|
| | | |
The exhibits filed under the Registration Statements, Proxy Statements and Forms 8-K, 10-K and 10-Q that are incorporated herein by reference were filed under Commission File Number 1-14201 (Sempra Energy), Commission File Number 1-40 (Pacific Lighting Corporation), Commission File Number 1-03779 (San Diego Gas & Electric Company) and/or Commission File Number 1-01402 (Southern California Gas Company). |
|
The following exhibits relate to each registrant as indicated. |
SEMPRA ENERGY
| EXHIBIT 3 -- BYLAWS AND ARTICLES OF INCORPORATION |
| | | |
| Sempra Energy |
| 3.1 | | Amended and Restated Articles of Incorporation of Sempra Energy effective May 23, 2008 |
| | | (Appendix B to the 2008 Sempra Energy Definitive Proxy Statement, filed on April 15, 2008). |
| | | |
| 3.2 | | Bylaws of Sempra Energy (as amended through December 15, 2015) (Sempra Energy Form 8-K |
| | | filed on December 17, 2015, Exhibit 3.1). |
| | | |
| San Diego Gas & Electric Company (SDG&E) |
| 3.3 | | Amended and Restated Bylaws of San Diego Gas & Electric effective June 15, 2010 (SDG&E |
| | | Form 8-K filed on June 17, 2010, Exhibit 3). |
| | | |
| 3.4 | | Amended and Restated Articles of Incorporation of San Diego Gas & Electric Company |
| | | effective August 15, 2014 (2014 Sempra Energy Form 10-K, Exhibit 3.4). |
| | | |
| Southern California Gas Company (SoCalGas) |
| 3.5 | | Amended and Restated Bylaws of Southern California Gas Company effective June 14, 2010 |
| | | (SoCalGas Form 8-K filed on June 17, 2010, Exhibit 3.1). |
| | | |
| 3.6 | | Restated Articles of Incorporation of Southern California Gas Company effective October 7, |
| | | 1996 (1996 SoCalGas Form 10-K, Exhibit 3.01). |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | | | |
| | | |
| EXHIBIT 4 -- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES |
| The companies agree to furnish a copy of each such instrument to the Commission upon request. | |
| | | |
Consolidated Financial Statements: | Sempra Energy |
San Diego Gas & Electric Company | 4.1 | | Description of rights of Sempra Energy Common Stock (Amended and Restated Articles ofSouthern California Gas Company |
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 | | | Incorporation of Sempra Energy effective May 23, 2008, Exhibit 3.1 above). |
| | | |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015 | 4.2 | | Indenture dated as of February 23, 2000, between Sempra Energy and U.S. Bank Trust |
| | | National Association, as Trustee (Sempra Energy Registration Statement on Form S-3 (No. |
| | | 333-153425), filed on September 11, 2008, Exhibit 4.1). |
| | | |
Consolidated Balance Sheets at December 31, 2017 and 2016 | Southern California Gas Company |
| 4.3 | | Description of preferences of Preferred Stock, Preference Stock and Series Preferred Stock |
| | | (Southern California Gas Company Restated Articles of Incorporation, Exhibit 3.6 above). |
| | | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | Sempra Energy / San Diego Gas & Electric Company |
| 4.4 | | Mortgage and Deed of Trust dated July 1, 1940 (SDG&E Registration Statement No. 2-4769, |
| | | Exhibit B-3). |
| | | |
Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015 | 4.5 | | Second Supplemental Indenture dated as of March 1, 1948 (SDG&E Registration Statement |
| | | No. 2-7418, Exhibit B-5B).N/A |
| | | |
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015 | 4.6N/A | N/A | Ninth Supplemental Indenture dated as of August 1, 1968 (SDG&E Registration Statement |
| | | No. 333-52150, Exhibit 4.5). |
| | | |
| 4.7 | | Tenth Supplemental Indenture dated as of December 1, 1968 (SDG&E Registration Statement |
| | | No. 2-36042, Exhibit 2-K). |
| | | |
| 4.8 | | Sixteenth Supplemental Indenture dated August 28, 1975 (SDG&E Registration Statement |
