as a result of any approved plan be included in rate base and that cost recovery be allowed for any other incremental cost not eligible for rate-base recovery. The costs that are the subject of these plans were outside the scope of the 2012 General Rate Case proceedings concluded in 2013. Similarly, these costs are not included in our 2016 General Rate Case filings.
 
In June 2014, the CPUC issued a final decision in the Triennial Cost Allocation Proceeding (TCAP) addressing SDG&E’s and SoCalGas’ Pipeline Safety Enhancement Plan (PSEP) that approved the utilities’ model for implementing PSEP, and established the criteria to determine the amounts related to PSEP that may be recovered from ratepayers and the processes for recovery of such amounts, including providing that such costs are subject to a reasonableness review.
 
As a result of this decision, SoCalGas recorded an after-tax earnings charge of $5 million in 2014 for costs incurred in prior periods for which SoCalGas was disallowed recovery. After taking the amounts disallowed for recovery into consideration, as of June 30, 2015, SDG&E and SoCalGas have recorded PSEP costs of $5 million and $137 million, respectively, in the CPUC-authorized regulatory account. In October 2014, SDG&E and SoCalGas filed a petition for modification with the CPUC requesting authority to recover PSEP costs from customers as incurred, subject to refund pending the results of a reasonableness review by the CPUC, instead of in the subsequent year. This request is pending at the CPUC. In December 2014, SDG&E and SoCalGas filed an application with the CPUC for recovery of $0.1 million and $46 million, respectively, in costs recorded in the regulatory account through June 11, 2014. In June 2015, SDG&E and SoCalGas agreed to remove certain projects from the filing and defer their review to future proceedings and, as a result, are now requesting recovery of $0.1 million and $26.8 million, respectively. We expect a decision on this application in the first half of 2016.
 
In July 2014, the CPUC Office of Ratepayer Advocates (ORA) and The Utility Reform Network (TURN) filed a joint application for rehearing of the CPUC’s June 2014 final decision. The ORA and TURN allege that the CPUC made a legal error in directing that ratepayers, not shareholders, be responsible for the costs associated with testing or replacing transmission pipelines that were installed between January 1, 1956 and July 1, 1961 for which the California Utilities do not have a record of a pressure test. In November 2014, the CPUC denied the ORA and TURN request for rehearing of the decision adopting the PSEP. In December 2014, ORA and TURN sought rehearing of the CPUC’s decision on rehearing. In late December 2014, SoCalGas and SDG&E filed their opposition to this second application for rehearing, and are continuing to implement PSEP in accordance with the June 2014 CPUC decision. In March 2015, the CPUC issued a decision denying ORA’s and TURN’s second request for rehearing but keeping the record in the proceeding open to admit additional evidence on the limited issue of pressure testing of pipelines installed between January 1, 1956 and July 1, 1961. As part of this review, the CPUC will allow parties to submit additional evidence relevant to this narrow issue to ensure a complete record, with no additional discovery allowed. The ORA and TURN filed their responses on May 1, 2015. We expect a CPUC decision in the second half of 2015.
 
We provide additional information regarding these rulemaking proceedings and the California Utilities’ PSEP in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report and in Note 10 of the Notes to Condensed Consolidated Financial Statements herein.
 
Safety Enforcement
 
California Senate Bill (SB) 291, enacted in October 2013, requires the CPUC to develop and implement a safety enforcement program that includes procedures for monitoring, data tracking and analysis, and investigations, as well as delegating citation authority to CPUC staff personnel under the direction of the CPUC Executive Director. SB 291 requires the CPUC to implement the enforcement program for gas safety by July 1, 2014 and for electric safety by January 1, 2015. In exercising the citation authority, the CPUC staff will take into account voluntary reporting of potential violations, voluntary resolution efforts undertaken, prior history of violations, the gravity of the violation, and the degree of culpability. In December 2014, the CPUC adopted an electric safety enforcement program whereby electric utilities may be cited by CPUC staff for violations of the CPUC’s safety requirements or federal standards.
 
In December 2011, the CPUC adopted a gas safety citation program whereby natural gas distribution companies can be cited by CPUC staff for violations of the CPUC’s safety standards. In September 2013, the CPUC’s safety and enforcement division issued its Standard Operating Procedures setting forth its principles and management process for the natural gas safety citation program.
 
Under each enforcement program, each day of an ongoing violation may be counted as an additional offense. The maximum penalty is $50,000 per offense. Citations under either program may be appealed to the CPUC. The CPUC plans to make further refinements to the electric and gas safety enforcement programs in 2015.
 


 
SDG&E Matters
 

2007 Wildfire Litigation
 
In regard to the 2007 wildfire litigation, SDG&E’s payments for claims settlements plus funds estimated to be required for settlement of outstanding claims and legal fees have exceeded its liability insurance coverage and amounts recovered from third parties. However, SDG&E has concluded that it is probable that it will be permitted to recover in rates a substantial portion of the reasonably incurred costs of resolving wildfire claims in excess of its liability insurance coverage and amounts recovered from third parties. Consequently, Sempra Energy and SDG&E expect no significant earnings impact from the resolution of the remaining wildfire claims. At June 30, 2015, Sempra Energy’s and SDG&E’s Condensed Consolidated Balance Sheets include assets of $373 million in Other Regulatory Assets (long-term), of which $367 million is related to CPUC-regulated operations and $6 million is related to FERC-regulated operations, for costs incurred and the estimated settlement of pending claims. Recovery of these costs in rates will require future regulatory approval, and a failure to obtain substantial or full recovery, or any negative assessment of the likelihood of recovery, would likely have a material adverse effect on Sempra Energy’s and SDG&E’s financial condition, cash flows and results of operations.
 
SDG&E will continue to gather information to evaluate and assess the remaining wildfire claim and the likelihood, amount and timing of recoveries in rates and will make appropriate adjustments to wildfire reserves and the related regulatory assets as additional information becomes available.
 
Should SDG&E conclude that recovery of excess wildfire costs in rates is no longer probable, at that time SDG&E will record a charge against earnings. If SDG&E had concluded that the recovery of regulatory assets related to CPUC-regulated operations was no longer probable or was less than currently estimated, at June 30, 2015, the resulting after-tax charge against earnings would have been up to approximately $218 million. We discuss how we assess the probability of recovery of our regulatory assets in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 
We provide additional information concerning these matters in Note 11 of the Notes to Condensed Consolidated Financial Statements herein and in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 

SONGS
 
We discuss regulatory and other matters related to SONGS in the Notes to Condensed Consolidated Financial Statements herein as follows:
 
In Note 9:
 
§  
SONGS Outage and Retirement
 
§  
Settlement Agreement to Resolve the CPUC’s Order Instituting Investigation (OII) into the SONGS Outage (SONGS OII)
 
§  
Nuclear Regulatory Commission Proceedings
 
§  
Nuclear Decommissioning and Funding
 
§  
Nuclear Decommissioning Trusts
 
In Note 11:
 
§  
Legal Proceedings – SDG&E – Lawsuit Against Mitsubishi Heavy Industries, Ltd.
 
§  
Nuclear Insurance
 
§  
U.S. Department of Energy (DOE) Nuclear Fuel Disposal
 
We also discuss SONGS in Notes 13 and 15 of the Notes to Consolidated Financial Statements in the Annual Report, and in “Risk Factors” in the Annual Report.
 
Investment in Wind Farm
 
In 2011, the CPUC and FERC approved SDG&E’s estimated $285 million tax equity investment in the Rim Rock wind farm project. SDG&E and the project developer are in dispute regarding whether all conditions precedent in the contribution agreement have been achieved by the developer of the project. As a result, SDG&E has not made the investment, and the project developer and SDG&E are in dispute regarding SDG&E’s contractual obligation to invest in the project, as we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements herein and in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Electric Rate Reform – State of California Assembly Bill 327
 
In October 2013, the Governor of California signed Assembly Bill (AB) 327. This bill became law on January 1, 2014. This new law restores the authority to establish electric residential rates for electric utility companies in California to the CPUC and removes the rate caps established in AB 1X adopted in early 2001 during California’s energy crisis, as well as SB 695 adopted in 2009. Additionally, the bill provides the CPUC the authority to adopt up to a $10.00 monthly fixed charge for all non-CARE (California Alternate Rates for Energy) residential customers and up to a $5.00 monthly fixed charge for CARE customers. Beginning January 1, 2016, the maximum allowable fixed charge may be adjusted by no more than the annual percentage increase in the Consumer Price Index for the prior calendar year. In February 2014, SDG&E filed comprehensive proposals with the CPUC that provide a roadmap to reforming electric residential rate design beginning in 2015 and continuing through 2018, consistent with the provisions of AB 327. In July 2015, the CPUC adopted a revised Administrative Law Judge (ALJ)-proposed decision that establishes comprehensive reform and a framework for rates that are more transparent, fair and sustainable. The revised ALJ-proposed decision directs changes beginning in summer 2015 and provides a path for continued reforms through 2020, including a minimum monthly bill of $10 ($5 for CARE customers). The changes also include fewer rate tiers and a gradual reduction in the difference between the tiered rates, similar to the tier differential that existed prior to the 2000-2001 Energy Crisis. The number of tiers would be reduced from four to three in 2015 and to two in 2016. The rate differential between the highest and lowest tiers would be reduced from approximately 2.4 times to 2.18 times this year, down to 1.25 times by 2019. The revised ALJ-proposed decision also directs the utilities to pursue expanded time of use (TOU) rates and implements a super user electric (SUE) surcharge in 2017 for usage that exceeds average customer usage by approximately 400 percent. The adopted decision still allows the utilities to seek a fixed charge, but sets certain conditions for its implementation, which would be no sooner than 2020. The changes implemented should result in significant rate relief for higher-use SDG&E customers who do not exceed the SUE threshold and will result in a rate structure that better aligns rates with the actual cost to serve customers.
 
In July 2014, the CPUC initiated a rulemaking proceeding to develop a successor tariff to the state’s existing net energy metering (NEM) program pursuant to the provisions of AB 327 that require the CPUC to establish a revised NEM tariff or similar program by December 31, 2015. The NEM program is an electric billing tariff mechanism designed to promote the installation of on-site renewable generation. It was originally established in California in 1995 with the adoption of SB 656, as codified in Section 2827 of the Public Utilities Code. Currently, customers who install and operate eligible renewable generation facilities of one megawatt or less may choose to participate in the NEM program. Under NEM, customer-generators receive a full retail-rate for the power they generate that is fed back to the utility’s power grid during times when the customer’s generation exceeds their own energy usage. In addition, if a NEM customer net generates any electricity over the annual measurement period, they receive compensation at a rate equal to a wholesale energy price.
 
Appropriate NEM reform is necessary to ensure that SDG&E is authorized to recover, from NEM customers, the costs incurred in providing grid and energy services, as well as mandated legislative and regulatory public policy programs. If the CPUC fails to reform SDG&E’s rate structures to allow it to recover costs associated with the services provided to NEM customers, such failure could have a material adverse effect on SDG&E’s business, cash flows, financial condition, results of operations and/or prospects. On August 3, 2015, SDG&E proposed a successor NEM tariff that is intended to ensure that all NEM customers pay for the grid and other services they receive, supports the continued growth and adoption of distributed energy resources and helps California meet its energy policy goals. A CPUC decision should be issued by the end of 2015. SDG&E would implement the successor tariff by the earlier of July 1, 2017 or when SDG&E reaches its existing NEM program limit, which may occur as early as the second half of 2016. For additional discussion, see “Risk Factors” in the Annual Report.

 
SoCalGas Matter
 

Triennial Cost Allocation Proceeding (TCAP) – Adoption of Seasonal Factors
 
The TCAP decision issued by the CPUC in June 2014 requires SoCalGas to recognize interim period revenue for its core natural gas customers by applying seasonal factors to its annual authorized revenue beginning in 2015, instead of recognizing such revenue ratably over the year as was previously required. While this “seasonalization” will not impact SoCalGas’ cash flows or total calendar year revenue and earnings for 2015 or beyond, and does not change the annual total authorized revenue or our earnings from that revenue, it will cause variability in revenue and earnings from quarter to quarter. We expect that core natural gas customer authorized revenue recognized in the first and fourth quarters of each year will be higher (approximately 34 percent in the first quarter and 29 percent in the fourth quarter) than that recognized in the second and third quarters of each year (approximately 21 percent in the second quarter and 16 percent in the third quarter). This seasonalization resulted in a decrease to Sempra Energy’s and SoCalGas’ revenue and earnings for the three-month period ended June 30, 2015 of $72 million and $48 million, respectively, and an increase to Sempra Energy’s and SoCalGas’ revenue and earnings for the six-month period ended June 30, 2015 of $91 million and $65 million, respectively, compared to the same periods in 2014. Also as a result of seasonalization, beginning in 2015, substantially all of SoCalGas’ annual earnings will be recognized in the first and fourth quarters of the year. The reduced revenue expected to be recognized in the second and third quarters of each year could result in losses for SoCalGas in these quarters.
 


 
Industry Developments and Capital Projects
 

We describe capital projects, electric and natural gas regulation and rates, and other pending proceedings and investigations that affect the California Utilities in Note 10 of the Notes to Condensed Consolidated Financial Statements herein and in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
 


 
SEMPRA INTERNATIONAL
 

As we discuss in “Cash Flows From Investing Activities,” our investments will significantly impact our future performance. In addition to the discussion below, we provide information about these investments in “Capital Resources and Liquidity” herein and in the “Capital Resources and Liquidity” and “Factors Influencing Future Performance” sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 


 
Sempra South American Utilities
 

Overview
 
In connection with the increase in 2011 of our interests in our two utilities in South America, Chilquinta Energía and Luz del Sur, Sempra Energy has $788 million in goodwill on its Condensed Consolidated Balance Sheet at June 30, 2015. Goodwill is subject to impairment testing, annually and under other potential circumstances, which may cause its fair value to vary if differing estimates and assumptions are used in the valuation techniques applied as indicated by changing market or other conditions.
 
Sempra South American Utilities has historically provided relatively stable earnings and liquidity, and its performance will depend primarily on the ratemaking and regulatory process, environmental regulations, foreign currency rate fluctuations and economic conditions. Sempra South American Utilities is also expected to provide earnings from construction projects when completed and from other investments, but will require substantial funding for these investments.
 
Revenues at Chilquinta Energía are based on tariffs set by the National Energy Commission (Comisión Nacional de Energía, or CNE) every four years. Rates for four-year periods related to distribution and sub-transmission are reviewed separately on an alternating basis every two years. In late 2011, Chilquinta Energía initiated the process to establish its distribution rates for the period from November 2012 to October 2016. This process was completed in November 2012, with rates published in April 2013, and tariff adjustments going into effect retroactively from November 2012. This resulted in a 3.2 percent decrease in rates.
 
In April 2013, the CNE completed the process to establish sub-transmission rates for the period January 2011 to December 2014, with tariff adjustments going into effect retroactively from January 2011. This resulted in immaterial changes in rates. The sub-transmission rates period has been extended for one year, for one time only, to December 2015, due to a change in law issued in December 2014. Accordingly, the next reviews are scheduled to be completed, with tariff adjustments also going into effect, in January 2016 for sub-transmission, and again for distribution in November 2016. Sub-transmission will cover the period from January 2016 to December 2019 and distribution will cover the period from November 2016 to October 2020.
 
Luz del Sur serves primarily regulated customers in Peru and revenues are based on rates set by the Energy and Mining Investment Supervisory Body (Organismo Supervisor de la Inversión en Energía y Minería, or OSINERGMIN). The rates are reviewed and adjusted every four years. OSINERGMIN’s final distribution rate setting resolution for the 2013-2017 period was published in October 2013 and went into effect on November 1, 2013. There was no material change in the rates.
 
In September 2014, tax reform legislation was passed in Chile. The main amendments established in the tax reform include, among others, a gradual increase in the corporate income tax rate and the introduction of two options to pay the secondary tax (shareholder tax) on corporate profits (either immediate payment of tax or deferment of tax until earnings are distributed) with different impacts to the total income tax burden. We discuss this tax reform in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 
In December 2014, the Peruvian government passed a tax reform law. Among other changes, the new law gradually reduces the 30 percent corporate tax rate in 2014 to 26 percent by 2019 with an offsetting increase in the withholding tax rate on dividends. We discuss this tax reform in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 
Field, technical and administrative employees at Luz del Sur are represented by the Unified Trade Union of Electricity Workers of Lima and Callao, and the Trade Union of Employees of Electrolima. A collective bargaining agreement was signed in February 2015 with both of these trade unions covering these employees and was also extended to 149 nonrepresented employees. It covers wages, working conditions and other benefit plans, and is in effect from January 1, 2015 through December 31, 2015.
 
Santa Teresa
 
Luz del Sur is in the final stages of completion of Santa Teresa, a 100-MW hydroelectric power plant in Peru’s Cusco region. Construction has been completed and we expect it to be in commercial operation in the third quarter of 2015.
 
Transmission Projects
 
Chilquinta Energía. Chilquinta Energía has 50-percent ownership in two joint ventures, Eletrans S.A. and Eletrans II S.A., with Sociedad Austral de Electricidad Sociedad Anónima (SAESA) to construct transmission lines in Chile.
 
In May 2012, Eletrans S.A. was awarded two 220-kilovolt (kV) transmission lines in Chile. The transmission lines will extend 150 miles, and we estimate the projects will cost approximately $180 million in total and be completed in 2016 and 2017.
 
In June 2013, Eletrans II S.A. was awarded two 220-kV transmission lines in Chile. The transmission lines will extend approximately 60 miles, and we estimate the projects will cost approximately $80 million in total and be completed in 2018.
 