| | | No. 33-34017, Exhibit 4.2). |
| | | |
| Sempra Energy / Southern California Gas Company |
| 4.9 | | First Mortgage Indenture of Southern California Gas Company to American Trust Company |
| | | dated October 1, 1940 (Registration Statement No. 2-4504 filed by Southern California Gas |
| | | Company on September 16, 1940, Exhibit B-4). |
| | | |
| 4.10 | | Supplemental Indenture of Southern California Gas Company to American Trust Company |
| | | dated as of August 1, 1955 (Registration Statement No. 2-11997 filed by Pacific Lighting |
| | | Corporation on October 26, 1955, Exhibit 4.07). |
| | | |
| 4.11 | | Supplemental Indenture of Southern California Gas Company to American Trust Company |
| | | dated as of December 1, 1956 (2006 Sempra Energy Form 10-K, Exhibit 4.09). |
| | | |
| 4.12 | | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank dated as of |
| | | June 1, 1965 (2006 Sempra Energy Form 10-K, Exhibit 4.10). |
| | | |
| 4.13 | | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National |
| | | Association dated as of August 1, 1972 (Registration Statement No. 2-59832 filed by Southern |
| | | California Gas Company on September 6, 1977, Exhibit 2.19). |
| | | |
| 4.14 | | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National |
| | | Association dated as of May 1, 1976 (Registration Statement No. 2-56034 filed by Southern |
| | | California Gas Company on April 14, 1976, Exhibit 2.20). |
| | | |
| 4.15 | | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National |
| | | Association dated as of September 15, 1981 (Registration Statement No. 333-70654, Exhibit |
| | | 4.24). |
| | | |
| | | |
| EXHIBIT 10 -- MATERIAL CONTRACTS |
| | | |
| Sempra Energy / San Diego Gas & Electric Company / Southern California Gas Company |
| 10.1 | | Form of Continental Forge and California Class Action Price Reporting Settlement Agreement |
| | | dated as of January 4, 2006 (Form 8-K filed on January 5, 2006, Exhibit 99.1). |
| | | |
| Sempra Energy / San Diego Gas & Electric Company |
| 10.2 | | Amended and Restated Operating Order between San Diego Gas & Electric Company and the |
| | | California Department of Water Resources effective March 10, 2011 (Sempra Energy March |
| | | 31, 2011 Form 10-Q, Exhibit 10.4). |
| | | |
| 10.3 | | Amended and Restated Servicing Order between San Diego Gas & Electric Company and the |
| | | California Department of Water Resources effective March 10, 2011 (Sempra Energy March |
| | | 31, 2011 Form 10-Q, Exhibit 10.5). |
| | | |
|
| Compensation | | | |
| | | |
| Sempra Energy / San Diego Gas & Electric |
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SEMPRA ENERGY
To the Board of Directors and Shareholders of Sempra Energy:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sempra Energy and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period ended December 31, 2017 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 27, 2018
We have served as the Company’s auditor since 1935.
SAN DIEGO GAS & ELECTRIC COMPANY
To the Board of Directors and Shareholder of San Diego Gas & Electric Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of San Diego Gas & Electric Company (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period ended December 31, 2017 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 27, 2018
We have served as the Company’s auditor since 1935.
SOUTHERN CALIFORNIA GAS COMPANY
To the Board of Directors and Shareholders of Southern California Gas Company:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Southern California Gas Company (the “Company”) as of December 31, 2017 and 2016, and the related statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 27, 2018
We have served as the Company’s auditor since 1937.
|
| | | | | | | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(Dollars in millions, except per share amounts) |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
REVENUES | | | | | | |
Utilities | | $ | 9,776 |
| | $ | 9,261 |
| | $ | 9,254 |
|
Energy-related businesses | | 1,431 |
| | 922 |
| | 977 |
|
Total revenues | | 11,207 |
| | 10,183 |
| | 10,231 |
|
| | | | | | |
EXPENSES AND OTHER INCOME | | |
| | |
| | |
|
Utilities: | | |
| | |
| | |
|
Cost of electric fuel and purchased power | | (2,281 | ) | | (2,188 | ) | | (2,136 | ) |
Cost of natural gas | | (1,190 | ) | | (1,067 | ) | | (1,134 | ) |
Energy-related businesses: | | | | | | |
|
Cost of natural gas, electric fuel and purchased power | | (339 | ) | | (277 | ) | | (335 | ) |
Other cost of sales | | (24 | ) | | (322 | ) | | (148 | ) |
Operation and maintenance | | (3,117 | ) | | (2,970 | ) | | (2,886 | ) |
Depreciation and amortization | | (1,490 | ) | | (1,312 | ) | | (1,250 | ) |
Franchise fees and other taxes | | (436 | ) | | (426 | ) | | (423 | ) |
Write-off of wildfire regulatory asset | | (351 | ) | | — |
| | — |
|
Impairment losses | | (72 | ) | | (153 | ) | | (9 | ) |
Plant closure adjustment | | — |
| | — |
| | 26 |
|
Gain on sale of assets | | 3 |
| | 134 |
| | 70 |
|
Equity earnings, before income tax | | 34 |
| | 6 |
| | 104 |
|
Remeasurement of equity method investment | | — |
| | 617 |
| | — |
|
Other income, net | | 254 |
| | 132 |
| | 126 |
|
Interest income | | 46 |
| | 26 |
| | 29 |
|
Interest expense | | (659 | ) | | (553 | ) | | (561 | ) |
Income before income taxes and equity earnings of certain unconsolidated subsidiaries | | 1,585 |
| | 1,830 |
| | 1,704 |
|
Income tax expense | | (1,276 | ) | | (389 | ) | | (341 | ) |
Equity earnings, net of income tax | | 42 |
| | 78 |
| | 85 |
|
Net income | | 351 |
| | 1,519 |
| | 1,448 |
|
Earnings attributable to noncontrolling interests | | (94 | ) | | (148 | ) | | (98 | ) |
Preferred dividends of subsidiary | | (1 | ) | | (1 | ) | | (1 | ) |
Earnings | | $ | 256 |
| | $ | 1,370 |
| | $ | 1,349 |
|
| | | | | | |
| | | | | | |
Basic earnings per common share | | $ | 1.02 |
| | $ | 5.48 |
| | $ | 5.43 |
|
Weighted-average number of shares outstanding, basic (thousands) | | 251,545 |
| | 250,217 |
| | 248,249 |
|
| | | | | | |
Diluted earnings per common share | | $ | 1.01 |
| | $ | 5.46 |
| | $ | 5.37 |
|
Weighted-average number of shares outstanding, diluted (thousands) | | 252,300 |
| | 251,155 |
| | 250,923 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | | | | | | | | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) |
| Years ended December 31, 2017, 2016 and 2015 |
| Sempra Energy shareholders’ equity | | | | |
| Pretax amount | | Income tax (expense) benefit | | Net-of-tax amount | | Noncontrolling interests (after-tax) | | Total |
2017: | | | | | | | | | |
Net income | $ | 1,533 |
| | $ | (1,276 | ) | | $ | 257 |
| | $ | 94 |
| | $ | 351 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | 107 |
| | — |
| | 107 |
| | 8 |
| | 115 |
|
Financial instruments | 2 |
| | 1 |
| | 3 |
| | 12 |
| | 15 |
|
Pension and other postretirement benefits | 20 |
| | (8 | ) | | 12 |
| | — |
| | 12 |
|
Total other comprehensive income | 129 |
| | (7 | ) | | 122 |
| | 20 |
| | 142 |
|
Comprehensive income | 1,662 |
| | (1,283 | ) | | 379 |
| | 114 |
| | 493 |
|
Preferred dividends of subsidiary | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Comprehensive income, after | |
| | |
| | |
| | |
| | |
|
preferred dividends of subsidiary | $ | 1,661 |
| | $ | (1,283 | ) | | $ | 378 |
| | $ | 114 |
| | $ | 492 |
|
2016: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 1,760 |
| | $ | (389 | ) | | $ | 1,371 |
| | $ | 148 |
| | $ | 1,519 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | 42 |
| | — |
| | 42 |
| | (3 | ) | | 39 |
|
Financial instruments | (6 | ) | | 11 |
| | 5 |
| | 17 |