Sempra South American Utilities has a U.S. dollar-denominated loan to Eletrans S.A. totaling $61 million at June 30, 2015 to provide project financing for the construction of transmission lines. Eletrans S.A. is an affiliate of Chilquinta Energía.
 
The projects will be financed by the joint venture partners. Other financing may be pursued upon completion of the projects.
 
Luz del Sur. Luz del Sur has received regulatory approval for an amended transmission investment plan that includes the development and operation of four substations and their related transmission lines in Lima. We estimate that the project will cost approximately $150 million and be in service in 2016 and 2017 as portions are completed. Once in operation, the capitalized cost will earn the regulated return for 30 years. The project will be financed through Luz del Sur’s existing debt program in Peru’s capital markets.
 


 
Sempra Mexico
 

Overview
 
Sempra Mexico is expected to provide earnings from construction projects when completed and from joint venture investments. We expect projects, joint venture investments and dividends in Mexico to be funded through a combination of available funds, including credit facilities, funds internally generated by the Mexico businesses, securities issuances, project financing, interim funding from the parent, and partnering in joint ventures.
 
IEnova and PEMEX are 50-50 partners in the joint venture Gasoductos de Chihuahua (GdC). In July 2015, IEnova entered into an agreement to purchase PEMEX’s 50-percent interest for $1.325 billion, excluding the assumption of approximately $170 million of net debt. GdC develops and operates energy infrastructure in Mexico. The assets involved in the acquisition include three natural gas pipelines, an ethane pipeline, and a liquid petroleum gas pipeline and associated storage terminal. All the assets are regulated and covered by long-term contracts. The transaction excludes the Los Ramones Norte pipeline that IEnova will continue to develop under a joint venture with PEMEX at the existing holding company for the project, through which IEnova’s interest in the project will remain at the current 25 percent. The transaction is subject to approval by IEnova shareholders, satisfactory completion of the Mexican anti-trust review and other customary closing conditions and is expected to close in the fourth quarter of 2015.
 
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 transaction is not expected to close until the fourth quarter of 2015, we are unable to estimate the gain at this time.
 
We discuss the financing of the transaction above, under “Capital Resources and Liquidity – Sempra Mexico.” After financing at the IEnova level, we expect the acquisition to be accretive to Sempra Energy’s diluted earnings per share in 2016 and beyond, based on the joint venture’s strong historical performance and the expected benefits of the acquisition. These benefits include an ongoing relationship with PEMEX for joint development of new projects in the future; opportunities for asset optimization and expansion into areas such as the transportation and storage of refined products; and a larger platform and presence in Mexico to participate in energy sector reform.
 

We discuss IEnova’s credit facilities in Note 6 of the Notes to Condensed Consolidated Financial Statements herein.
 

We discuss the impact of Mexican tax reform in “Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 
Pipeline Projects
 
In October 2012, IEnova was awarded two contracts by the Federal Electricity Commission (Comisión Federal de Electricidad, or CFE) to build and operate an approximately 500-mile pipeline network (Sonora pipeline) to transport natural gas from the U.S.-Mexico border south of Tucson, Arizona through the Mexican state of Sonora to the northern part of the Mexican state of Sinaloa along the Gulf of California. The network will be comprised of two segments that will interconnect to the U.S. interstate pipeline system. We estimate it will cost approximately $1 billion. A section of the project was completed in October 2014. We expect to complete the remaining sections in stages in 2015 and 2016. The capacity is fully contracted by the CFE under two 25-year contracts denominated in U.S. dollars.
 

In December 2012, through its joint venture with PEMEX, IEnova executed an ethane transportation services agreement with PEMEX to construct and operate an approximately 140-mile pipeline (Ethane pipeline) to transport ethane from Tabasco, Mexico to Veracruz, Mexico. We estimate it will cost approximately $330 million. The first and second sections of the pipeline were completed in January and July 2015, respectively, and we expect to complete the remaining section in 2015. PEMEX has fully contracted the capacity under a 21-year contract denominated in U.S. dollars.
 

In 2014, IEnova’s joint venture with PEMEX and affiliates of PEMEX executed agreements for the development of Los Ramones Norte, a natural gas pipeline of approximately 275 miles and two compression stations, which will connect with the first phase of Los Ramones and run to the vicinity of San Luis Potosi, with an estimated cost of approximately $1.3 billion to $1.5 billion. IEnova’s joint venture with PEMEX has a 50-percent interest in the project. In June 2014, the project executed an engineering, procurement and construction (EPC) contract, and in July 2014, the project issued the full notice to proceed. We expect expenditures for the project to be funded by the joint venture’s cash flows from operations and project financing, plus additional contributions from its partners. The pipeline’s capacity is fully contracted under a 25-year transportation services agreement with PEMEX denominated in Mexican pesos, with a contract rate based on the U.S. dollar investment, adjusted annually for inflation and fluctuation of the exchange rate.
 
Sempra Mexico has loans to affiliates of its joint venture with PEMEX totaling $85 million at June 30, 2015.
 
In December 2014, Sempra Mexico entered into the Ojinaga pipeline natural gas transportation services agreement with CFE for a 25-year term, denominated in U.S. dollars. CFE contracted 100 percent of the transport capacity of the Ojinaga pipeline, equal to 1.4 billion cubic feet (Bcf) per day. Sempra Mexico will be responsible for the development, construction and operation of the approximately 137-mile, 42-inch pipeline, with an estimated cost of $300 million. We expect the pipeline to begin operations in the first half of 2017.
 
In July 2015, Sempra Mexico entered into the San Isidro - Samalayuca pipeline (San Isidro pipeline) natural gas transportation services agreement with CFE for a 25-year term, denominated in U.S. dollars. CFE contracted 100 percent of the transport capacity of the San Isidro pipeline, equal to 1.1 Bcf per day. Sempra Mexico will be responsible for the development, construction and operation of the approximately 14-mile pipeline, with an estimated cost of $110 million. We expect the pipeline to begin operations in the first half of 2017. IEnova continues to monitor CFE project opportunities and carefully analyze CFE bids in order to participate in those that fit its overall growth strategy.
 
Energía Sierra Juárez
 
In 2014, we consummated the sale of a 50-percent equity interest in the first phase of Energía Sierra Juárez to a wholly owned subsidiary of InterGen N.V. The project is designed to provide up to 1,200 MW of capacity if fully developed. The 155-MW first phase of the Energía Sierra Juárez wind generation project is fully contracted by SDG&E and began commercial operations in June 2015. Future expansion of Energía Sierra Juárez will depend, among other factors, on the ability to obtain additional power purchase contracts.
 
Energía Costa Azul LNG Terminal
 
In February 2015, Sempra Natural Gas, IEnova, and a subsidiary of PEMEX entered into a Memorandum of Understanding (MOU) to collaborate in the development of a natural gas liquefaction project at IEnova’s existing regasification terminal at Energía Costa Azul. The MOU defines the basis for the parties to explore PEMEX’s participation in this potential liquefaction project, including joining efforts on its development and structuring agreements that would allow opportunities for PEMEX to become a customer, natural gas supplier and investor; we have also started to share development costs with PEMEX. Energía Costa Azul has profitable long-term regasification contracts for 100 percent of the facility, making the decision to pursue a new liquefaction facility dependent in part on whether the investment in a new liquefaction facility would, over the long term, be more beneficial than continuing to supply regasification services under our existing contracts. In addition, this project requires the receipt of a number of permits and regulatory approvals, finding suitable partners and customers, obtaining financing and negotiating suitable construction contracts. For a discussion of these risks, see “Risk Factors” in our Annual Report.
 

 
SEMPRA U.S. GAS & POWER
 
 
Sempra Renewables
 
Overview
 
Sempra Renewables is developing and investing in renewable energy generation projects that have long-term contracts with electric load serving entities, which provide electric service to end-users and wholesale customers. The renewable energy projects have planned in-service dates through 2016. These projects require construction financing which may come from a variety of sources including operating cash flow, project financing, funds from the parent, partnering in joint ventures and, potentially, other forms of equity sales. The varying costs of these alternative financing sources impact the projects’ returns.
 
Sempra Renewables’ future performance and the demand for renewable energy is impacted by various market factors, most notably state mandated requirements to deliver a portion of total energy load from renewable energy sources. The rules governing these requirements are generally known as the Renewables Portfolio Standard (RPS). Additionally, the phase out or extension of U.S. federal income tax incentives, primarily investment tax credits and production tax credits, and grant programs could significantly impact future renewable energy resource availability and investment decisions.
 
Black Oak Getty Wind Project
 
In March 2015, Sempra Renewables acquired the Black Oak Getty Wind project, a 78-MW wind farm under development in Stearns County, Minnesota. Sempra Renewables will complete the development of the wind farm, and we expect the project to be fully operational by the end of 2016. Minnesota Municipal Power Agency has contracted for the energy generated from the project for 20 years.
 
Copper Mountain Solar
 
Copper Mountain Solar is a photovoltaic generation facility operated and under development by Sempra Renewables in Boulder City, Nevada. When fully developed, the project will be capable of producing up to approximately 550 MW of solar power; it is being developed in multiple phases as power sales become contracted. Copper Mountain Solar is comprised of four separate projects.
 
Copper Mountain Solar 1 is a 58-MW photovoltaic generation facility currently in operation, which is fully contracted for 20 years to PG&E.
 
Copper Mountain Solar 2 is divided into two phases totaling 150 MW. The 92-MW first phase was placed in service in November 2012 and the 58-MW second phase was placed in service in April 2015. PG&E has contracted for all of the solar power at Copper Mountain Solar 2 for 25 years. In July 2013, we completed the sale of 50 percent of our equity in Copper Mountain Solar 2 to Con Edison Development.
 
Copper Mountain Solar 3 achieved full commercial operation in April 2015, and totals 250 MW. The cities of Los Angeles and Burbank have contracted for all of the solar power at Copper Mountain Solar 3 for 20 years. In addition to solar power, the power sales agreement provides the cities of Los Angeles and Burbank the option to purchase the Copper Mountain Solar 3 facility at years 10, 15 and 20 of the contract term, or upon earlier termination of the agreement. In March 2014, we completed the sale of 50 percent of our equity in Copper Mountain Solar 3 to Con Edison Development, as we discuss in Note 3 of the Notes to Condensed Consolidated Financial Statements herein.
 
In July 2014, Sempra Renewables signed a 20-year power sale agreement with Southern California Edison Company (Edison) for all of the solar power from Copper Mountain Solar 4 beginning in 2020. We expect Copper Mountain Solar 4 to be in service in 2016, marketing its output prior to the commencement of the power sale agreement. Copper Mountain Solar 4 will total 94 MW when completed. The CPUC approved the power sale agreement in March 2015.
 
Mesquite Solar
 
Mesquite Solar is a photovoltaic generation facility under development by Sempra Renewables in Maricopa County, Arizona. If fully developed, the project will be capable of producing up to approximately 700 MW of solar power with 150 MW currently in operation in a joint venture with Con Edison Development. In June 2015, Sempra Renewables signed a 20-year power sale agreement with Edison for 100 MW of solar power from the second phase of Mesquite Solar. The power sale agreement is subject to approval by the CPUC. In July 2015, Sempra Renewables signed a 25-year power sale agreement with the Western Area Power Administration for 150-MW of solar power from the third phase of Mesquite Solar. We expect the second and third phases of Mesquite Solar to be in service in 2016.
 
 
Sempra Natural Gas
 
Mesquite Power Natural Gas-Fired Plant
 
In February 2013, Sempra Natural Gas completed the sale of one 625-MW block of its Mesquite Power plant to the Salt River Project Agricultural Improvement and Power District for $371 million in cash. Sempra Natural Gas retained ownership of the second block of the Mesquite Power plant.
 
On April 9, 2015, Sempra Natural Gas sold the remaining 625-MW block of the Mesquite Power plant, together with the related power sales contract, for net cash proceeds of $347 million. We discuss this sale further in Note 3 of the Notes to Condensed Consolidated Financial Statements herein.
 
Rockies Express
 
Sempra Natural Gas owns a 25-percent interest in Rockies Express Pipeline LLC (Rockies Express), a partnership that operates a natural gas pipeline, the Rockies Express pipeline (REX), which links the Rocky Mountains region to the upper Midwest and the eastern United States. All of REX’s original capacity sales provide for west-to-east service. Sempra Natural Gas has an agreement for such capacity on REX through November 2019. The capacity costs are offset by revenues from releases of the capacity contracted to third parties. Certain capacity release commitments totaling $22 million concluded during 2013. Contracting activity related to that capacity has not been sufficient to offset all of our capacity payments to Rockies Express.
 
In November 2013, FERC issued a decision ruling that east-to-west service offerings within a single REX rate zone would not result in potential rate reductions under provisions in the original customers’ west-to-east contracts (“most favored nation” provisions). In December 2013, certain west-to-east customers sought rehearing of that decision. In 2014, Rockies Express reached settlements with three west-to-east customers, with one customer continuing to seek rehearing. The triggering of these provisions would result in significantly reduced revenue to REX from these west-to-east contracts.
 
In April 2014, prior to the launching of an open season, Rockies Express had secured binding financial commitments with four shippers totaling 1.2 Bcf per day of capacity for east-to-west transportation services for a term of 20 years originating at or near Clarington, Ohio. In February 2015, Rockies Express received FERC approval for the project. Rockies Express began construction on the project, and the capacity went into service on August 1, 2015. In June 2014, Rockies Express finished constructing the Seneca Lateral, an initial 0.25 Bcf per day capacity project that connects natural gas production sources in Ohio to REX. The lateral’s capability was further expanded to 0.6 Bcf per day of capacity in January 2015. The lateral is fully contracted through September 2021.
 
In March 2015, Rockies Express requested FERC approval of the Zone 3 Capacity Enhancement Project. The project is an expansion of REX’s east-to-west capability of 0.8 Bcf per day. Rockies Express conducted both a non-binding and a binding open season for service on the Zone 3 Capacity Enhancement Project and secured binding financial commitments with six Appalachian shippers totaling 0.7 Bcf per day of capacity for east-to-west transportation services for a term of 15 years originating at or near Clarington, Ohio. We expect the project to be in-service in the fourth quarter of 2016. This expansion, with an estimated cost of approximately $530 million, will require additional capital investment by the partners and is subject to regulatory approval. When completed, REX’s total east-to-west capability within Zone 3 will be 2.6 Bcf per day.
 
In April 2015, Sempra Natural Gas invested $113 million in Rockies Express to repay project debt that matured in early 2015.
 
On January 29, 2015, REX experienced a rupture that resulted in no injuries or fire. This incident occurred near Bowling Green, Missouri. Rockies Express returned the segment of the pipeline to service on February 8, 2015. Rockies Express is fully cooperating with the Pipeline and Hazardous Materials Safety Administration.
 

Natural Gas Storage
 
Our natural gas storage assets include operational and development assets at Bay Gas in Alabama and Mississippi Hub in Mississippi, as well as our development project, LA Storage, LLC (LA Storage) in Louisiana. LA Storage could be positioned to support LNG export from the Cameron LNG JV terminal and other liquefaction projects, if anticipated cash flows support further investment. However, changes in the U.S. natural gas market could also lead to diminished natural gas storage values.
 
Historically, the value of natural gas storage services has positively correlated with the difference between the seasonal prices of natural gas, among other factors. In general, over the past several years, seasonal differences in natural gas prices have declined, which have contributed to lower prices for storage services. As our legacy (higher rate) sales contracts mature at Bay Gas and Mississippi Hub, replacement sales contract rates could be lower than has historically been the case. Lower sales revenues may not be offset by cost reductions, which could lead to depressed asset values. In addition, our LA Storage development project may be unable to attract cash flow commitments sufficient to support further investment. In April 2015, we received authorization from FERC to begin construction on the LA Storage project. In an order issued on May 7, 2015, FERC approved our request to extend the construction permit for the project for an additional two years, so that it now will expire in June 2017, absent an additional extension. The LA Storage project also includes an existing 23.3-mile pipeline header system, the LA Storage pipeline, that is uncontracted. We perform recovery testing of our recorded asset values when market conditions indicate that such values may not be recoverable. In the event such values are not recoverable, we would consider the fair value of these assets relative to their recorded value. To the extent the book value is in excess of the fair value, we would record a noncash impairment charge. The book value of our long-lived natural gas storage assets at June 30, 2015 is $1.5 billion.
 
Sempra Natural Gas has 42 Bcf of operational working natural gas storage capacity (20 Bcf at Bay Gas and 22 Bcf at Mississippi Hub). Sempra Natural Gas may, over the long term, develop additional storage capacity at its facilities.
 
Sempra Natural Gas’ natural gas storage facilities and projects include
 
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Bay Gas, a facility located 40 miles north of Mobile, Alabama, that provides underground storage and delivery of natural gas. Sempra Natural Gas owns 91 percent of the project. It is the easternmost salt dome storage facility on the Gulf Coast, with direct service to the Florida market and markets across the Southeast, Mid-Atlantic and Northeast regions.
 
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Mississippi Hub, located 45 miles southeast of Jackson, Mississippi, an underground salt dome natural gas storage project with access to shale basins of East Texas and Louisiana, traditional gulf supplies and LNG, with multiple interconnections to serve the Southeast and Northeast regions.
 
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LA Storage, a salt cavern development project in Cameron Parish, Louisiana. Sempra Natural Gas owns 75 percent of the project and ProLiance Transportation LLC owns the remaining 25 percent. The project’s location provides access to several LNG facilities in the area.
 