| | 22 |
|
Pension and other postretirement benefits | (13 | ) | | 4 |
| | (9 | ) | | — |
| | (9 | ) |
Total other comprehensive income | 23 |
| | 15 |
| | 38 |
| | 14 |
| | 52 |
|
Comprehensive income | 1,783 |
| | (374 | ) | | 1,409 |
| | 162 |
| | 1,571 |
|
Preferred dividends of subsidiary | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Comprehensive income, after | |
| | |
| | |
| | |
| | |
|
preferred dividends of subsidiary | $ | 1,782 |
| | $ | (374 | ) | | $ | 1,408 |
| | $ | 162 |
| | $ | 1,570 |
|
2015: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 1,691 |
| | $ | (341 | ) | | $ | 1,350 |
| | $ | 98 |
| | $ | 1,448 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | (260 | ) | | — |
| | (260 | ) | | (30 | ) | | (290 | ) |
Financial instruments | (80 | ) | | 33 |
| | (47 | ) | | 5 |
| | (42 | ) |
Pension and other postretirement benefits | (3 | ) | | 1 |
| | (2 | ) | | — |
| | (2 | ) |
Total other comprehensive loss | (343 | ) | | 34 |
| | (309 | ) | | (25 | ) | | (334 | ) |
Comprehensive income | 1,348 |
| | (307 | ) | | 1,041 |
| | 73 |
| | 1,114 |
|
Preferred dividends of subsidiary | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Comprehensive income, after | |
| | |
| | |
| | |
| | |
|
preferred dividends of subsidiary | $ | 1,347 |
| | $ | (307 | ) | | $ | 1,040 |
| | $ | 73 |
| | $ | 1,113 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016(1) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 288 |
| | $ | 349 |
|
Restricted cash | 62 |
| | 66 |
|
Accounts receivable – trade, net | 1,307 |
| | 1,390 |
|
Accounts receivable – other, net | 277 |
| | 164 |
|
Due from unconsolidated affiliates | 37 |
| | 26 |
|
Income taxes receivable | 110 |
| | 43 |
|
Inventories | 307 |
| | 258 |
|
Regulatory assets | 325 |
| | 348 |
|
Fixed-price contracts and other derivatives | 66 |
| | 83 |
|
Greenhouse gas allowances | 299 |
| | 40 |
|
Assets held for sale | 127 |
| | 201 |
|
Other | 136 |
| | 142 |
|
Total current assets | 3,341 |
| | 3,110 |
|
| | | |
Other assets: | |
| | |
|
Restricted cash | 14 |
| | 10 |
|
Due from unconsolidated affiliates | 598 |
| | 201 |
|
Regulatory assets | 1,517 |
| | 3,414 |
|
Nuclear decommissioning trusts | 1,033 |
| | 1,026 |
|
Investments | 2,527 |
| | 2,097 |
|
Goodwill | 2,397 |
| | 2,364 |
|
Other intangible assets | 596 |
| | 548 |
|
Dedicated assets in support of certain benefit plans | 455 |
| | 430 |
|
Insurance receivable for Aliso Canyon costs | 418 |
| | 606 |
|
Deferred income taxes | 170 |
| | 234 |
|
Greenhouse gas allowances | 93 |
| | 295 |
|
Sundry | 792 |
| | 520 |
|
Total other assets | 10,610 |
| | 11,745 |
|
| | | |
Property, plant and equipment: | |
| | |
|
Property, plant and equipment | 48,108 |
| | 43,624 |
|
Less accumulated depreciation and amortization | (11,605 | ) | | (10,693 | ) |
Property, plant and equipment, net ($321 and $354 at December 31, 2017 and | |
| | |
|
2016, respectively, related to VIE) | 36,503 |
| | 32,931 |
|
Total assets | $ | 50,454 |
| | $ | 47,786 |
|
| |
(1) | 10.4Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Consolidated Financial Statements.
|
| | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED BALANCE SHEETS (CONTINUED) |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016(1) |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Short-term debt | $ | 1,540 |
| | $ | 1,779 |
|
Accounts payable – trade | 1,350 |
| | 1,346 |
|
Accounts payable – other | 173 |
| | 130 |
|
Due to unconsolidated affiliates | 7 |
| | 11 |
|
Dividends and interest payable | 342 |
| | 319 |
|
Accrued compensation and benefits | 439 |
| | 409 |
|
Regulatory liabilities | 109 |
| | 122 |
|
Current portion of long-term debt | 1,427 |
| | 913 |
|
Fixed-price contracts and other derivatives | 109 |
| | 83 |
|
Customer deposits | 162 |
| | 158 |
|