Cameron Liquefaction Project
 
The Cameron LNG, LLC regasification terminal in Hackberry, Louisiana, 100-percent owned by Sempra Natural Gas until October 1, 2014, is capable of processing 1.5 Bcf of natural gas per day. The terminal currently generates revenue under a terminal services agreement for approximately 3.75 Bcf of natural gas storage and associated send-out rights of approximately 600 million cubic feet (MMcf) of natural gas per day through 2029. The agreement allows the customer to pay capacity reservation and usage fees to use the facilities to receive, store and regasify the customer’s LNG. Sempra Natural Gas also may enter into short-term supply agreements to purchase LNG to be received, stored, and regasified at the terminal for sale to other parties.
 
In August 2014, Sempra Energy and three project partners provided their respective final investment decision with regard to the Cameron LNG Holdings, LLC (Cameron LNG Holdings or Cameron LNG JV) joint venture for the development, construction and operation of a natural gas liquefaction export facility at the Cameron LNG, LLC terminal. On October 1, 2014, we contributed our share of equity to the joint venture through the contribution of Cameron LNG, LLC. Beginning from the October 1, 2014 joint venture effective date, Cameron LNG, LLC is no longer wholly owned, and Sempra Natural Gas accounts for its investment in the new joint venture under the equity method. We expect that our remaining equity requirements to complete the project will be met by a combination of our share of cash generated from each liquefaction train as it comes on line and additional cash contributions. If construction, financing or other project costs are higher than we currently expect, we may have to contribute additional cash exceeding our current expectations.
 
The current project, which will utilize Cameron LNG JV’s existing facilities, is comprised of three liquefaction trains designed to a nameplate capacity of 13.9 million tonnes per annum (Mtpa) of LNG with an expected export capability of 12 Mtpa of LNG, or approximately 1.7 Bcf per day. We expect the project to achieve commercial operation of all three trains in 2018, and have the first year of full operations in 2019. The anticipated incremental investment in the three-train liquefaction project is estimated to be approximately $7 billion, including the cost of the lump-sum, turnkey construction contract, development engineering costs and permitting costs, but excluding capitalized interest and other financing costs. The majority of the incremental investment will be project-financed and the balance provided by the project partners. The total cost of the facility, including the cost of our original facility plus interest during construction, financing costs and required reserves, is estimated to be approximately $10 billion.
 
The joint venture has authorization to export LNG to both Free Trade Agreement (FTA) countries and to countries that do not have an FTA with the United States. Cameron LNG JV has 20-year liquefaction and regasification tolling capacity agreements in place with GDF SUEZ S.A. and affiliates of Mitsubishi Corporation and Mitsui & Co, Ltd., that subscribe the full nameplate capacity of the facility.
 
Sempra Natural Gas has agreements totaling 1.45 Bcf per day of firm natural gas transportation service to the Cameron LNG JV facilities on the Cameron Interstate Pipeline with GDF SUEZ S.A. and affiliates of Mitsubishi Corporation and Mitsui & Co., Ltd. The terms of these agreements are concurrent with the liquefaction and regasification tolling capacity agreements.
 
Construction on the current project began in the second half of 2014 under an EPC contract with a joint venture between CB&I Shaw Constructors, Inc., a wholly owned subsidiary of Chicago Bridge & Iron Company N.V., and Chiyoda International Corporation, a wholly owned subsidiary of Chiyoda Corporation.
 
In August 2014, Sempra Energy and the project partners executed project financing documents for senior secured debt in an initial aggregate principal amount up to $7.4 billion for the purpose of financing the cost of development and construction of the Cameron LNG JV liquefaction project. Concurrently, Sempra Energy entered into completion guarantees under which it has severally guaranteed 50.2 percent of the debt, or a maximum principal amount of $3.7 billion. The project financing and completion guarantees became effective on October 1, 2014, and will terminate upon financial completion of the project, which will occur upon satisfaction of certain conditions, including all three trains achieving commercial operation and meeting certain operational performance tests. We expect the project to achieve financial completion and the completion guarantees to be terminated in the second half of 2019.
 
Large-scale construction projects like the design, development and construction of the Cameron LNG JV liquefaction facility involve numerous risks and uncertainties, including among others, the potential for unforeseen engineering problems, substantial construction delays and increased costs. As noted above, Cameron LNG JV has a turnkey EPC contract with a joint venture between CB&I Shaw Constructors, Inc. and Chiyoda International Corporation. If the contractor becomes unwilling or unable to perform according to the terms and timetable of the EPC contract, Cameron LNG JV would be required to engage a substitute contractor, which would result in project delays and increased costs, which could be significant. For a discussion of these risks and other risks relating to the development of the Cameron LNG JV liquefaction project that could adversely affect our future performance, see “Risk Factors” in our Annual Report.
 
Cameron LNG JV has a terminal services agreement with one customer that requires the customer to pay capacity reservation and usage fees to use its facilities to receive, store and regasify the customer’s LNG. There is a termination agreement in place that will result in the termination of this services agreement at the point during construction of the new liquefaction facilities where piping tie-ins to the existing regasification terminal become necessary. Based on the full notice to proceed that was issued to Cameron LNG JV’s EPC contractor in October 2014, we expect this termination date to occur during the first half of 2017.
 
In December 2014, Cameron LNG JV filed with the DOE for authorization to match the total export volumes allowed to be exported to FTA countries under the FERC permit. This would allow for increased export from the three-train facility of up to 2.95 Mtpa. In April 2015, Cameron LNG JV filed the corresponding DOE Non-FTA permit application. Cameron LNG JV is also pursuing the permitting to expand the current configuration from the current three liquefaction trains. The expansion project is expected to include up to two additional liquefaction trains, capable of increasing LNG production capacity by approximately 9 Mtpa to 10 Mtpa, and one additional full containment LNG storage tank; a fourth tank was permitted with the base liquefaction project but not built. In February 2015, Cameron LNG JV filed the DOE FTA application and the pre-filing application at FERC for the two additional trains and one containment tank. In May 2015, the joint venture filed a corresponding DOE Non-FTA permit application. In July 2015, Cameron LNG JV received approval of the DOE FTA application. Under the Cameron LNG JV financing agreements, expansion of the Cameron LNG JV facilities beyond the first three trains is subject to certain restrictions and conditions, including among others, timing restrictions on expansion of the project unless appropriate prior consent is obtained from lenders. In addition, expansion of the Cameron LNG JV facilities beyond the first three trains is subject to a number of risks and uncertainties, including completing the required commercial agreements, securing all necessary permits and approvals, obtaining financing, reaching a final investment decision and other factors associated with the potential investment. See the “Risk Factors” section of our Annual Report.
 
We discuss the deconsolidation of Cameron LNG, LLC, the Cameron LNG JV project financing obligations and Sempra Energy’s completion guarantee further in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 
Other LNG Liquefaction Development
 
Design, regulatory and commercial activities are ongoing for potential LNG liquefaction developments at Sempra Mexico’s Energía Costa Azul facility and at our Port Arthur, Texas site. For these development projects, we have been meeting with potential customers and continue to see long-term demand for LNG supplies beginning in the 2020 to 2023 time frame. Total expenditures on LNG liquefaction development in the six months ended June 30, 2015 were $15.6 million, including capitalized costs of $7.5 million (pretax). After-tax LNG development costs expensed in the three months and six months ended June 30, 2015 were $1 million and $5 million, respectively.
 
Port Arthur. In March 2015, Sempra Natural Gas submitted a request to the FERC to initiate the pre-filing review for the proposed Port Arthur LNG natural gas liquefaction and export facility in Port Arthur, Texas. The proposed project is designed to include two natural gas liquefaction trains with total export capability of approximately 10 Mtpa, or 1.4 Bcf per day; two 160,000-cubic-meter storage tanks; marine facilities for vessel berthing and loading; natural gas liquids and refrigerant storage; feed gas pre-treatment; truck loading and unloading areas; and combustion turbine generators for self-generation of electrical power.
 
In March 2015, Sempra Natural Gas also submitted a request to the FERC to initiate the pre-filing review for the proposed Port Arthur pipeline project. The proposed project consists of two 42-inch-diameter feed gas pipelines (7- and 27-miles long), two compressor stations, receipt meter stations, and other appurtenant facilities in Orange and Jefferson Counties, Texas, and Cameron Parish, Louisiana. The pipelines would provide up to 1.6 Bcf per day of capacity to the Port Arthur LNG facilities.
 
In March and June 2015, Sempra Natural Gas filed permit applications with the DOE for authorization to export the LNG produced from the proposed project to all current and future FTA and Non-FTA countries, respectively.
 
In June 2015, Sempra Natural Gas entered into a non-binding MOU with an affiliate of Woodside Petroleum Ltd. (Woodside) to commence discussions and assessments for the potential development of the proposed Port Arthur LNG liquefaction project. The non-binding MOU is the initial step for Sempra Natural Gas and Woodside to explore this opportunity and undertake due diligence for the potential development of the Port Arthur LNG liquefaction project. Any decision to proceed with a binding agreement between Woodside and Sempra Natural Gas in relation to the potential development of the project, including the establishment of any joint venture or partnership between Sempra Natural Gas and Woodside, is contingent upon completing project assessments and achieving other necessary internal and external approvals for each party.
 
Development of the Port Arthur LNG liquefaction project is subject to a number of risks and uncertainties, including completing the required commercial agreements, securing all necessary permits and approvals, obtaining financing and incentives, reaching a final investment decision and other factors associated with the potential investment. See the “Risk Factors” section of our Annual Report.
 
Energía Costa Azul. We further discuss Sempra Natural Gas’ participation in potential LNG liquefaction development at Sempra Mexico’s Energía Costa Azul facility above under “Sempra Mexico − Energía Costa Azul LNG Terminal.”
 
 
RBS Sempra Commodities
 
In three separate transactions in 2010 and one in early 2011, we and The Royal Bank of Scotland plc (RBS), our partner in the RBS Sempra Commodities joint venture, sold substantially all of the businesses and assets of our commodities-marketing partnership. The investment balance of $71 million at June 30, 2015 reflects remaining distributions expected to be received from the partnership as it is dissolved. The amount of distributions may be impacted by the matters we discuss related to RBS Sempra Commodities under “Other Litigation” in Note 11 of the Notes to Condensed Consolidated Financial Statements herein. In addition, amounts may be retained by the partnership for an extended period of time to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership.
 

 
OTHER SEMPRA ENERGY MATTERS
 

We may be further impacted by depressed and rapidly changing economic conditions. Moreover, the dollar may fluctuate significantly compared to some foreign currencies, especially in Mexico and South America where we have significant operations. We discuss foreign currency rate risk further under “Foreign Currency Rate Risk” in Item 3. “Quantitative and Qualitative Disclosures About Market Risk” below. North American natural gas prices, when in decline, negatively affect profitability at Sempra Renewables and Sempra Natural Gas. In addition, an extended decline in current and forward projections of crude oil prices, coupled with slow economic growth, could cause a corresponding reduction in projected global demand for LNG. This could result in increased competition among those working on projects in an environment of declining LNG demand, such as the Sempra Energy-sponsored export initiatives. For a discussion of these risks and other risks involving changing natural gas and crude oil prices, see “Risk Factors” in the Annual Report.
 
In July 2010, federal legislation to reform financial markets was enacted that significantly alters how over-the-counter (OTC) derivatives are regulated, which may impact all of our businesses. The law increased regulatory oversight and transparency requirements of OTC energy derivatives, including (1) requiring standardized OTC derivatives to be traded on registered exchanges regulated by the U.S. Commodity Futures Trading Commission (CFTC), (2) imposing new and potentially higher capital and margin requirements and (3) authorizing the establishment of overall volume and position limits, the latter of which is pending final approval in 2015. The law gives the CFTC authority to exempt end users of energy commodities which could reduce, but not eliminate, the applicability of these measures to us and other end users. These requirements could cause our OTC transactions to be more costly and have a material adverse effect on our liquidity due to additional capital requirements. In addition, as these reforms aim to standardize OTC products, they could limit the effectiveness and extent of our hedging programs, because we would have less ability to tailor OTC derivatives to match the precise risk we are seeking to mitigate and may be restricted on the size of our hedging program.
 
Our future performance depends substantially on the timing and success of our business development efforts and our construction, maintenance and capital projects. We discuss this and additional matters that could affect our future performance in Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements herein, in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report, and in “Risk Factors” in the Annual Report.
 


 
LITIGATION
 

We describe legal proceedings which could adversely affect our future performance in Note 11 of the Notes to Condensed Consolidated Financial Statements herein.
 


 
 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 

We view certain accounting policies as critical because their application is the most relevant, judgmental, and/or material to our financial position and results of operations, and/or because they require the use of material judgments and estimates. We discuss these accounting policies in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.
 
We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes.
 


 
 

NEW ACCOUNTING STANDARDS
 

We discuss the relevant pronouncements that have recently become effective and have had or may have an impact on our financial statements and/or disclosures in Note 2 of the Notes to Condensed Consolidated Financial Statements herein.
 


 
 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 

We provide disclosure regarding derivative activity in Note 7 of the Notes to Condensed Consolidated Financial Statements herein. We discuss our market risk and risk policies in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.
 


 
INTEREST RATE RISK
 

The table below shows the nominal amount and the one-year Value at Risk (VaR) for long-term debt at June 30, 2015 and December 31, 2014:
 


NOMINAL AMOUNT AND ONE-YEAR VALUE AT RISK OF LONG-TERM DEBT(1)
(Dollars in millions)
   
Sempra Energy
           
   
Consolidated
 
SDG&E
 
SoCalGas
   
Nominal
One-year
 
Nominal
One-year
 
Nominal
One-year
   
debt
VaR(2)
 
debt
VaR(2)
 
debt
VaR(2)
At June 30, 2015:
                           
 
California Utilities fixed-rate
$
6,799
$
1,007
 
$
4,287
$
656
 
$
2,512
$
351
 
California Utilities variable-rate
 
460
 
12
   
460
 
12
   
 
 
All other, fixed-rate and variable-rate
 
6,310
 
461
   
 
   
 
At December 31, 2014:
                           
 
California Utilities fixed-rate
$
6,049
$
502
 
$
4,136
$
341
 
$
1,913
$
161
 
California Utilities variable-rate
 
325
 
13
   
325
 
13
   
 
 
All other, fixed-rate and variable-rate
 
5,973
 
306
   
 
   
 
(1)
Excluding capital lease obligations, build-to-suit lease and interest rate swaps, and before reductions/increases for unamortized discount/premium.
(2)
After the effects of interest rate swaps.

We provide additional information about interest rate swap transactions in Note 7 of the Notes to Condensed Consolidated Financial Statements herein.
 


 
FOREIGN CURRENCY RATE RISK
 

We discuss our foreign currency exposure at our Mexican subsidiaries in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Changes in Revenues, Costs and Earnings – Income Taxes – Foreign Currency Exchange Rate and Inflation Impact on Income Taxes and Related Economic Hedging Activity” herein. We also discuss our foreign currency exposure at our Mexican and South American subsidiaries in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Foreign Currency Rate Risk” in the Annual Report. At June 30, 2015, there were no significant changes to our exposure to foreign currency rate risk since December 31, 2014.

 
 
 

ITEM 4. CONTROLS AND PROCEDURES
 


 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 

Sempra Energy, SDG&E and SoCalGas have designed and maintain disclosure controls and procedures to ensure that information required to be disclosed in their respective reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to the management of each company, including each respective Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating these controls and procedures, the management of each company recognizes that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives; therefore, the management of each company applies judgment in evaluating the cost-benefit relationship of other possible controls and procedures.
 
Under the supervision and with the participation of management, including the Chief Executive Officers and Chief Financial Officers of Sempra Energy, SDG&E and SoCalGas, each company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of June 30, 2015, the end of the period covered by this report. Based on these evaluations, the Chief Executive Officers and Chief Financial Officers of Sempra Energy, SDG&E and SoCalGas concluded that their respective company’s disclosure controls and procedures were effective at the reasonable assurance level.
 


 
INTERNAL CONTROL OVER FINANCIAL REPORTING
 

There have been no changes in the companies’ internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the companies’ internal control over financial reporting.
 

 
 
 
PART II – OTHER INFORMATION
 


 
 

ITEM 1. LEGAL PROCEEDINGS
 

We are not party to, and our property is not the subject of, any material pending legal proceedings (other than ordinary routine litigation incidental to our businesses) except for the matters 1) described in Notes 9, 10 and 11 of the Notes to Condensed Consolidated Financial Statements herein and Notes 13, 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report, or 2) referred to in “Management's Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Annual Report.
 


 
 

ITEM 1A. RISK FACTORS
 

There have not been any material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 
 
 

ITEM 6. EXHIBITS
 

The following exhibits relate to each registrant as indicated.

 
EXHIBIT 10 -- MATERIAL CONTRACTS
       
 
Compensation
       
 
Sempra Energy
 
10.1
 
Amendment to the Amended and Restated Sempra Energy 2005 Deferred
     
Compensation Plan, now known as Sempra Energy Employee and Director Retirement
     
Savings Plan.
       
 
EXHIBIT 12 -- STATEMENTS RE: COMPUTATION OF RATIOS
       
 
Sempra Energy
 
12.1
 
Sempra Energy Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
     
Stock Dividends.
       
 
San Diego Gas & Electric Company
 
12.2
 
San Diego Gas & Electric Computation of Ratio of Earnings to Combined Fixed Charges and
     
Preferred Stock Dividends.
       
 
Southern California Gas Company
 
12.3
 
Southern California Gas Company Computation of Ratio of Earnings to Combined Fixed
     
Charges and Preferred Stock Dividends.
       
       
 
EXHIBIT 31 -- SECTION 302 CERTIFICATIONS
       
 
Sempra Energy
 
31.1
 
Statement of Sempra Energy’s Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
     
of the Securities Exchange Act of 1934.
       
 
31.2
 
Statement of Sempra Energy’s Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
     
of the Securities Exchange Act of 1934.
       