Reserve for Aliso Canyon costs | 84 |
| | 53 |
|
Greenhouse gas obligations | 299 |
| | 40 |
|
Liabilities held for sale | 49 |
| | 47 |
|
Other | 545 |
| | 517 |
|
Total current liabilities | 6,635 |
| | 5,927 |
|
| | | |
Long-term debt ($284 and $293 at December 31, 2017 and 2016, respectively, | |
| | |
|
related to VIE) | 16,445 |
| | 14,429 |
|
| | | |
Deferred credits and other liabilities: | |
| | |
|
Customer advances for construction | 150 |
| | 152 |
|
Due to unconsolidated affiliates | 35 |
| | — |
|
Pension and other postretirement benefit plan obligations, net of plan assets | 1,148 |
| | 1,208 |
|
Deferred income taxes | 2,767 |
| | 3,745 |
|
Deferred investment tax credits | 28 |
| | 28 |
|
Regulatory liabilities | 3,922 |
| | 2,876 |
|
Asset retirement obligations | 2,732 |
| | 2,431 |
|
Fixed-price contracts and other derivatives | 316 |
| | 405 |
|
Greenhouse gas obligations | — |
| | 171 |
|
Deferred credits and other | 1,136 |
| | 1,173 |
|
Total deferred credits and other liabilities | 12,234 |
| | 12,189 |
|
| | | |
Commitments and contingencies (Note 15) |
|
| |
|
|
| | | |
Equity: | |
| | |
|
Preferred stock (50 million shares authorized; none issued) | — |
| | — |
|
Common stock (750 million shares authorized; 251 million and 250 million | |
| | |
|
shares outstanding at December 31, 2017 and 2016, respectively; no par value) | 3,149 |
| | 2,982 |
|
Retained earnings | 10,147 |
| | 10,717 |
|
Accumulated other comprehensive income (loss) | (626 | ) | | (748 | ) |
Total Sempra Energy shareholders’ equity | 12,670 |
| | 12,951 |
|
Preferred stock of subsidiary | 20 |
| | 20 |
|
Other noncontrolling interests | 2,450 |
| | 2,270 |
|
Total equity | 15,140 |
| | 15,241 |
|
Total liabilities and equity | $ | 50,454 |
| | $ | 47,786 |
|
| | Form of Sempra Energy Shared Services Executive Incentive Compensation Plan |
(1) | Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016(1) | | 2015(1) |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | $ | 351 |
| | $ | 1,519 |
| | $ | 1,448 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
Depreciation and amortization | 1,490 |
| | 1,312 |
| | 1,250 |
|
Deferred income taxes and investment tax credits | 1,160 |
| | 217 |
| | 239 |
|
Write-off of wildfire regulatory asset | 351 |
| | — |
| | — |
|
Impairment losses | 72 |
| | 153 |
| | 9 |
|
Plant closure adjustment | — |
| | — |
| | (26 | ) |
Gain on sale of assets | (3 | ) | | (134 | ) | | (70 | ) |
Equity earnings, net | (76 | ) | | (84 | ) | | (189 | ) |
Remeasurement of equity method investment | — |
| | (617 | ) | | — |
|
Fixed-price contracts and other derivatives | 7 |
| | 21 |
| | (10 | ) |
Other | 149 |
| | 62 |
| | 66 |
|
Net change in other working capital components | 57 |
| | (59 | ) | | 699 |
|
Insurance receivable for Aliso Canyon costs | 188 |
| | (281 | ) | | (325 | ) |
Changes in other assets | (214 | ) | | 49 |
| | (169 | ) |
Changes in other liabilities | 93 |
| | 153 |
| | (24 | ) |
Net cash provided by operating activities | 3,625 |
| | 2,311 |
| | 2,898 |
|
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| | |
|
Expenditures for property, plant and equipment | (3,949 | ) | | (4,214 | ) | | (3,156 | ) |
Expenditures for investments and acquisitions, net of cash, cash equivalents and restricted cash acquired | (270 | ) | | (1,504 | ) | | (198 | ) |
Proceeds from sale of assets, net of cash sold | 17 |
| | 763 |
| | 373 |
|
Distributions from investments | 26 |
| | 25 |
| | 15 |
|
Purchases of nuclear decommissioning and other trust assets | (1,314 | ) | | (1,034 | ) | | (531 | ) |
Proceeds from sales by nuclear decommissioning and other trusts | 1,314 |
| | 1,134 |
| | 577 |
|
Advances to unconsolidated affiliates | (531 | ) | | (25 | ) | | (31 | ) |
Repayments of advances to unconsolidated affiliates | 9 |
| | 11 |
| | 74 |
|
Other | (2 | ) | | 9 |
| | 9 |
|
Net cash used in investing activities | (4,700 | ) | | (4,835 | ) | | (2,868 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| | |
|
Common dividends paid | (755 | ) |
| (686 | ) |
| (628 | ) |
Preferred dividends paid by subsidiary | (1 | ) |
| (1 | ) |
| (1 | ) |
Issuances of common stock | 47 |
|
| 51 |
|
| 52 |
|
Repurchases of common stock | (15 | ) |
| (56 | ) |
| (74 | ) |
Issuances of debt (maturities greater than 90 days) | 4,509 |
| | 2,951 |
| | 2,992 |
|
Payments on debt (maturities greater than 90 days) | (2,800 | ) | | (2,057 | ) | | (1,854 | ) |
(Decrease) increase in short-term debt, net | (36 | ) | | 692 |
| | (622 | ) |
Advances from unconsolidated affiliates | 35 |
| | — |
| | — |
|
Proceeds from sale of noncontrolling interests, net of $3 and $40 in offering costs, respectively | 196 |
| | 1,692 |
| | — |
|
Net distributions to noncontrolling interests | (130 | ) | | (63 | ) | | (73 | ) |
Tax benefit related to share-based compensation | — |
| | — |
| | 52 |
|
Other | (43 | ) | | (21 | ) | | (20 | ) |
Net cash provided by (used in) financing activities | 1,007 |
| | 2,502 |
| | (176 | ) |
| | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 7 |
| | (3 | ) | | (14 | ) |
| | | | | |
Decrease in cash, cash equivalents and restricted cash | (61 | ) | | (25 | ) | | (160 | ) |
Cash, cash equivalents and restricted cash, January 1 | 425 |
| | 450 |
| | 610 |
|
Cash, cash equivalents and restricted cash, December 31 | $ | 364 |
| | $ | 425 |
| | $ | 450 |
|
| |
(1) | (2013 Sempra Energy Form 10-K, Exhibit 10.19).As adjusted for the retrospective adoption of ASU 2016-15 and ASU 2016-18, which we discuss in Note 2. |
See Notes to Consolidated Financial Statements
|
| | | | | | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016(1) | | 2015(1) |
CHANGES IN OTHER WORKING CAPITAL COMPONENTS | | | | | |
(Excluding cash, cash equivalents and restricted cash, and debt due within one year) | | | | | |
Accounts receivable | $ | 17 |
| | $ | (42 | ) | | $ | (99 | ) |
Income taxes receivable, net | (70 | ) | | 3 |
| | 39 |
|
Inventories | (49 | ) | | (20 | ) | | 65 |
|
Regulatory balancing accounts | 108 |
| | 198 |
| | 586 |
|
Other current assets | (12 | ) | | (41 | ) | | (19 | ) |
Accounts payable | 83 |
| | 122 |
| | (157 | ) |
Reserve for Aliso Canyon costs | 31 |
| | (221 | ) | | 274 |
|
Other current liabilities | (51 | ) | | (58 | ) | | 10 |
|
Net change in other working capital components | $ | 57 |
| | $ | (59 | ) | | $ | 699 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | |
| | |
|
Interest payments, net of amounts capitalized | $ | 619 |
| | $ | 532 |
| | $ | 537 |
|
Income tax payments, net of refunds | 172 |
| | 160 |
| | 67 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |
| | |
| | |
|
Acquisitions: | |
| | |
| | |
|
Assets acquired, net of cash, cash equivalents and restricted cash | $ | 436 |
| | $ | 3,808 |
| | $ | 10 |
|
Value of equity method investment immediately prior to acquisition | (28 | ) | | (1,144 | ) | | — |
|
Liabilities assumed | (261 | ) | | (1,322 | ) | | (2 | ) |
Accrued purchase price | — |
| | — |
| | (5 | ) |
Cash paid, net of cash, cash equivalents and restricted cash acquired | $ | 147 |
| | $ | 1,342 |
| | $ | 3 |
|
| | | | | |
Accrued capital expenditures | $ | 562 |
| | $ | 626 |
| | $ | 566 |
|
Increase in capital lease obligations for investment in property, plant and equipment | 504 |
| | — |
| | 24 |
|
Accrued Merger-related transaction costs | 31 |
| | — |
| | — |
|
Financing of build-to-suit property | — |
| | — |
| | 61 |
|
Redemption of industrial development bonds | — |
| | — |
| | 79 |
|
Equitization of note receivable due from unconsolidated affiliate | 19 |
| | — |
| | — |
|
Common dividends issued in stock | 53 |
|
| 53 |
|
| 55 |