 
San Diego Gas & Electric Company
 
31.3
 
Statement of San Diego Gas & Electric Company’s Chief Executive Officer pursuant to Rules
     
13a-14 and 15d-14 of the Securities Exchange Act of 1934.
       
 
31.4
 
Statement of San Diego Gas & Electric Company’s Chief Financial Officer pursuant to Rules
     
13a-14 and 15d-14 of the Securities Exchange Act of 1934.
       
 
Southern California Gas Company
 
31.5
 
Statement of Southern California Gas Company’s Chief Executive Officer pursuant to Rules
     
13a-14 and 15d-14 of the Securities Exchange Act of 1934.
       
 
31.6
 
Statement of Southern California Gas Company’s Chief Financial Officer pursuant to Rules
     
13a-14 and 15d-14 of the Securities Exchange Act of 1934.
       
       
 
EXHIBIT 32 -- SECTION 906 CERTIFICATIONS
       
 
Sempra Energy
 
32.1
 
Statement of Sempra Energy’s Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350.
       
 
32.2
 
Statement of Sempra Energy’s Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350.
       
 
San Diego Gas & Electric Company
 
32.3
 
Statement of San Diego Gas & Electric Company’s Chief Executive Officer pursuant to 18
     
U.S.C. Sec. 1350.
       
 
32.4
 
Statement of San Diego Gas & Electric Company’s  Chief Financial Officer pursuant to 18
     
U.S.C. Sec. 1350.
       
 
Southern California Gas Company
 
32.5
 
Statement of Southern California Gas Company’s Chief Executive Officer pursuant to 18
     
U.S.C. Sec. 1350.
       
 
32.6
 
Statement of Southern California Gas Company’s Chief Financial Officer pursuant to 18
     
U.S.C. Sec. 1350.
       
       
 
EXHIBIT 101 -- INTERACTIVE DATA FILE
       
 
Sempra Energy / San Diego Gas & Electric Company / Southern California Gas Company
 
  101.INS
 
XBRL Instance Document
       
 
  101.SCH
 
XBRL Taxonomy Extension Schema Document
       
 
  101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
       
 
  101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
       
 
  101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
       
 
  101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
SIGNATURES
Sempra Energy:
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SEMPRA ENERGY,
(Registrant)
   
Date: August 4, 2015
By:  /s/ Trevor I. Mihalik
 
Trevor I. Mihalik
Senior Vice President, Controller and
Chief Accounting Officer

San Diego Gas & Electric Company:
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SAN DIEGO GAS & ELECTRIC COMPANY,
(Registrant)
   
Date: August 4, 2015
By:  /s/ Bruce A. Folkmann
 
Bruce A. Folkmann
Vice President, Controller, Chief Financial Officer and Chief Accounting Officer

Southern California Gas Company:
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SOUTHERN CALIFORNIA GAS COMPANY,
(Registrant)
   
Date: August 4, 2015
By:  /s/ Bruce A. Folkmann
 
Bruce A. Folkmann
Vice President, Controller, Chief Financial Officer and Chief Accounting Officer


Exhibit 10.1

Exhibit 10.1

 




THE SEMPRA ENERGY EMPLOYEE

AND DIRECTOR SAVINGS PLAN

(As Amended and Restated Effective as of June 16, 2015)









 



TABLE OF CONTENTS

ARTICLE I. TITLE AND DEFINITIONS

1.1

Title.

1.2

Definitions.

ARTICLE II. PARTICIPATION

2.1

Commencement of Participation

2.2

Newly Appointed or Elected Directors

ARTICLE III. CONTRIBUTIONS

3.1

Elections to Defer Compensation

3.2

Distribution Elections.

3.3

Employer Matching Contributions

3.4

FICA and Other Taxes.

ARTICLE IV. INVESTMENTS

4.1

Measurement Funds.

4.2

Investment Elections.

4.3

Compliance with Section 16 of the Exchange Act.

ARTICLE V. ACCOUNTS

5.1

Accounts.

5.2

Subaccounts.

ARTICLE VI. VESTING

ARTICLE VII. DISTRIBUTIONS

7.1

Distribution of Accounts.

7.2

Hardship Distribution.

7.3

Effect of a Change in Control.

7.4

Inability to Locate Participant.

7.5

Prohibition on Acceleration of Distributions.

ARTICLE VIII. ADMINISTRATION

8.1

Committee.

8.2

Administrator.

8.3

Committee Action.

8.4

Powers and Duties of the Committee.

8.5

Construction and Interpretation.

8.6

Information.

8.7

Compensation, Expenses and Indemnity.

8.8

Quarterly Statements.

8.9

Disputes.

ARTICLE IX. MISCELLANEOUS

9.1

Unsecured General Creditor.

9.2

Restriction Against Assignment.

9.3

Withholding.

9.3

Amendment, Modification, Suspension or Termination.

9.5

Designation of Beneficiary.

9.6

Insurance.

9.7

Governing Law.

9.8

Receipt of Release.

9.9

Compliance with Code Section 162(m)

9.10

Payments on Behalf of Persons Under Incapacity.

9.11

Limitation of Rights

9.12

Exempt ERISA Plan

9.13

Notice

9.14

Errors and Misstatements

9.15

Pronouns and Plurality

9.16

Severability

9.17

Status

9.18

Headings.

ARTICLE X. EMPLOYEES OF SEMPRA ENERGY TRADING CORPORATION  AND SEMPRA ENERGY SOLUTIONS LLC  

ARTICLE XI. SECTION 409A OF THE CODE






 

 


 



THE SEMPRA ENERGY EMPLOYEE AND DIRECTOR SAVINGS PLAN

(As Amended and Restated Effective as of June 16, 2015)

Effective as of January 1, 2005, Sempra Energy, a California corporation, established the Sempra Energy 2005 Deferred Compensation Plan (the “Plan”) which was designed to provide supplemental retirement income benefits for certain directors of Sempra Energy and for a select group of management and highly compensated employees of the Company (as defined herein) through deferrals of salary and incentive compensation and employer matching contributions.  The Plan has been amended from time to time and, effective as of January 1, 2011, the name of the Plan was changed to “The Sempra Energy Employee and Director Retirement Savings Plan”.  Effective as of June 29, 2012, the name of the Plan was changed to “The Sempra Energy Employee and Director Savings Plan”.  The following provisions constitute an amendment, restatement and continuation of the Plan as in effect immediately prior to June 16, 2015.

ARTICLE I.
TITLE AND DEFINITIONS

1.1

Title.

This Plan shall be known as the Sempra Energy Employee and Director Savings Plan.

1.2

Definitions.

Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.

(a)

Account” or “Accounts” shall mean a Participant’s Deferral Account and/or Employer Matching Account.

(b)

Administrator” shall mean the individual(s) designated by the Committee (who need not be a member of the Committee) to handle the day-to-day Plan administration.  If the Committee does not make such a designation, the Administrator shall be the most senior officer of Human Resources of Sempra Energy.  

(c)

Affiliate” has the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act.

(d)

 “Base Salary” shall mean, with respect to any Participant, the Participant’s annual base salary, excluding bonus, incentive and all other remuneration for services rendered to the Company, prior to reduction for any salary contributions to a plan established pursuant to Section 125 of the Code or qualified pursuant to Section 401(k) of the Code and prior to reduction for deferrals under this Plan.

(e)

Beneficial Owner” has the meaning set forth in Rule 13d-3 under the Exchange Act.

(f)

Beneficiary” or “Beneficiaries” shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Participant to receive the benefits specified hereunder in the event of the Participant’s death in accordance with Section 9.5.  

(g)

Board of Directors” or “Board” shall mean the Board of Directors of Sempra Energy.

(h)

Bonus” shall mean the annual cash incentive award earned by a Participant under the Company’s short-term incentive plans and other special cash payments or cash awards that may be granted by the Company from time to time to the extent that such other special cash payments or cash awards are permitted by the Committee to be deferred under the Plan.

(i)

Change in Control” shall be deemed to have occurred when any event or transaction described in paragraph (1), (2), (3) or (4) occurs, subject to paragraph (5):

(1)

Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Sempra Energy representing twenty percent (20%) or more of the combined voting power of Sempra Energy’s then outstanding securities; or

(2)

The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to, a consent solicitation, relating to the election of directors of Sempra Energy) whose appointment or election by the Board or nomination for election by Sempra Energy’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

(3)

There is consummated a merger or consolidation of Sempra Energy or any direct or indirect subsidiary of Sempra Energy with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Sempra Energy outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Sempra Energy or any subsidiary of Sempra Energy, at least sixty percent (60%) of the combined voting power of the securities of Sempra Energy or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Sempra Energy (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Sempra Energy (not including in the securities beneficially owned by such Person any securities acquired directly from Sempra Energy or its affiliates other than in connection with the acquisition by Sempra Energy or its affiliates of a business) representing twenty percent (20%) or more of the combined voting power of Sempra Energy’s then outstanding securities; or

(4)

The shareholders of Sempra Energy approve a plan of complete liquidation or dissolution of Sempra Energy or there is consummated an agreement for the sale or disposition by Sempra Energy of all or substantially all of Sempra Energy’s assets, other than a sale or disposition by Sempra Energy of all or substantially all of Sempra Energy’s assets to an entity, at least sixty percent (60%) of the combined voting power of the voting securities of which are owned by shareholders of Sempra Energy in substantially the same proportions as their ownership of Sempra Energy immediately prior to such sale.

(5)

An event or transaction described in paragraph (1), (2), (3), or (4) shall be a “Change in Control” only if such event or transaction is also a “change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation,” within the meaning of Section 409A of the Code.

(j)

Code” shall mean the Internal Revenue Code of 1986, as amended, and all applicable rules and regulations thereunder

(k)

Committee” shall mean the compensation committee of the Board of Directors.

(l)

Company” shall mean Sempra Energy and any successor corporations.  The term “Company” shall also include each corporation which is a member of a controlled group of corporations (within the meaning of Section 414(b) of the Code) of which Sempra Energy is a component member if the Committee provides that such corporation shall participate in the Plan and such corporation’s governing board of directors adopts the Plan.  Any corporation described in the preceding sentence which participates in the Plan immediately prior to the Effective Date shall be deemed to participate in the Plan and to have adopted the Plan without any further action of either such corporation or Sempra Energy, subject to the terms and conditions of the Plan.

(m)

Compensation” shall mean, with respect to a Participant, the following:

(1)

with respect to any Participant who is an employee, Base Salary and Bonus that the Participant is entitled to receive for services rendered to the Company.  In addition, for any Participant who is an Executive Officer “Compensation” includes (i) SERP Lump Sum, (ii) Restricted Stock Units and (iii) Severance Payments.  The Committee may also permit Eligible Individuals who are not Executive Officers to defer Restricted Stock Units (or any other compensation specifically designated by the Committee) provided that such Eligible Individual shall not be an Executive Officer for purposes of the Plan solely as a result of such deferral unless such Eligible Individual is otherwise designated as such by the Committee; and  

(2)

with respect to any Director, retainer payments and/or meeting and other fees (including Elective Phantom Share Amounts and Nonelective Phantom Share Amounts), received from Sempra Energy for services performed by the Participant as a Director.  

(n)

Deferral Account” shall mean the bookkeeping account maintained under the Plan for each Participant that is credited with amounts equal to the portion of the Participant’s Compensation that he elects to defer pursuant to Section 3.1, debited by amounts equal to all distributions to and withdrawals made by the Participant and/or his Beneficiary and adjusted for investment earnings and losses pursuant to Article V.  The Deferral Account may be further subdivided into subaccounts as determined by the Administrator.

(o)

Deferral Election Form” shall mean the form designated by the Administrator for purposes of making deferrals under Section 3.1.

(p)

Director” shall mean an individual who is a non-employee member of the Board.

(q)

Disability or Disabled” means, with respect to a Participant, that the Participant:

(1)

is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or

(2)

is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident or health plan covering employees of such Participant’s employer,

in either case, as determined in accordance with Section 409A of the Code.

(r)

Distributable Amount” of a Participant’s subaccounts with respect to a Plan Year shall mean the sum of the vested balance of the subaccount in a Participant’s Deferral Account and Employer Matching Account with respect to such Plan Year.

(s)

Effective Date” shall mean June 16, 2015.

(t)

(1)

Election Period” with respect to a Plan Year shall mean the period designated by the Administrator; provided, however, that such period shall be no less than ten (10) business days.  The Election Period with respect to a Plan Year shall end not later than the last day of the prior Plan Year; provided, however, that, in the case of an Eligible Individual who first becomes eligible to participate in the Plan during a Plan Year, the Election Period may be the thirty (30) calendar day period (or such shorter period specified by the Administrator) commencing on the date such Eligible Individual first becomes eligible to participate in accordance with Section 409A of the Code; and provided, further, in the case of an Eligible Individual’s election to defer a Bonus (or portion thereof) for a Plan Year that is performance-based compensation within the meaning of Section 409A of the Code, the Election Period may be a period designated by the Administrator during such Plan Year that satisfies the requirements of Section 409A of the Code.

(2)

Notwithstanding paragraph (1), in the case of a Director who becomes a Participant in accordance with Section 2.2, with respect to the Plan Year in which such Director first becomes eligible to participate in the Plan by reason of appointment or election as a Director, “Election Period,” for purposes of:  (A) such Director’s election under paragraph 3.1(b)(4) to defer any Elective Phantom Share Amount with respect to an initial equity award granted during the Plan Year shall be the thirty (30) calendar day period (or such shorter period designated by the Administrator) after the date such Director first becomes eligible to participate in the Plan (which period shall end not later than the day next preceding the grant date of such initial equity award), and (B) such Director’s election under Section 3.1(f) of the time and form of payment of any Nonelective Phantom Share Account (or any prorated Nonelective Phantom Share Amount) credited during such Plan Year shall be the thirty (30) calendar day period (or such shorter period designated by the Administrator) after such appointment or election (which period shall end not later than the day next preceding the first day of the calendar quarter with respect to such Nonelective Phantom Share Amount (or such prorated Nonelective Phantom Share Amount) as determined under Section 3.1(f)); provided that any such election under clause (A) or (B) satisfies the requirements of Section 409A of the Code.

(u)

Elective Phantom Share Amount” ” shall mean, with respect to an initial or annual equity award by Sempra Energy to a Participant who is a Director, which the Director may elect to receive in the form of (1) an award of Restricted Stock Units, or (2) an amount credited to such Participant’s Deferral Account in the Sempra Energy Stock Fund, the dollar value designated by the Board for such equity award that is used for purposes of determining the number of Restricted Stock Units subject to such award, or the amount to be credited to such Participant’s Deferral Account.  In the case of a Director who first becomes a Director by reason of appointment or election as a Director, any such initial equity award shall be granted on the tenth (10th) New York Stock Exchange trading day after such appointment or election.

(v)

Eligible Individual” shall mean those individuals selected by the Committee from (1) those employees of the Company who either (A) are Executive Officers or (B) have Base Salary for a calendar year that is at least $165,000, as adjusted by the Committee from time to time and (2) those Directors who are not employees of the Company.  The Committee may, in its sole discretion, select such other individuals to participate in the Plan who do not otherwise meet the foregoing criteria.

(w)

Employer Matching Account” shall mean the bookkeeping account maintained under the Plan for each Participant that is credited with an amount equal to the Employer Matching Contribution, if any, debited by amounts equal to all distributions to and withdrawals made by the Participant and/or his Beneficiary and adjusted for investment earnings and losses pursuant to Article V.

(x)

Employer Matching Contributions” shall mean the employer matching contribution made to the Plan pursuant to Section 3.3.

(y)

ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and all applicable rules and regulations thereunder.

(z)

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder.

(aa)

Executive Officer” shall mean an employee of the Company who holds a position as an executive officer of Sempra Energy, is eligible to participate in the Sempra Energy Supplemental Executive Retirement Plan or who is otherwise designated as an Executive Officer by the Committee.  

(bb)

401(k) Plan” shall mean the Sempra Energy Savings Plan, as in effect from time to time,  maintained by Sempra Energy under Section 401(k) of the Code.

(cc)

Manager” shall mean an employee of the Company who is an Eligible Individual, other than an Executive Officer or a Director.

(dd)

Measurement Fund” shall mean one or more of the investment funds selected by the Committee pursuant to Section 4.1.

(ee)

Moody’s Plus Rate” shall mean the Moody’s Rate (as defined below) plus the greater of  (1) 10% of the Moody’s Corporate Bond Yield Average – Monthly Average Corporates as published by Moody’s Investors Service, Inc. (or any successor) or (2) one percentage point per annum. The Moody’s Rate for a month means the average of the daily Moody’s Corporate Bond Yield Average – Monthly Average Corporates for the applicable month.

(ff)

Nonelective Phantom Share Amount” shall mean the dollar amount designated by the Board for purposes of Section 3.1(f) to be invested in the Sempra Energy Stock Fund.

(gg)

Participant” shall mean any Eligible Individual who becomes a Participant in accordance with Article II and who has not received a complete distribution of the amounts credited to his Accounts.

(hh)

Payroll Date” shall mean, with respect to any Participant, the date on which he would otherwise be paid Compensation.

(ii)

Payment Date” shall mean the date determined by the Administrator that is on or within thirty (30) calendar days after one of the following dates as designated by the Participant in his distribution form election with respect to a Plan Year:

(1)

the first day of the first calendar month on or next following thirty (30) calendar days after the date of the Participant's Separation from Service or Disability, or

(2)

the first day of the first, second, third, fourth or fifth calendar year next following the date of the Participant’s Separation from Service or Disability.  

“Payment Date” shall also mean the Scheduled Withdrawal Date elected in accordance with the provisions of Section 7.1(b).  