|
Dividends declared but not paid | 214 |
| | 196 |
| | 180 |
|
| |
(1) | As adjusted for the retrospective adoption of ASU 2016-15 and ASU 2016-18, which we discuss in Note 2. |
See Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | |
SEMPRA ENERGY |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(Dollars in millions) |
| Years ended December 31, 2017, 2016 and 2015 |
| Common stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Sempra Energy shareholders' equity | | Other non- controlling interests | | Total equity |
Balance at December 31, 2014 | $ | 2,484 |
| | $ | 9,339 |
| | $ | (497 | ) | | $ | 11,326 |
| | $ | 774 |
| | $ | 12,100 |
|
| | | | | | | | | | | |
Net income | | | 1,350 |
| | | | 1,350 |
| | 98 |
| | 1,448 |
|
Other comprehensive loss | | | | | (309 | ) | | (309 | ) | | (25 | ) | | (334 | ) |
| | | | | | | | | | | |
Share-based compensation expense | 52 |
| | | | | | 52 |
| | | | 52 |
|
Common stock dividends declared | | | (694 | ) | | | | (694 | ) | | | | (694 | ) |
Preferred dividends of subsidiary | | | (1 | ) | | | | (1 | ) | | | | (1 | ) |
Issuances of common stock | 107 |
| | | | | | 107 |
| | | | 107 |
|
Repurchases of common stock | (74 | ) | | | | | | (74 | ) | | | | (74 | ) |
Tax benefit related to share-based | | | | | | | | | | | |
compensation | 52 |
| | | | | | 52 |
| | | | 52 |
|
Distributions to noncontrolling interests | |
| | |
| | |
| |
|
| | (80 | ) | | (80 | ) |
Equity contributed by noncontrolling | | | | | | | | | | | |
interests | | | | | | | | | 3 |
| | 3 |
|
Balance at December 31, 2015 | 2,621 |
| | 9,994 |
| | (806 | ) | | 11,809 |
| | 770 |
| | 12,579 |
|
Cumulative-effect adjustment from | | | | | | | | | | | |
change in accounting principle | | | 107 |
| | | | 107 |
| | | | 107 |
|
| | | | | | | | | | | |
Net income | | | 1,371 |
| | | | 1,371 |
| | 148 |
| | 1,519 |
|
Other comprehensive income | | | | | 38 |
| | 38 |
| | 14 |
| | 52 |
|
| | | | | | | | | | | |
Share-based compensation expense | 52 |
| | | | | | 52 |
| | | | 52 |
|
Common stock dividends declared | | | (754 | ) | | | | (754 | ) | | | | (754 | ) |
Preferred dividends of subsidiary | | | (1 | ) | | | | (1 | ) | | | | (1 | ) |
Issuances of common stock | 104 |
| | | | | | 104 |
| | | | 104 |
|
Repurchases of common stock | (56 | ) | | | | | | (56 | ) | | | | (56 | ) |
Sale of noncontrolling interests, net of | | | | | | | | | | | |
offering costs | 261 |
| | | | 20 |
| | 281 |
| | 1,420 |
| | 1,701 |
|
Distributions to noncontrolling interests | |
| | |
| | |
| | | | (65 | ) | | (65 | ) |
Equity contributed by noncontrolling | |
| | |
| | |
| | |
| | |
| | |
|
interests | |
| | |
| | |
| | | | 3 |
| | 3 |
|
Balance at December 31, 2016 | 2,982 |
| | 10,717 |
| | (748 | ) | | 12,951 |
| | 2,290 |
| | 15,241 |
|
| | | | | | | | | | | |
Net income | | | 257 |
| | | | 257 |
| | 94 |
| | 351 |
|
Other comprehensive income | | | | | 122 |
| | 122 |
| | 20 |
| | 142 |
|
| | | | | | | | | | | |
Share-based compensation expense | 82 |
| | | | | | 82 |
| | | | 82 |
|
Common stock dividends declared | | | (826 | ) | | | | (826 | ) | | | | (826 | ) |
Preferred dividends of subsidiary | | | (1 | ) | | | | (1 | ) | | | | (1 | ) |
Issuances of common stock | 100 |
| | | | | | 100 |
| | | | 100 |
|
Repurchases of common stock | (15 | ) | | | | | | (15 | ) | | | | (15 | ) |
Sale of noncontrolling interests, net of | | | | | | | | | | | |
offering costs | | | | | | |
|
| | 196 |
| | 196 |
|
Distributions to noncontrolling interests | |
| | |
| | |
| | | | (132 | ) | | (132 | ) |
Equity contributed by noncontrolling | |
| | |
| | |
| | |
| | |
| | |
|
interests | |
| | |
| | |
| | | | 2 |
| | 2 |
|
Balance at December 31, 2017 | $ | 3,149 |
| | $ | 10,147 |
| | $ | (626 | ) | | $ | 12,670 |
| | $ | 2,470 |