(jj)

 “Person” means any person, entity or “group” within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, except that such term shall not include (1) Sempra Energy or any of its Affiliates, (2) a trustee or other fiduciary holding securities under an employee benefit plan of Sempra Energy or any of its Affiliates, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) a corporation owned, directly or indirectly, by the shareholders of Sempra Energy in substantially the same proportions as their ownership of stock of Sempra Energy, or (5) a person or group as used in Rule 13d-1(b) under the Exchange Act.

(kk)

Plan” shall mean the Sempra Energy Employee and Director Savings Plan set forth herein, as amended from time to time.

(ll)

Plan Year” shall mean the twelve (12) consecutive month period beginning on each January 1 and ending on each December 31.

(mm)

Restricted Stock Units” shall mean restricted stock units granted to a Participant under the Sempra Energy 2008 Long Term Incentive Plan, Sempra Energy 2013 Long-Term Incentive Plan,  and any successor plan(s) thereto.

(nn)

Rule 16b-3” shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time.

(oo)

Scheduled Withdrawal Date” shall be in January in the year elected by the Participant for an in-service withdrawal of all amounts of Compensation deferred in a given Plan Year, but excluding earnings and losses attributable thereto, as set forth on the election forms for such Plan Year.  

(pp)

Sempra Energy Stock Fund” shall mean the Measurement Fund in which investment earnings and losses parallel the investment return on the common stock of Sempra Energy.

(qq)

Separation from Service” shall mean, with respect to a Participant, the Participant’s “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).   

(rr)

 “SERP Lump Sum” shall mean the lump sum retirement benefit that would be payable to an Executive Officer who is a Plan Participant under either the Sempra Energy Supplemental Executive Retirement Plan or the Sempra Energy Excess Cash Balance Plan.

(ss)

Severance Payment” shall mean any cash severance payments payable to a Participant under an executive employment agreement or severance agreement with the Company.

(tt)

Specified Employee” shall mean a specified employee determined in accordance with the requirements of Section 409A of the Code.

(uu)

Subaccount” or “Subaccounts” shall mean the subaccount or subaccounts maintained with respect to a Participant’s Deferral Account or Employer Matching Account.

(vv)

“Valuation Date”, with respect to the Measurement Funds that are available under the 401(k) Plan, shall have the same meaning as under the 401(k) Plan.  For purposes of the Moody’s Plus Rate, “Valuation Date” shall mean the last day of the calendar month.  

ARTICLE II.
PARTICIPATION

2.1

Commencement of Participation

Subject to Section 2.2, an Eligible Individual shall become a Participant in the Plan by (1) electing to make deferrals in accordance with Section 3.1 and (2) filing such other forms as the Administrator may reasonably require for participation hereunder.  

2.2

Newly Appointed or Elected Directors

A Director who first becomes an Eligible Individual during a Plan Year by reason of appointment or election as a Director shall become a Participant on the date of such appointment or election.  Such Eligible Individual may elect to make deferrals in accordance with Section 3.1 and shall file such forms as the Administrator reasonably requires.

ARTICLE III.
CONTRIBUTIONS

3.1

Elections to Defer Compensation

(a)

General Rule.  Each Eligible Individual may defer Compensation for a Plan Year by filing with the Administrator a Deferral Election Form for such Plan Year that conforms to the requirements of this Section 3.1, no later than the last day of the applicable Election Period for such Plan Year, and such deferral election shall become irrevocable on the last day of the applicable Election Period for such Plan Year (or such later date permitted by the Administrator consistent with the requirements of Section 409A of the Code).  Unless otherwise provided by the Committee, an Eligible Individual who first becomes eligible to participate in the Plan during a Plan Year may elect to defer Compensation for such Plan Year; provided, however, that any such election to defer Compensation for such Plan Year must be filed during the Election Period prior to the effective date of such election, shall be irrevocable when made, and shall be effective only for Compensation that constitutes compensation for services performed during periods during the Plan Year beginning after the effective date of such election.  Notwithstanding the previous sentence, if an Eligible Individual’s Bonus (or portion thereof) is a performance-based compensation within the meaning of Section 409A of the Code, the Administrator may permit such Eligible Individual to file an election to defer such Bonus (or such portion thereof), or change such Eligible Individual’s prior election to defer such Bonus (or such portion thereof), no later than the date that is six (6) months before the end of the performance period over which such services are to be performed, under the terms and conditions that may be specified by the Administrator, in accordance with Section 409A of the Code, and such deferral election shall become irrevocable on the date that is six (6) months before the end of the performance period.  

(b)

Special Rules.  Notwithstanding the above, the following restrictions apply to deferrals of certain elements of Compensation:

(1)

Severance Payments.  A Participant may elect to defer Severance Payments (or a portion thereof), to the extent permitted by the Committee.  The Participant’s election to defer Severance Payments (or a portion thereof) shall be irrevocable when made, shall be made at least twelve (12) months prior to the first date on which Severance Payments are scheduled to be paid (or, in the case of installment payments, twelve (12) months prior to the date on which the first amount is to be paid), and shall not take effect until at least twelve (12) months after the date on which the election is made.  Such deferral election shall provide that the amount deferred shall be deferred for a period of not less than five (5) years from the date the payment of the amount deferred would otherwise have been made (or, in the case of installment payments treated as a single payment as determined under Section 409A of the Code, five (5) years from the date the first amount was scheduled to be paid).  

(2)

Restricted Stock Units.  Each Eligible Individual designated by the Committee as so eligible to defer, may elect to defer Restricted Stock Units (or a portion thereof), in accordance with such rules as the Committee may establish, which such rules shall not be inconsistent with the deferral election rules set forth in Sections 3.1 and 3.2 or the distribution provisions of Section 7.1.  In order to defer Restricted Stock Units (or a portion thereof), an eligible Participant must file the appropriate Deferral Election Form no later than the election date required under Section 409A of the Code.  The Participant’s election to defer Restricted Stock Units (or a portion thereof) shall apply only if the Restricted Stock Units (or portion thereof) constitute a legally binding right to a payment of compensation in a subsequent taxable year and, absent a deferral election, would be treated as a short-term deferral, within the meaning of Section 409A of the Code.  Any deferral election that does not satisfy the requirements for an initial deferral election under Section 409A of the Code shall be irrevocable when made and shall be made in accordance with Section 409A of the Code, applied as if the amount were a deferral of compensation and the scheduled payment date for the amount were the date the substantial risk of forfeiture lapses. Such subsequent deferral election shall be irrevocable when made, shall be made at least twelve (12) months prior to the first date on which Restricted Stock Units are scheduled to be paid (or, in the case of installment payments, twelve (12) months prior to the date on which the first amount is to be paid), and shall not take effect until at least twelve (12) months after the date on which the election is made.  Such deferral election shall provide that the amount deferred shall be deferred for a period of not less than five (5) years from the date the payment of the amount deferred would otherwise have been made (or, in the case of installment payments treated as a single payment as determined under Section 409A of the Code, five (5) years from the date the first amount was scheduled to be paid); provided, however, that such deferral election may provide that the deferred amounts will be payable upon a change in control event (within the meaning of Section 409A of the Code) without regard to the five (5) year additional deferral requirement.  Deferrals of Restricted Stock Units shall be invested in the Sempra Energy Stock Fund and may not be moved to any other Measurement Fund.  Notwithstanding anything contained in the Plan to the contrary, a Participant may not elect a Scheduled Withdrawal Date with respect to the deferral of any Restricted Stock Units.

(3)

SERP Lump Sum.  A Participant may elect to defer a SERP Lump Sum (or a portion thereof), to the extent permitted by the Committee.  In order to defer a SERP Lump Sum (or a portion thereof), an eligible Participant must file the appropriate Deferral Election Form no later than the election date required under Section 409A of the Code.  The Participant’s election to defer a SERP Lump Sum (or a portion thereof) shall satisfy the requirements of Section 409A of the Code as a subsequent deferral.  Such deferral election shall be irrevocable when made, and shall not take effect until at least twelve (12) months after the date on which the election is made.  Such deferral election shall provide that the amount deferred shall be deferred for a period of not less than five (5) years from the date the payment of the amount deferred would otherwise have been made (or, in the case of installment payments treated as a single payment, five years from the date the first amount was scheduled to be paid) in accordance with Section 409A of the Code.

(4)

Elective Phantom Share Amounts.  A Participant who is a Director and is entitled to receive an initial or annual equity award from Sempra Energy, in the form of an award of Restricted Stock Units or an amount credited to his Deferral Account, may elect to have the Elective Phantom Share Amount with respect to such award credited to his Deferral Account (in lieu of such award of Restricted Stock Units) and defer such Elective Phantom Share Amount.  In order to elect such credit and deferral of the Elective Phantom Share Amount with respect to such an equity award, an eligible Participant must file the appropriate Deferral Election Form no later than the last day of the applicable Election Period for the Plan Year during which such equity award is granted, and such deferral election shall become irrevocable on the last day of the applicable Election Period for such Plan Year.  A Director who first becomes a Participant during a Plan Year may make a deferral election during such Plan Year in accordance with subparagraph 1.2(t)(2)(A).  Such an election to defer an Elective Phantom Share Amount with respect to an equity award granted during a Plan Year must be filed during the Election Period prior to the effective date of such election and shall be irrevocable when made and shall be effective only for an Elective Phantom Share Amount that constitutes compensation for services performed after the effective date of such election.  If a Participant fails to elect such credit and deferral of the Elective Phantom Share Amount with respect to such an equity award, the Participant’s equity award shall be made in the form of an award of Restricted Stock Units.  A Participant shall make a separate election to defer Elective Phantom Share Amounts for each Plan Year.

(c)

Deferral Amounts.  The amount of Compensation which a Participant may elect to defer for a Plan Year is such Compensation earned on or after the time at which the Participant elects to defer each Plan Year in accordance with Section 3.1(a), and which is earned during such Plan Year (other than with respect to subsequent deferrals of previously deferred amounts or other amounts that are treated as subsequent deferrals for purposes of Section 409A of the Code).  

(1)

Each Participant who is a Manager shall be permitted to defer, in any whole percentage:  (A) from 6% to 85% of Base Salary, (B) from 6% to 85% of his Bonus, and (C) if permitted by the Committee, between 10% and 100% of such Participant’s Restricted Stock Units, subject to Section 3.1(b).

(2)

Each Participant who is an Executive Officer shall be permitted to defer, in any whole percentage:  (A) from 6% to 85% of Base Salary, (B) from 6% to 85% of his Bonus and (c) from 10% to 100% of such Participant’s Restricted Stock Units, Severance Payments and SERP Lump Sum, subject to Section 3.1(b).

(3)

Each Participant who is a Director: (A) shall be permitted to defer, in any whole percentage, from 10% to 100% of his Compensation (other than Elective Phantom Share Amounts and Nonelective Phantom Share Amounts), and (B) shall be permitted to defer 100% of his Elective Phantom Share Amounts.  In the case of a Participant who is a Director, 100% of such Participant’s Nonelective Phantom Share Amounts shall be deferred under Section 3.1(f).

Notwithstanding the limitations established above, the total amount deferred by a Participant shall be limited in any calendar year, if necessary, to satisfy the Participant’s income and employment tax withholding obligations (including Social Security, unemployment and Medicare), and the Participant’s employee benefit plan contribution requirements, determined on the first day of the Election Period for such Plan Year, in any case as determined by the Administrator or the Committee, as applicable.  

(d)

Duration of Deferral Election.

(1)

A Participant shall not modify or suspend his election to defer Compensation during a Plan Year.

(2)

A Participant must file a new deferral election for each subsequent Plan Year.  In the event a Participant fails to file a timely deferral election for the next Plan Year, he shall be deemed to have elected not to defer any Compensation for such Plan Year.

(3)

A Participant’s election to defer all or any portion of his SERP Lump Sum shall automatically become void in the event the Participant dies or becomes disabled while employed by the Company.

(4)

A Participant who is a Director must file a new deferral election for the Elective Phantom Share Amounts for the equity awards granted during each Plan Year.  In the event a Participant fails to file a timely deferral election for the next Plan Year, he shall be deemed to have elected not to defer the Elective Phantom Share Amounts for the equity awards granted during such Plan Year.

(e)

Elections.  Any Eligible Individual who does not elect to defer Compensation during his Election Period for a Plan Year may subsequently participate in the Plan in accordance with the terms and conditions of the Plan.  

(f)

Nonelective Compensation Deferrals for Directors.  The Board may determine from time to time whether deferrals of Nonelective Phantom Share Amounts shall be credited to the Deferral Accounts of one or more Participants who are Directors.  The Board shall designate the Nonelective Phantom Share Amounts and any conditions under which a Director shall be entitled to have Nonelective Phantom Share Amounts credited to his Deferral Account.  A Nonelective Phantom Share Amount credited to a Director’s Deferral Account shall constitute compensation for services to be performed by the Director during a calendar quarter, and the Nonelective Phantom Share Amount for such calendar quarter shall be credited to the Director’s Deferral Account on the first New York Stock Exchange trading day of such calendar quarter; provided, however, that, in the case of a Director who first becomes a Director by reason of appointment or election as a Director, for purposes of the calendar quarter during which such appointment or election occurs, such Director’s Deferral Account shall be credited with a prorated portion of the Nonelective Phantom Share Amount for the portion of such calendar quarter (if any), commencing on the tenth (10th) New York Stock Exchange trading day after such Director’s appointment or election and ending on the last day of the calendar quarter, and any such prorated portion of the Nonelective Phantom Share Amount shall constitute compensation for services to be performed by the Director during the period commencing on such tenth (10th) New York Stock Exchange trading day and ending on the last day of such calendar quarter and shall be determined based on the portion of such calendar quarter that comprises such period and such prorated portion of the Nonelective Phantom Share Amount shall be credited to the Director’s Deferral Account on the New York Stock Exchange trading day next following the last day of such calendar quarter.  The service period for a Nonelective Phantom Share Amount (or a prorated Nonelective Phantom Share Amount) shall be the calendar quarter, or portion thereof, during which the Director performs services for which such Nonelective Phantom Share Amount (or prorated Phantom Share Amount) constitutes compensation.  Such Nonelective Phantom Share Amounts shall be deferred on a nonelective basis.  An eligible Participant must file the appropriate Deferral Election Form with respect to the Nonelective Phantom Share Amounts that constitute compensation for services performed during periods during the Plan Year beginning after the effective date of such election, for purposes of electing the Payment Date and the form of distribution of such Nonelective Phantom Share Amounts, no later than the last day of the applicable Election Period for the Plan Year during which such Nonelective Phantom Share Amounts are credited, and such deferral election shall become irrevocable on the last day of the applicable Election Period for such Plan Year.  The Administrator shall permit such a Participant who first becomes a Participant during a Plan Year to have his first Election Period with respect to such election of the Payment Date and the form of distribution during such Plan Year in accordance with subparagraph 1.2(v)(2)(B).  Such an election as to the Payment Date and the form of distribution must be filed during the Election Period prior to the effective date of such election and shall be irrevocable when made and shall be effective only for a Nonelective Phantom Share Amount that constitutes compensation for services performed after the date of such election.   

(g)

Termination of Participation and/or Deferrals.  If the Committee and/or the Administrator determines in good faith that a Participant no longer qualifies as a Director or a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee and/or the Administrator shall have the right, in its sole discretion and only for purposes of preserving the Plan’s exemption from Title I of ERISA, to prevent the Participant from making deferral elections for future Plan Years.  

3.2

Distribution Elections.

(a)

General Rule.  Each Participant shall make a separate distribution election with respect to each Plan Year for which such Participant elects to defer Compensation in accordance with Section 3.1.  In the case of each Participant who is a Director, such Participant shall make a separate distribution election with respect to each Plan Year without regard to whether such Participant elects to defer Compensation in accordance with Section 3.1.  A Participant’s distribution election with respect to a Plan Year shall apply to:  (1) the subaccount in his Deferral Account to which shall be credited the amount equal to the portion of his Compensation earned during such Plan Year that he elects to defer pursuant to Section 3.1, (2) in the case of a Participant who is a Director, the subaccount in his Deferred Account to which shall be credited any Elective Phantom Share Amounts for equity awards granted during such Plan Year that he elects to defer pursuant to Section 3.1, and the subaccount in his Deferral Account to which shall be credited any Nonelective Phantom Share Amounts during such Plan Year pursuant to Section 3.1(f), and (3) the subaccount in his Employer Matching Account to which shall be credited the amount equal to the Employer Matching Contribution for such Plan Year.  A Participant may elect any Payment Date described in Section 1.2(ii), and may elect distribution in the normal form, as described in paragraph 7.1(a)(1), or an optional form described in paragraph 7.1(a)(2).  Such Payment Date and distribution form elections shall be made on such Participant’s Deferral Election Form during the Election Period for which such Participant elects to defer Compensation under Section 3.1 for such Plan Year, and such Payment Date and distribution form elections with respect to such Plan Year shall be irrevocable, except as provided in subsection (b).  A Participant may elect any Payment Date described in Section 1.2(ii), and may elect distribution in the normal form, as described in paragraph 7.1(a)(1), or an optional form described in subparagraphs 7.1(a)(2)(A), (B) or (C).  In the event a Participant fails to elect a Payment Date for his Distributable Amount with respect to a Plan Year, his Payment Date for his Distributable Amount with respect to such Plan Year shall be the date described in paragraph 1.2(ii)(1).  In the event a Participant fails to make a distribution form election for his Distributable Amount with respect to a Plan Year, his Distributable Amount with respect to such Plan Year shall be distributed in the normal form, as described in paragraph 7.1(a)(1) in the event of his Separation from Service or Disability, except as provided in subsection (b).  Except as provided in subsection (b), a Participant’s distribution for his Distributable Amount with respect to a Plan Year shall be made or commence on such Participant’s Payment Date.

(b)

Changes to Distribution Form Election.   Subject to subsection (e), a Participant may change his distribution form election for his Distributable Amount with respect to a Plan Year in accordance with this subsection (b) as follows:

(1)

Change from Lump Sum.  If such Participant elected to receive the distribution of his Distributable Amount with respect to a Plan Year in the event of his Separation from Service or Disability in a lump sum, such Participant may change such distribution form election by making a new distribution form election for his Distributable Amount with respect to such Plan Year providing for distribution in one of the following forms, with such distribution made or commencing on the fifth anniversary of his Payment Date:


(A)

a lump sum,


(B)

annual installments (calculated as set forth at paragraph 7.1(a)(6)) over five years,

 

(C)

annual installments (calculated as set forth at paragraph 7.1(a)(6) over ten (10) years, or


(D)

annual installments (calculated as set forth at paragraph 7.1(a)(6)) over fifteen (15) years.


(2)

Change from Installments.  If such Participant elected to receive the distribution of his Distributable Amount with respect to a Plan Year in the event of his Separation from Service or Disability in annual installments over five, ten or fifteen years, such Participant may change such distribution form election by making a new distribution form election for his Distributable Amount with respect to such Plan Year providing for distribution in one of the following forms, with such distribution commencing on the fifth anniversary of his Payment Date:


(i)

annual installments (calculated as set forth at paragraph 7.1(a)(6)) over the period of years specified in such Participant’s initial distribution form election, or


(ii)

annual installments (calculated as set forth at paragraph 7.1(a)(6)) over a period of either ten (10) years or fifteen (15) years, provided that such period exceeds the period of years specified in such Participant’s initial distribution form election.


(3)

A Participant may make only one change to his distribution form election with respect to a Plan Year under this subsection (b).


(c)

Election of Scheduled Withdrawal Date.  A Participant may elect a Scheduled Withdrawal Date with respect to his deferrals of Compensation (but excluding any investment earnings on such amounts) (the “Withdrawal Amount”) with respect to a Plan Year.  Such election of a Scheduled Withdrawal Date for such Participant’s Withdrawal Amount with respect to a Plan Year shall be made by such Participant during the Election Period for which such Participant elects to defer Compensation under Section 3.1 for such Plan Year, and such election of a Scheduled Withdrawal Date shall be irrevocable, except as provided in subsection (d).  A Participant may make separate Scheduled Withdrawal Date elections for his deferrals of Compensation (excluding any investment earnings on such amounts) with respect to different Plan Years.  A Participant’s Withdrawal Amount with respect to a Plan Year shall be credited to subaccounts under such Participant’s Accounts for such Plan Year.  A Participant shall not be required to elect a Scheduled Withdrawal Date with respect to his deferrals of Compensation for a Plan Year and, if a Participant fails to make an election of a Scheduled Withdrawal Date for a Plan Year, no Scheduled Withdrawal Date shall apply with respect to his deferrals of Compensation for such Plan Year.  


(d)

Change of Scheduled Withdrawal Date.  Subject to subsection (e), if a Participant elected a Scheduled Withdrawal Date with respect to his deferrals of Compensation (excluding any investment earnings on such amounts) with respect to a Plan Year, such Participant may change such Scheduled Withdrawal Date for the Withdrawal Amount with respect to such Plan Year by electing a new Scheduled Withdrawal Date for the Withdrawal Amount with respect to such Plan Year that is not less than five years later than the Scheduled Withdrawal Date previously elected by such Participant for such Plan Year.   A Participant who has not elected a Scheduled Withdrawal Date for his deferrals of Compensation (excluding any investment earnings on such amounts) for a Plan Year may not subsequently elect a Scheduled Withdrawal Date for his deferrals of Compensation (excluding any investment earnings on such amounts) for such Plan Year.  A Participant may make only one change to the Scheduled Withdrawal Date with respect to each Plan Year under this subsection (d).  


(e)

Limitation on Distribution Changes.  A Participant’s election to change to his distribution form election with respect to a Plan Year under subsection (b), or change of a Scheduled Withdrawal Date with respect to a Plan Year under subsection (d), shall be subject to the following limitations:

(1)

The Participant’s election to change his distribution election form with respect to a Plan Year, or change his Scheduled Withdrawal Date with respect to a Plan Year, shall not take effect until at least twelve (12) months after his election to change the distribution form election, or Scheduled Withdrawal Date, is made.  If the distribution of such Participant’s Distributable Amount with respect to a Plan Year (in the case of a change in his distribution election form), or the distribution of the Withdrawal Amount with respect to such Plan Year (in the case of a change in his Scheduled Withdrawal Date), is made or commence before the election to change his distribution form election or Scheduled Withdrawal Date, as the case may be, becomes effective, the election to change his distribution form election or Scheduled Withdrawal Date shall not thereafter become effective, and distributions shall be made in accordance with the distribution form election, and Scheduled Withdrawal Date (if any), as applicable, in effect prior to the Participant’s election to change.


(2)

The Participant’s election to change his distribution election form with respect to a Plan Year, or change his Scheduled Withdrawal Date with respect to a Plan Year, shall provide that each payment with respect to such new distribution form election, or new Scheduled Withdrawal Date, shall be deferred for a period of not less than five years from the date such payment would otherwise have been made.


(3)

The Participant’s election to change his Scheduled Withdrawal Date with respect to a Plan Year shall not be made less than twelve (12) months prior to the date of the first scheduled payment under the Participant’s initial election of the Scheduled Withdrawal Date with respect to such Plan Year.


The limitations under this subsection (e) shall be applied in accordance with Section 409A of the Code


3.3

Employer Matching Contributions

(a)

The Company shall make an Employer Matching Contribution for each payroll date during a Plan Year, on behalf of each Participant who is employed by the Company on such payroll date, who has been employed by the Company for at least one year as of such payroll date, and who makes deferrals of Base Salary and/or Bonus under Article III, in an amount equal to:

(1)

the product of (A) 3% and (B) the sum of the deferrals of Base Salary and/or Bonus deferred under Article III for such payroll period; plus


(2)

the product of (A) 3% and (B) the difference between (I) the Participant’s Compensation for such payroll period and (II) the sum of the deferrals of Base Salary and/or Bonus deferred under Article III for such payroll period, reduced by (C) the amount of the matching contribution made under the 401(k) Plan for such payroll period not in excess of 3% of the Participant’s eligible 401(k) Plan compensation. Notwithstanding any other provision of the Plan to the contrary, no Employer Matching Contributions shall be made under this paragraph (2) unless and until the Participant has made to the 401(k) Plan the maximum elective contributions permitted under section 402(g) or the maximum pre-tax elective contributions permitted under the terms of the 401(k) Plan and in no event shall the Employer Matching Contributions made pursuant to this paragraph (2) exceed 100% of the matching contributions that would be provided under the 401(k) Plan absent any plan-based restrictions on contributions to qualified plans under the Code.

 

If a Participant is employed by more than one corporation that is included in the Company, the foregoing computation shall be applied to each such corporation based on the portion of the Plan Year during which the Participant was employed by such corporation.  Notwithstanding the above, the Committee reserves the right to change or eliminate the Employer Matching Contribution in its sole discretion for any subsequent Plan Year.

(b)

The Employer Matching Contribution for a Plan Year shall be credited to a Participant’s Employer Matching Account in the manner determined by the Administrator.

3.4

FICA and Other Taxes.  

(a)

Withholding, Generally.  The Company shall have the right to withhold from any payments due under the Plan (or with respect to amounts credited to the Plan) any taxes required by law to be withheld in respect of such payment (or credit).

(b)

Annual Deferral Amounts.  For each Plan Year in which a Participant who is an employee makes a deferral under Section 3.1, the Participant’s employer shall withhold from that portion of the Participant’s Compensation that is not being deferred, in a manner determined by the employer, the Participant’s share of FICA and other employment taxes on such amount.  If necessary, the Administrator may reduce the Participant's deferrals under Section 3.1 or make deductions from his Deferral Account in order to comply with this Section 3.4, to the extent permitted under Section 409A of the Code.

(c)

Employer Matching Amounts.  For each Plan Year in which a Participant is credited with a contribution to his Employer Matching Account under Section 3.3, the Participant’s employer shall withhold from the Participant’s Compensation that is not deferred, in a manner determined by the employer, the Participant’s share of FICA and other employment taxes.  If necessary, the Administrator may reduce the Participant’s Employer Matching Account in order to comply with this Section 3.4, to the extent permitted under Section 409A of the Code.

(d)

Sempra Energy Stock Fund.  With respect to distributions of all or a portion of balances invested in the Sempra Energy Stock Fund, withholding obligations shall be satisfied through the surrender of the applicable withholding percentage of such distributed balances (or portion thereof) in the Sempra Energy Stock Fund.  Unless otherwise approved by the Committee, withholding obligations for Restricted Stock Units deferred into the Plan shall be satisfied by payment by the applicable Participant, deducted from other Compensation payable to such Participant which has not been deferred under the Plan, or a combination of these methods.

ARTICLE IV.
INVESTMENTS

4.1

Measurement Funds.

(a)

Election of Measurement Funds,  In the manner designated by the Administrator, Participants may elect one or more Measurement Funds to be used to determine the additional amounts to be credited to their Accounts.  Although the Participant may designate the Measurement Funds, the Committee shall not be bound by such designation; provided, however, that any substitute Measurement Funds designated by the Committee for a Participant must provide the Participant with an investment opportunity comparable to the original Measurement Funds designated by the Participant.  The Committee shall select from time to time, in its sole discretion, the Measurement Funds to be available under the Plan; provided, however, that such Measurement Funds shall be the same as the investment funds which are available from time to time under the 401(k) Plan, except to the extent prohibited by law.     

(b)

No Actual Investment.  Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation to his Accounts thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Accounts shall not be considered or construed in any manner as an actual investment of his Accounts in any such Measurement Fund.  In the event that the Administrator, the Committee, or the trustee, as applicable, in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves.  Without limiting the foregoing, a Participant’s Accounts shall at all times be a bookkeeping entry only and shall not represent any investment made on his behalf by the Company.  The Participant shall at all times remain an unsecured creditor of the Company

4.2

Investment Elections.  

(a)

Participants.  

(1)

Deferral Accounts.  Except as provided in paragraph 4.2(a)(2) and Section 4.3, Participants may designate how their Deferral Accounts shall be deemed to be invested under the Plan.

(A)

Such Participants may make separate investment elections for (I) their future deferrals of Compensation and (II) the existing balances of their Deferral Accounts.  

(B)

Such Participants may make and change their investment elections by choosing from the Measurement Funds designated by the Committee in accordance with the procedures established by the Administrator.  

(C)

Except as otherwise designated by the Committee, the available Measurement Funds under this paragraph 4.2(a)(1) shall be the investment funds under the 401(k) Plan (excluding the Stable Value Fund and any brokerage account option).  

(D)

If a Participant fails to elect a Measurement Fund under this Section 4.2(a), he shall be deemed to have elected the Measurement Fund based on the Moody’s Plus Rate (unless a different default fund is designated by the Committee) for all of his Accounts.

(2)

Employer Matching Account and Certain Deferral Subaccounts.  

(A)

(2)

Employer Matching Account and Certain Deferral Subaccounts.  Unless otherwise provided by the Administrator, Employer Matching Contributions credited to a Participant’s Employer Matching Account shall be invested in Measurement Funds in the same proportion as the corresponding deferrals of Compensation that are credited to his Deferral Account.  A Participant may, however, transfer the investment of the Employer Matching Contributions credited to his Employer Matching Account into any Measurement Fund, as permitted by the Committee, and may change their investment elections by choosing from the Measurement Funds designated by the Committee in accordance with the procedures established by the Administrator. The deferrals of a Participant’s Restricted Stock Units credited to such Participant’s Deferral Account shall be deemed invested in the Sempra Energy Stock Fund and may not be moved into any other Measurement Fund.

(B)

The deferrals of Elective Phantom Share Amounts and Nonelective Phantom Share Amounts credited to a Participant’s Deferral Account shall be initially deemed invested in the Sempra Energy Stock Fund and shall remain deemed invested in the Sempra Energy Stock Fund until the Participant’s Separation from Service.  After the Participant’s Separation from Service, a Participant may direct the investment of the Elective Phantom Share Amount subaccounts or Nonelective Phantom Share Amount subaccounts of the Participant’s Deferral Account into any other Measurement Fund, as permitted by the Committee.

(b)

Continuing Investment Elections.  Participants who have had a Separation From Service but not yet commenced distributions under Article VII or Participants or Beneficiaries who are receiving installment payments may continue to make investment elections pursuant to subsection (a) above, as applicable, except as otherwise determined by the Committee.  

4.3

Compliance with Section 16 of the Exchange Act.  

(a)

Any Participant or Beneficiary who is subject to Section 16 of the Exchange Act shall have his Measurement Fund elections under the Plan subject to the requirements of the Exchange Act, as interpreted by the Committee.   Any such Participant or Beneficiary who elects to have any portion of his Deferral Account or his future deferrals (pursuant to Section 3.1) either (i) invested in the Sempra Energy Stock Fund or (ii) transferred from the Sempra Energy Stock Fund to another available Measurement Fund under the Plan may not make an election with the opposite effect under this Plan or any other plan sponsored by Sempra Energy or any of its Affiliates until six (6) months and one (1) day following the original election.

(b)

Notwithstanding any other provision of the Plan or any rule, instruction, election form or other form, the Plan and any such rule, instruction or form shall be subject to any additional conditions or limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3) that are requirements for the application of such exemptive rule.  To the extent permitted by applicable law, such Plan provision, rule, instruction or form shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

ARTICLE V.
ACCOUNTS

5.1

Accounts.

(a)

The Administrator shall establish and maintain a Deferral Account, and an Employer Matching Account for each Participant under the Plan.   Each Participant’s Accounts shall be divided into separate subaccounts in accordance with Section 5.2.  Each such subaccount shall be further divided into separate investment fund subaccounts, each of which corresponds to a Measurement Fund elected by the Participant pursuant to Section 4.2.  In addition, Participants’ Deferral Accounts shall be further divided into subaccounts consisting of deferred Restricted Stock Units, Elective Phantom Share Amounts, and Nonelective Phantom Share Amounts.  A separate subaccount shall be maintained for each deferral of Restricted Stock Units, Nonelective Phantom Share Amount and Elective Phantom Share Amount.

(b)

The performance of each elected Measurement Fund (either positive or negative) shall be determined by the Administrator, in its reasonable discretion, based on the performance of the Measurement Funds themselves.  A Participant’s Accounts shall be credited or debited on each Valuation Date, as determined by the Administrator in its reasonable discretion,  based on the performance of each Measurement Fund selected by the Participant as though (i) a Participant’s Accounts were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such period, as of the close of business on the first business day of such period, at the closing price on such date; (ii) the portion of the Participant's Compensation that was actually deferred pursuant to Section 3.1 during any period were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such period, no later than the close of business on the first business day after the day on which such amounts are actually deferred from the Participant’s Compensation, at the closing price on such date; and (iii) any withdrawal or distribution made to a Participant that decreases such Participant’s Accounts ceased being invested in the Measurement Fund(s), in the percentages applicable to such period, no earlier than one (1) business day prior to the distribution, at the closing price on such date.  The Participant’s Employer Matching Contribution for a Plan Year shall be credited to his Employer Matching Account for purposes of this Section 5.1(b), in the manner determined on the first day of the Election Period for such Plan Year, as determined by the Administrator.

5.2

Subaccounts.

(a)

The Administrator shall establish and maintain, with respect to a Participant’s Deferral Account, a subaccount with respect to each Plan Year, to which shall be credited the amount equal to the portion of the Participant’s Compensation earned during such Plan Year that he elects to defer pursuant to Section 3.1, debited by amounts equal to distributions to and withdrawals made by the Participant and/or his Beneficiary and adjusted for investment earnings and losses pursuant to Article V.

(b)

The Administrator shall establish and maintain, with respect to a Participant’s Employer Matching Account, a subaccount with respect to each Plan Year, to which shall be credited the amount equal to the Employer Matching Contributions made pursuant to Section 3.3 on behalf of such Participant in respect of such Participant’s Compensation earned during such Plan Year that he elects to defer pursuant to Section 3.1, debited by amounts equal to distributions to and withdrawals made by the Participant and/or his Beneficiary and adjusted for investment earnings and losses pursuant to Article V.

ARTICLE VI.
VESTING

(a)

Subject to subsections (b) and (c), each Participant shall be 100% vested in his Deferral Account and his Matching Account at all times.  

(b)

A Participant’s deferred Restricted Stock Units credited to a subaccount of such Deferred Account shall be subject to the vesting conditions applicable to the Restricted Stock Unit award.  The subaccount of such  Participant’s Deferral Amount for a deferred Restricted Stock Unit award shall become vested in accordance with the vesting conditions applicable to such Restricted Stock Unit award.  To the extent such Restricted Stock Unit award is forfeited, the subaccount of such Participant’s Deferral Account for such award shall be forfeited immediately following the event causing such forfeiture and the amount of such subaccount shall be debited from such Deferral Account.

(c)

A Participant’s deferred Elective Phantom Share Amount credited to a subaccount of such Participant’s Deferral Account shall be subject to the vesting conditions applicable to the initial or annual equity award for which such Elective Phantom Share Amount is credited.  The subaccount of such Participant’s Deferral Account for a deferred Elective Phantom Share Amount shall become vested in accordance with the vesting conditions applicable to such equity award.  To the extent such equity award is forfeited, the subaccount of such Participant’s Deferral Account for such Elective Phantom Share Amount shall be forfeited immediately following the event causing such forfeiture and the amount of  such subaccount shall be debited from such Deferral Account.

ARTICLE VII.
DISTRIBUTIONS

7.1

Distribution of Accounts.

(a)

Distribution at Separation from Service or Disability.

(1)

Normal Form.  

(A)

Except as provided in subparagraph (B), paragraph (2), paragraph (3) or Section 7.3, upon the Separation from Service or Disability of a Participant, a Participant’s Distributable Amount with respect to each Plan Year beginning on or after January 1, 2011 shall be paid to the Participant in a lump sum in cash (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) on the Participant’s Payment Date. Except as provided in subparagraph (B), paragraph (2), paragraph (3) or Section 7.3, upon the Separation from Service or Disability of a Participant, a Participant’s Distributable Amount with respect to each Plan Year beginning prior to January 1, 2011 shall be paid to the Participant in substantially equal annual installments in cash (calculated as set forth in paragraph 7.1(a)(6) over ten (10) years beginning on the Participant’s Payment Date.

(B)

Upon the Separation from Service of a Participant who is a Specified Employee (determined as of the date of Separation from Service), the distribution of the Participant’s Distributable Amount with respect each Plan Year shall not be made before the date which is six (6) months after the date of such Participant’s Separation from Service (or, if earlier, the date of such Participant’s death) in accordance with Section 409A of the Code.  

(2)

Optional Forms.  Instead of receiving his Distributable Amount with respect to each Plan Year as described at subparagraph 7.1(a)(1)(A), the Participant may elect in accordance with Section 3.2 one of the following optional forms of payment (on the form provided by Administrator) (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) at the time of his deferral election for such Plan Year:

(i)

equal annual installments in cash (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) (calculated as set forth in paragraph 7.1(a)(6)) over five years beginning on the Participant’s Payment Date,

(ii)

equal annual installments in cash (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) (calculated as set forth in paragraph 7.1a(a)(6)) over ten (10) years beginning on the Participant’s Payment Date, or

(iii)

equal annual installments in cash (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) (calculated as set forth in paragraph 7.1(a)(6)) over fifteen (15) years beginning on the Participant’s Payment Date, or

(iv)

a lump sum in cash (or shares of Sempra Energy common stock for Restricted Stock Unit subaccounts) .

The payment of such Participant’s Distributable Amount with respect each Plan Year shall be made or commence on such Participant’s Payment Date (or, if applicable, the date determined under subparagraph (a)(1)(B)).

(3)

Distribution Election Changes.  In the event that a Participant changes his distribution form election with respect to a Plan Year in accordance with Section 3.2(b), and such new distribution form election becomes effective, upon the Separation from Service or Disability of such Participant, the Distributable Amount with respect to such Plan Year shall be paid to the Participant in accordance with such new distribution form election.

(4)

Small Accounts.  Notwithstanding provision to the contrary, in the event the  total of a Participant’s Distributable Amounts with respect to all Plan Years is equal to or less than $25,000, such Distributable Amounts shall be distributed to the Participant (or his Beneficiary, as applicable) in a lump sum.

(5)

Investment Adjustments.  The Participant’s Accounts shall continue to be adjusted for investment earnings and losses pursuant to Section 4.2 and Section 4.3 of the Plan until all amounts credited to his Accounts under the Plan have been distributed.

(6)

Calculating Installments.  All installment payments made under the Plan shall be determined in accordance with the annual fractional payment method, calculated as follows:  the balance of subaccounts in the Participant’s Accounts with respect to a Plan Year shall be calculated as of the close of business on the last business day of the year.  The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant.  By way of example, if the Participant elects 10 year installments for the distribution of the subaccounts in his Accounts with respect to a Plan Year, the first payment shall be 1/10 of the balance of such subaccounts in his Accounts calculated as described in this definition.  The following year, the payment shall be 1/9 of such subaccounts in the balance of the Participant’s Accounts, calculated as described in this definition.  Each annual installment shall be paid on or as soon as practicable after the last business day of the applicable year.

(b)

Distribution on a Scheduled Withdrawal Date.  

(1)

In the case of a Participant who has elected a Scheduled Withdrawal Date for a distribution to be made prior to the Participant’s Separation from Service or while still a Director, such Participant shall receive his deferrals of Compensation (but excluding any investment earnings on such amounts) (the “Withdrawal Amount”) as shall have been elected by the Participant to be subject to the Scheduled Withdrawal Date.  A Participant’s Scheduled Withdrawal Date with respect to amounts of Compensation deferred in a given Plan Year must be at least three years from the last day of the Plan Year for which such deferrals are made.


(2)

The Withdrawal Amount shall be paid in a lump sum in cash.


(3)

A Participant may elect to change the Scheduled Withdrawal Date for the Withdrawal Amount for any Plan Year in accordance with Section 3.2(d).


(4)

In the event of Participant’s Separation from Service or Disability prior to a Scheduled Withdrawal Date, the Participant’s entire Withdrawal Amount shall be paid in accordance with the Participant’s election with respect to such Plan Year under Section 7.1(a).  In the event of a Participant’s death prior to a Scheduled Withdrawal Date, the Participant’s entire Withdrawal Amount shall be paid as soon as practicable after the Participant’s death in a lump sum in cash.  


(c)

Distribution upon Death.  In the event a Participant dies before he has begun receiving distributions under Section 7.1(a), his Accounts shall be paid to his Beneficiary in the same manner elected by the Participant.  In the event a Participant dies after he has begun receiving distributions under Section 7.1(a) with a remaining balance in his Accounts, the balance shall continue to be paid to his Beneficiary in the same manner.

7.2

Hardship Distribution.  

A Participant shall be permitted to elect a Hardship Distribution of all or a portion of his Accounts under the Plan prior to the Payment Date, subject to the following restrictions:

(a)

The election to take a Hardship Distribution shall be made by filing the form provided by the Administrator before the date established by the Administrator.

(b)

The Administrator shall have made a determination that the requested distribution constitutes a Hardship Distribution in accordance with subsection (d).

(c)

The amount determined by the Administrator as a Hardship Distribution shall be paid in a single lump sum in cash as soon as practicable after the end of the calendar month in which the Hardship Distribution election is made and approved by the Administrator.  The Hardship Distribution shall be distributed proportionately from the subaccounts in the Participant’s Accounts.

(d)

If a Participant receives a Hardship Distribution, the Participant shall be ineligible to contribute deferrals to the Plan for the remainder of the Plan Year in which the Hardship Distribution is received or the immediately following Plan Year.  “Hardship Distribution” shall mean a severe financial hardship to the Participant resulting from (i) an illness or accident of the Participant, the Participant’s spouse or of his dependent (as defined in Section 152(a) of the Code), (ii) loss of a Participant’s property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, as determined by the Administrator in accordance with Section 409A of the Code.  The amount of the Hardship Distribution with respect to a severe financial hardship shall not exceed the amounts necessary to satisfy such hardship, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), as determined by the Administrator in accordance with Section 409A of the Code.

7.3

Effect of a Change in Control.

(a)

In the event there is a Change in Control, the person who is the chief executive officer (or, if not so identified, Sempra Energy’s highest ranking officer) shall name a third-party fiduciary as the sole member of the Committee immediately prior to such Change in Control. The appointed fiduciary, shall provide for the immediate distributions of the accounts under the Plan in lump sum payments and cash to the extent permitted under Section 409A of the Code.  

(b)

Upon and after the occurrence of a Change in Control, the Company must (i) pay all reasonable administrative fees and expenses of the appointed fiduciary, (ii) indemnify the appointed fiduciary against any costs, expenses and liabilities including, without limitation, attorney’s fees and expenses arising in connection with the appointed fiduciary's duties hereunder, other than with respect to matters resulting from the gross negligence of the appointed fiduciary or its agents or employees and (iii) timely provide the appointed fiduciary with all necessary information related to the Plan, the Participants and Beneficiaries.  

(c)

Notwithstanding Section 9.3, in the event there is a Change in Control no amendment may be made to this Plan except as approved by the third-party fiduciary; provided, however, that in no event shall any amendment approved by the third-party fiduciary have any retroactive effect to reduce any vested amounts allocated to a Participant’s Accounts.  Upon a Change in Control, assets shall be placed in a rabbi trust in an amount which shall equal the full accrued liability under this Plan as determined by Towers Perrin, or a successor actuarial firm.

7.4

Inability to Locate Participant.

In the event that the Administrator is unable to locate a Participant or Beneficiary within two years following the required Payment Date, the amount allocated to the Participant’s Accounts shall be forfeited.  If, after such forfeiture, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings from the date of forfeiture, subject to applicable escheat laws.

7.5

Prohibition on Acceleration of Distributions.

The time or schedule of payment of any withdrawal or distribution under the Plan shall not be subject to acceleration, except as provided or permitted under Section 409A of the Code (including, without limitation, acceleration on termination of the Plan or in connection with a change in control event within the meaning of Section 409A of the Code).

ARTICLE VIII.
ADMINISTRATION

8.1

Committee.

The Committee shall administer the Plan in accordance with this Article.  

8.2

Administrator.  

The Administrator, unless restricted by the Committee, shall exercise the powers under Sections 8.4 and 8.5 except when the exercise of such authority would materially affect the cost of the Plan to the Company or materially increase benefits to Participants.

8.3

Committee Action.

The Committee shall act at meetings by affirmative vote of a majority of the members of the Committee.  Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Committee and such written consent is filed with the minutes of the proceedings of the Committee.  A member of the Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant.  The chairman or any other member or members of the Committee designated by the chairman may execute any certificate or other written direction on behalf of the Committee.

8.4

Powers and Duties of the Committee.

The Committee, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms and shall have all powers necessary to accomplish its purposes as set forth herein, including, but not by way of limitation, the following:

(a)

To select the Measurement Funds in accordance with Section 4.1 hereof;

(b)

To conclusively construe and interpret the terms and provisions of the Plan and to remedy any inconsistencies or ambiguities hereunder;

(c)

To select employees eligible to participate in the Plan;

(d)

To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries;

(e)

To maintain all records that may be necessary for the administration of the Plan;

(f)

To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;

(g)

To make and publish such rules for the regulation and operation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof;

(h)

To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Committee may from time to time prescribe; and

(i)

To take all actions necessary for the administration of the Plan.  

8.5

Construction and Interpretation.

The Committee shall have full discretion to conclusively construe and interpret the terms and provisions of this Plan, which interpretations or construction shall be final and binding on all parties, including but not limited to the Company and any Participant or Beneficiary.  The Committee shall administer such terms and provisions in accordance with any and all laws applicable to the Plan.  The Committee or the Administrator may provide for different rules, rights and procedures for different Participants or Eligible Individuals and there is no requirement under the Plan that all Participants or Eligible Individuals receive the same benefits, payment rights, election rights or any other benefits or rights, subject to the requirements of applicable law.

8.6

Information.

The Company shall furnish the Administrator with such data and information as may be required for it to discharge its duties.  Participants and other persons entitled to benefits under the Plan must furnish the Administrator such evidence, data or information as the Administrator considers necessary or desirable to carry out the terms of the Plan.

8.7

Compensation, Expenses and Indemnity.

(a)

The members of the Committee shall serve without compensation for their services hereunder.

(b)

The Committee is authorized at the expense of the Company to employ such legal counsel and other advisors as it may deem advisable to assist in the performance of its duties hereunder.  Expenses and fees in connection with the administration of the Plan shall be paid by the Company.

(c)

To the extent permitted by applicable state law, the Company  shall indemnify and save harmless the Committee and each member thereof, the Board of Directors and any delegate of the Committee who is an employee of the Company or any Affiliate and the Administrator against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct.  This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the any bylaw, agreement or otherwise, of the Company as such indemnities are permitted under state law.

8.8

Quarterly Statements.

Under procedures established by the Administrator, a Participant shall receive a statement with respect to such Participant’s Accounts on a quarterly basis as of each March 31, June 30, September 30 and December 31.

8.9

Disputes.

(a)

Claim.

A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as “Claimant”) may file a written request for such benefit with the Administrator, setting forth his claim.  The request must be addressed to the Administrator at Sempra Energy at its then principal place of business.

(b)

Claim Decision.

Upon receipt of a claim, the Administrator shall advise the Claimant that a reply shall be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period.  The Administrator may, however, extend the reply period for an additional ninety (90) days for special circumstances.

If the claim is denied in whole or in part, the Administrator shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (i) the specified reason or reasons for such denial; (ii) the specific reference to pertinent provisions of this Agreement on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his claim and an explanation of why such material or such information is necessary; (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) the time limits for requesting a review under subsection (c).

(c)

Request For Review.

With sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing a review the determination of the Administrator.  Such review shall be completed by the most senior officer of Human Resources of Sempra Energy for Participants who are Managers and by the Committee for Participants who are Executive Officers or Directors.  Such request must be addressed to the Secretary of Sempra Energy, at its then principal place of business.  The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the most senior officer of Human Resources of Sempra Energy or the Committee, as applicable.  If the Claimant does not request a review within such sixty (60)-day period, he shall be barred and estopped from challenging the Administrator’s determination.

(d)

Review of Decision.

Within sixty (60) days after the receipt of a request for review by the most senior officer of Human Resources of Sempra Energy or the Committee, as applicable, after considering all materials presented by the Claimant, the most senior officer of Human Resources of Sempra Energy or the Committee, as applicable, shall inform the Participant in writing, in a manner calculated to be understood by the Claimant, the decision setting forth the specific reasons for the decision contained specific references to the pertinent provisions of this Plan on which the decision is based.  If special circumstances require that the sixty (60) day time period be extended, the most senior officer of Human Resources of Sempra Energy or the Committee, as applicable, shall so notify the Claimant and shall render the decision as soon as possible, but no later than one hundred and twenty (120) days after receipt of the request for review.

ARTICLE IX.
MISCELLANEOUS

9.1

Unsecured General Creditor.

Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company.  No assets of the Company shall be held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan.  Any and all of the Company’s assets shall be, and remain, the general unpledged, unrestricted assets of the Company.  The Company’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future, and the rights of a Participant or Beneficiary shall be no greater than those of an unsecured general creditor of the Company.  It is the intention of the Company that this Plan be unfunded for purposes of the Code and Title I of ERISA.

9.2

Restriction Against Assignment.

(a)

The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or entity.  No right, title or interest in the Plan or in any account may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution.  No right, title or interest in the Plan or in any Account shall be liable for the debts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence.

(b)

Notwithstanding the provisions of subsection (a), a Participant’s interest in his Account may be transferred by the Participant pursuant to a domestic relations order that constitutes a “qualified domestic relations order” as defined by the Code or Title I of ERISA.

9.3

Amendment, Modification, Suspension or Termination.

(a)

Subject to Section 7.3, the Committee may amend, modify, suspend or terminate the Plan in whole or in part, except that no amendment, modification, suspension or termination shall have any retroactive effect to reduce any vested amounts allocated to a Participant’s Accounts. In the event of Plan termination, distributions shall continue to be made in accordance with the terms of the Plan, subject to the provisions of Section 7.3(a).

(b)

Notwithstanding anything to the contrary in the Plan, if and to the extent Sempra Energy shall determine that the terms of the Plan may result in the failure of the Plan, or amounts deferred by or for any Participant under the Plan, to comply with the requirements of Section 409A of the Code, Sempra Energy shall have authority to take such action to amend, modify, cancel or terminate the Plan or distribute any or all of the amounts deferred by or for a Participant, as it deems necessary or advisable, including without limitation:

(1)

Any amendment or modification of the Plan to conform the Plan to the requirements of Section 409A of the Code (including, without limitation, any amendment or modification of the terms of any applicable to any Participant’s Accounts regarding the timing or form of payment).

(2)

Any cancellation or termination of any unvested interest in a Participant’s Accounts without any payment to the Participant.

(3)

Any cancellation or termination of any vested interest in any Participant’s Accounts, with immediate payment to the Participant of the amount otherwise payable to such Participant.

Any such amendment, modification, cancellation, or termination of the Plan may adversely affect the rights of a Participant without the Participant’s consent.

9.4

Designation of Beneficiary.

(a)

Each Participant shall have the right to designate, revoke and redesignate Beneficiaries hereunder and to direct payment of his Distributable Amount to such Beneficiaries upon his death.

(b)

Designation, revocation and redesignation of Beneficiaries must be made in writing in accordance with the procedures established by the Administrator and shall be effective upon delivery to the Committee.

(c)

No designation of a Beneficiary other than the Participant’s spouse shall be valid unless consented in writing by such spouse.  If there is no Beneficiary designation in effect, or the designated beneficiary does not survive the Participant, then the Participant’s spouse shall be the Beneficiary.  If there is no surviving spouse, the duly appointed and currently acting personal representative of the Participant’s estate (which shall include either the Participant’s probate estate or living trust) shall be the Beneficiary.

(d)

After the Participant’s death, any Beneficiary (other than the Participant’s estate) who is to receive installment payments may designate a secondary beneficiary to receive amounts due under this Plan to the Beneficiary in the event of the Beneficiary’s death prior to receiving full payment from the Plan.  If no secondary beneficiary is designated, it shall be the Beneficiary’s estate.

9.5

Insurance.

(a)

As a condition of participation in this Plan, each Participant shall, if requested by the Administrator, the Committee or the Company, undergo such examination and provide such information as may be required by the Company with respect to any insurance contracts on the Participant’s life and shall authorize the Company to purchase life insurance on his life, payable to the Company

(b)

If the Company maintains an insurance policy on a Participant’s life to fund benefits under the Plan and such insurance policy is invalidated because (i) the Participant commits suicide during the two-year period beginning on the first day of the first Plan Year of such Participant’s participation in the Plan or because (ii) the Participant makes any material misstatement of information or nondisclosure of medical history, then, to the extent determined by the Administrator in its sole discretion, the only benefits that shall be payable hereunder to such Participant, his Beneficiary or his surviving spouse, are the payment of the amount of deferrals of Compensation then credited to the Participant’s Accounts but without any interest including interest theretofore credited under this Plan.   

9.6

Governing Law.

Subject to ERISA, this Plan shall be construed, governed and administered in accordance with the laws of the State of California.

9.7

Receipt of Release.

Any payment to a Participant or the Participant’s Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Administrator, the Committee and the Company.  The Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect prior to the payment date specified under the Plan.

9.8

Payments Subject to Section 162(m) of the Code

To the extent Sempra Energy reasonably anticipates that, if a distribution under the Plan were made as scheduled, Sempra Energy’s deduction with respect to such payment would not be permitted due to the application of Section 162(m) of the Code, Sempra Energy, in the discretion of the Committee, may delay the distribution; provided, however, that any such delayed distribution shall be made either (a) during the Participant’s first taxable year in which Sempra Energy reasonably anticipates, or should reasonably anticipate, that, if the payment is made during such year, the deduction of such payment will not be barred by application of Section 162(m) of the Code or (b) during the period beginning with the date of the Participant’s Separation from Service  and ending on the later of (i) the last day of the year in which the Participant’s Separation from Service occurs or (ii) within 2-1/2 months following the Participant’s Separation from Service; and provided further that, where any scheduled payment to a specific Participant is delayed in Sempra Energy’s taxable year accordance with this Section 9.9, the delay in payment will be treated as a subsequent deferral election under Section 409A of the Code unless all scheduled payments to that Participant that could be delayed in accordance with this Section 9.9 are also delayed.  Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Article IV, even if such amount is being paid out in installments.  Notwithstanding anything to the contrary in this Plan, this Section 9.9 shall not apply to any distributions made after a Change in Control.

9.9

Payments on Behalf of Persons Under Incapacity.

In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Administrator, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Administrator may direct that such payment be made to any person found by the Administrator, in its sole judgment, to have assumed the care of such person.  Any payment made pursuant to such termination shall constitute a full release and discharge of the Administrator, the Committee and the Company.

9.10

Limitation of Rights

Neither the establishment of the Plan nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company except as provided in the Plan.  In no event shall the terms of employment of, or membership on the Board by, any Participant be modified or in any be effected by the provisions of the Plan.

9.11

Exempt ERISA Plan

The Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for directors and a select group of management or highly compensated employees within the meaning of Sections 201, 301 and 401 of ERISA and therefore to be exempt from Parts 2, 3 and 4 of Title I of ERISA.

9.12

Notice

Any notice or filing required or permitted to be given to the Administrator or the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of Sempra Energy, directed, in the case of the Committee, to the attention of the General Counsel and Secretary of Sempra Energy and in the case of the Administrator, to the Administrator.  Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

9.13

Errors and Misstatements

In the event of any misstatement or omission of fact by a Participant to the Committee or the Administrator or any clerical error resulting in payment of benefits in an incorrect amount, the Committee or the Administrator, as applicable, shall promptly cause the amount of future payments to be corrected upon discovery of the facts and shall pay or, if applicable, cause the Plan to pay, the Participant or any other person entitled to payment under the Plan any underpayment in a lump sum or to recoup any overpayment from future payments to the Participant or any other person entitled to payment under the Plan in such amounts as the Committee or the Administrator shall direct or to proceed against the Participant or any other person entitled to payment under the Plan for recovery of any such overpayment.

9.14

Pronouns and Plurality

The masculine pronoun shall include the feminine pronoun, and the singular the plural where the context so indicates.

9.15

Severability

In the event that any provision of the Plan shall be declared unenforceable or invalid for any reason, such unenforceability or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if such unenforceable or invalid provision had never been included herein.

9.16

Status

The establishment and maintenance of, or allocations and credits to, the Accounts of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan.

9.17

Headings.

Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.

ARTICLE X.

EMPLOYEES OF SEMPRA ENERGY TRADING CORPORATION
AND SEMPRA ENERGY SOLUTIONS LLC

This Article X includes special provisions relating to the benefits of the Participants in the Plan who are employed by Sempra Energy Trading Corporation (“SET”) and Sempra Energy Solutions LLC (“SES”).

(a)

Background.  Certain SET and SES employees are Participants in this Plan.  

On July 9, 2007, Sempra Energy, Sempra Global, Sempra Energy Trading International, B.V. (“SETI”) and The Royal Bank of Scotland plc (“RBS”) entered into the Master Formation and Equity Interest Purchase Agreement, dated as of July 9, 2007 (the “Master Formation Agreement”), which provides for the formation of a partnership, RBS Sempra Commodities LLP (“RBS Sempra Commodities”), to purchase and operate Sempra Energy’s commodity-marketing businesses.  Pursuant to a Master Formation Agreement, RBS Sempra Commodities will be formed as a United Kingdom limited liability partnership and RBS Sempra Commodities will purchase Sempra Energy’s commodity-marketing subsidiaries.  

Prior to the Closing, SET will be converted into a limited liability company (“SET LLC”).  Following such conversion, SET employees will be employed by SET LLC.  Prior to the Closing, SES will become a wholly-owned subsidiary of SET LLC.

Also, prior to the Closing, Sempra Energy will own, directly or indirectly through wholly-owned subsidiaries, 100% of the membership interests in SET LLC and SES.  Prior to the Closing, SET LLC and SES will be disregarded entities for federal income tax purposes.

Effective as of the Closing, RBS Sempra Commodities will purchase 100% of the membership interests in SET LLC.  

As provided in the Master Formation Agreement, an employee of SET LLC who is actively at work on the Closing Date will continue to be employed by SET LLC immediately after the Closing Date, and an employee of SES who is actively at work on the Closing Date will continue to be employed by SES (each such employee is referred to as a Transferred Employee).  

Also, as provided in the Master Formation Agreement, with respect to an employee of SET LLC or SES who is not actively at work on the Closing Date because such employee is on approved short-term disability or long-term disability leave in accordance with the Sempra Plans (such employee is referred to as an Inactive Employee), if such Inactive Employee returns to active work at the conclusion of such leave, and in any case within six (6) months following the Closing Date (or such longer period as is required by applicable law), such Inactive Employee shall become a Transferred Employee as of the date of such person’s return to active employment with the SET LLC or SES (such date is referred to as the Transfer Date).

Effective as of the Closing, SET LLC will be a wholly-owned subsidiary of RBS Sempra Commodities, SES will be an indirect, wholly-owned subsidiary of RBS Commodities, Sempra Global and SETI will be partners in RBS Sempra Commodities, and Sempra Energy will own, indirectly through wholly-owned subsidiaries, at least a 50% profits interest in RBS Sempra Commodities.

(b)

Separation from Service

(1)

Effective as of the Closing, RBS Sempra Commodities will be a member of a group of trades or businesses (whether or not incorporated) under common control for purposes of Section 414(c) of the Code and Treasury Regulation Section 1.414(c)-2, as determined under Section 409A of the Code,  that includes Sempra Energy and its wholly-owned subsidiaries.  Consequently, effective as of the Closing, RBS Sempra Commodities will be included in the “service recipient” that includes Sempra Energy and its wholly-owned subsidiaries, as defined under Section  409A of the Code.  

(2)

A Participant who is an employee of SET LLC or SES, and who is a Transferred Employee effective as of the Closing Date, will not have a Separation from Service solely as a result of the purchase of the membership interests of SET LLC by RBS Sempra Commodities effective as of the Closing.

(3)

A Participant who is an employee of SET LLC or SES, who is an Inactive Employee, and who becomes a Transferred Employee effective on a Transfer Date after the Closing Date, will not have a Separation from Service solely as a result of the purchase of the membership interests of SET LLC by RBS Sempra Commodities or becoming a Transferred Employee on a Transfer Date after the Closing Date.

(4)

For purposes of the Plan, a participant in the Plan who is an employee of SET LLC or SES, and who is or becomes a Transferred Employee, will have a Separation from Service on or after the Closing Date (or the Transfer Date, if applicable), as determined under Section 1.2(pp) and Section 409A of the Code.

(c)

Certain Defined Terms.

For purposes of this Article X, the terms “Closing,” “Closing Date,” “Inactive Employee,” “Sempra Plans,” “Transferred Employees” and “Transfer Date” shall have the meanings ascribed to such terms under the Master Formation Agreement.

ARTICLE XI.

SECTION 409A OF THE CODE

Anything in this Plan to the contrary notwithstanding, it is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code so as not to subject any Participant to payment of any additional tax, penalty or interest imposed under Section 409A of the Code. The provisions of this Agreement shall be construed and interpreted to avoid the imputation of any such additional tax, penalty or interest under Section 409A of the Code yet preserve (to the nearest extent reasonably possible) the intended benefit payable to Participant.  In no event shall the Company guarantee the tax treatment of participation in the Plan or any benefit provided hereunder.  Notwithstanding any other provision of the Plan, in the event any of the amounts deferred or payable under the Plan are grandfathered for purposes of Section 409A of the Code, such amounts shall be subject to the terms and conditions “that applied to such amounts prior to the effective date of Section 409A of the Code.

  

Executed at San Diego, California this ___ day of __________, 2015.

SEMPRA ENERGY


By:

______________________________

Title:

Sr. Vice President, Human Resources

Date:

______________________, 2015





 


Exhibit 12.1




 

EXHIBIT 12.1

SEMPRA ENERGY

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

Fixed charges and preferred stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 $

492

 

 $

549

 

 $

601

 

 $

620

 

 $

636

 

 $

330

Interest portion of annual rentals

 

 

3

 

 

2

 

 

2

 

 

2

 

 

3

 

 

1

Preferred dividends of subsidiaries (1)

 

 

11

 

 

10

 

 

6

 

 

6

 

 

1

 

 

1

Total fixed charges

 

 

506

 

 

561

 

 

609

 

 

628

 

 

640

 

 

332

Preferred dividends for purpose of ratio

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Combined fixed charges and preferred dividends for purpose of ratio                        

 

 $

506

 

 $

561

 

 $

609

 

 $

628

 

 $

640

 

 $

332

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income from continuing operations before adjustment for income or loss from equity investees

 

 $

1,078

 

 $

1,747

 

 $

1,255

 

 $

1,399

 

 $

1,443

 

 $

956

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total fixed charges (from above)

 

 

506

 

 

561

 

 

609

 

 

628

 

 

640

 

 

332

  Distributed income of equity investees

 

 

260

 

 

96

 

 

50

 

 

51

 

 

61

 

 

31

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest capitalized

 

 

74

 

 

27

 

 

53

 

 

23

 

 

40

 

 

34

  Preferred dividends of subsidiaries (1)

 

 

11

 

 

10

 

 

6

 

 

6

 

 

1

 

 

1

Total earnings for purpose of ratio

 

 $

1,759

 

 $

2,367

 

 $

1,855

 

 $

2,049

 

 $

2,103

 

 $

1,284

Ratio of earnings to combined fixed charges and preferred stock dividends

 

 

3.48

 

 

4.22

 

 

3.05

 

 

3.26

 

 

3.29

 

 

3.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges

 

 

3.48

 

 

4.22

 

 

3.05

 

 

3.26

 

 

3.29

 

 

3.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

In computing this ratio, “Preferred dividends of subsidiaries” represents the before-tax earnings necessary to pay such dividends, computed at the effective tax rates for the applicable periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




Exhibit 12.2




EXHIBIT 12.2

SAN DIEGO GAS & ELECTRIC COMPANY

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 June 30,

 

 

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

Fixed charges and preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

153

 

$

193

 

$

220

 

$

231

 

$

238

 

$

122

Interest portion of annual rentals

 

 

1

 

 

1

 

 

1

 

 

1

 

 

1

 

 

-

Total fixed charges

 

 

154

 

 

194

 

 

221

 

 

232

 

 

239

 

 

122

Preferred stock dividends (1)

 

 

7

 

 

7

 

 

7

 

 

5

 

 

-

 

 

-

Combined fixed charges and preferred stock dividends for purpose of ratio

 

$

161

 

$

201

 

$

228

 

$

237

 

$

239

 

$

122

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income from continuing operations

 

$

531

 

$

692

 

$

705

 

$

626

 

$

797

 

$

423

Add: Total fixed charges (from above)

 

 

154

 

 

194

 

 

221

 

 

232

 

 

239

 

 

122

Less: Interest capitalized

 

 

1

 

 

1

 

 

-

 

 

-

 

 

1

 

 

-

Total earnings for purpose of ratio

 

$

684

 

$

885

 

$

926

 

$

858

 

$

1,035

 

$

545

Ratio of earnings to combined fixed charges and preferred stock dividends

 

 

4.25

 

 

4.40

 

 

4.06

 

 

3.62

 

 

4.33

 

 

4.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges

 

 

4.44

 

 

4.56

 

 

4.19

 

 

3.70

 

 

4.33

 

 

4.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

In computing this ratio, “Preferred stock dividends” represents the before-tax earnings necessary to pay such dividends, computed at the effective tax rates for the applicable periods.




Exhibit 12.3




EXHIBIT 12.3

 

 

SOUTHERN CALIFORNIA GAS COMPANY

 

 

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES

 

 

AND PREFERRED STOCK DIVIDENDS

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

Fixed charges and preferred stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

72

 

$

77

 

$

77

 

$

76

 

$

77

 

$

44

Interest portion of annual rentals

 

 

2

 

 

1

 

 

1

 

 

1

 

 

2

 

 

1

Total fixed charges

 

 

74

 

 

78

 

 

78

 

 

77

 

 

79

 

 

45

Preferred stock dividends (1)

 

 

2

 

 

2

 

 

2

 

 

2

 

 

2

 

 

1

Combined fixed charges and preferred    stock dividends for purpose of ratio

 

$

76

 

$

80

 

$

80

 

$

79

 

$

81

 

$

46

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income from continuing operations

 

$

463

 

$

431

 

$

369

 

$

481

 

$

472

 

$

396

Add: Total fixed charges (from above)

 

 

74

 

 

78

 

 

78

 

 

77

 

 

79

 

 

45

Less: Interest capitalized

 

 

1

 

 

1

 

 

1

 

 

1

 

 

1

 

 

-

Total earnings for purpose of ratio

 

$

536

 

$

508

 

$

446

 

$

557

 

$

550

 

$

441

Ratio of earnings to combined fixed charges and preferred stock dividends

 

 

7.05

 

 

6.35

 

 

5.58

 

 

7.05

 

 

6.79

 

 

9.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges

 

 

7.24

 

 

6.51

 

 

5.72

 

 

7.23

 

 

6.96

 

 

9.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

In computing this ratio, “Preferred stock dividends” represents the before-tax earnings necessary to pay such dividends, computed at the effective tax rates for the applicable periods.




Sempra Energy Ex 31.1

EXHIBIT 31.1

CERTIFICATION


I, Debra L. Reed, certify that:


1.

I have reviewed this report on Form 10-Q of Sempra Energy;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  Debra L. Reed

Debra L. Reed

Chief Executive Officer




Sempra Energy Ex 31.2

EXHIBIT 31.2

CERTIFICATION


I, Joseph A. Householder, certify that:


1.

I have reviewed this report on Form 10-Q of Sempra Energy;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  Joseph A. Householder

Joseph A. Householder

Chief Financial Officer




SDG&E Ex 31.3

EXHIBIT 31.3

CERTIFICATION


I, J. Walker Martin, certify that:


1.

I have reviewed this report on Form 10-Q of San Diego Gas & Electric Company;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  J. Walker Martin

J. Walker Martin

Chief Executive Officer




SDG&E Ex 31.4

EXHIBIT 31.4

CERTIFICATION


I, Bruce A. Folkmann, certify that:


1.

I have reviewed this report on Form 10-Q of San Diego Gas & Electric Company;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  Bruce A. Folkmann

Bruce A. Folkmann

Chief Financial Officer




SoCalGas Ex 31.5

EXHIBIT 31.5

CERTIFICATION


I, Dennis V. Arriola, certify that:


1.

I have reviewed this report on Form 10-Q of Southern California Gas Company;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  Dennis V. Arriola

Dennis V. Arriola

Chief Executive Officer




SoCalGas Ex 31.6

EXHIBIT 31.6

CERTIFICATION


I, Bruce A. Folkmann, certify that:


1.

I have reviewed this report on Form 10-Q of Southern California Gas Company;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:


a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and


d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



August 4, 2015


/s/  Bruce A. Folkmann

Bruce A. Folkmann

Chief Financial Officer




Sempra Energy Ex 32.1

Exhibit 32.1


Statement of Chief Executive Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Sempra Energy (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                            

/s/  Debra L. Reed

Debra L. Reed

Chief Executive Officer





Sempra Energy Ex 32.2

Exhibit 32.2


Statement of Chief Financial Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Sempra Energy (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                          

/s/  Joseph A. Householder

Joseph A. Householder

Chief Financial Officer




SDG&E Ex 32.3

Exhibit 32.3


Statement of Chief Executive Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of San Diego Gas & Electric Company (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                             

/s/  J. Walker Martin

J. Walker Martin

Chief Executive Officer






SDG&E Ex 32.4

Exhibit 32.4


Statement of Chief Financial Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of San Diego Gas & Electric Company (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                                

/s/  Bruce A. Folkmann

Bruce A. Folkmann

Chief Financial Officer




SoCalGas Ex 32.5

Exhibit 32.5


Statement of Chief Executive Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Southern California Gas Company (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                                

/s/  Dennis V. Arriola

Dennis V. Arriola

Chief Executive Officer





SoCalGas Ex 32.6

Exhibit 32.6


Statement of Chief Financial Officer


Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Southern California Gas Company (the "Company") certifies that:


(i)

the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission for the quarter ended June 30, 2015 (the "Quarterly Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and


(ii)

the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




August 4, 2015

                                               

/s/  Bruce A. Folkmann

Bruce A. Folkmann

Chief Financial Officer