| | $ | 15,140 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Operating revenues | | | | | |
Electric | $ | 3,935 |
| | $ | 3,754 |
| | $ | 3,719 |
|
Natural gas | 541 |
| | 499 |
| | 500 |
|
Total operating revenues | 4,476 |
| | 4,253 |
| | 4,219 |
|
Operating expenses | |
| | |
| | |
|
Cost of electric fuel and purchased power | 1,293 |
| | 1,187 |
| | 1,151 |
|
Cost of natural gas | 164 |
| | 127 |
| | 153 |
|
Operation and maintenance | 1,020 |
| | 1,048 |
| | 1,017 |
|
Depreciation and amortization | 670 |
| | 646 |
| | 604 |
|
Franchise fees and other taxes | 265 |
| | 255 |
| | 262 |
|
Write-off of wildfire regulatory asset | 351 |
| | — |
| | — |
|
Plant closure adjustment | — |
| | — |
| | (26 | ) |
Total operating expenses | 3,763 |
| | 3,263 |
| | 3,161 |
|
Operating income | 713 |
| | 990 |
| | 1,058 |
|
Other income, net | 66 |
| | 50 |
| | 36 |
|
Interest expense | (203 | ) | | (195 | ) | | (204 | ) |
Income before income taxes | 576 |
| | 845 |
| | 890 |
|
Income tax expense | (155 | ) | | (280 | ) | | (284 | ) |
Net income | 421 |
| | 565 |
| | 606 |
|
(Earnings) losses attributable to noncontrolling interest | (14 | ) | | 5 |
| | (19 | ) |
Earnings attributable to common shares | $ | 407 |
| | $ | 570 |
| | $ | 587 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | | | | | | | | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) | | | | |
| Years ended December 31, 2017, 2016 and 2015 |
| SDG&E shareholder's equity | | | | |
| Pretax amount | | Income tax (expense) benefit | | Net-of-tax amount | | Noncontrolling interest (after-tax) | | Total |
2017: | | | | | | | | | |
Net income | $ | 562 |
| | $ | (155 | ) | | $ | 407 |
| | $ | 14 |
| | $ | 421 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Financial instruments | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Pension and other postretirement benefits | (1 | ) | | 1 |
| | — |
| | — |
| | — |
|
Total other comprehensive (loss) income | (1 | ) | | 1 |
| | — |
| | 11 |
| | 11 |
|
Comprehensive income | $ | 561 |
| | $ | (154 | ) | | $ | 407 |
| | $ | 25 |
| | $ | 432 |
|
2016: | |
| | |
| | |
| | |
| | |
|
Net income (loss) | $ | 850 |
| | $ | (280 | ) | | $ | 570 |
| | $ | (5 | ) | | $ | 565 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Financial instruments | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
Total other comprehensive income | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
Comprehensive income | $ | 850 |
| | $ | (280 | ) | | $ | 570 |
| | $ | 5 |
| | $ | 575 |
|
2015: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 871 |
| | $ | (284 | ) | | $ | 587 |
| | $ | 19 |
| | $ | 606 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| | |
|
Financial instruments | — |
| | — |
| | — |
| | 6 |
| | 6 |
|
Pension and other postretirement benefits | 7 |
| | (3 | ) | | 4 |
| | — |
| | 4 |
|
Total other comprehensive income | 7 |
| | (3 | ) | | 4 |
| | 6 |
| | 10 |
|
Comprehensive income | $ | 878 |
| | $ | (287 | ) | | $ | 591 |
| | $ | 25 |
| | $ | 616 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016(1) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 12 |
| | $ | 8 |
|
Restricted cash | 6 |
| | 11 |
|
Accounts receivable – trade, net | 362 |
| | 354 |
|
Accounts receivable – other, net | 79 |
| | 17 |
|
Due from unconsolidated affiliates | — |
| | 4 |
|
Income taxes receivable | — |
| | 122 |
|
Inventories | 105 |
| | 80 |
|
Prepaid expenses | 58 |
| | 59 |
|
Regulatory assets | 316 |
| | 340 |
|
Fixed-price contracts and other derivatives | 42 |
| | 58 |
|
Greenhouse gas allowances | 116 |
| | 16 |
|
Other | 4 |
| | 3 |
|
Total current assets | 1,100 |
| | 1,072 |
|
| | | |
Other assets: | |
| | |
|
Restricted cash | 11 |
| | 1 |
|
Regulatory assets | 451 |
| | 2,012 |
|
Nuclear decommissioning trusts | 1,033 |
| | 1,026 |
|
Greenhouse gas allowances | 83 |
| | 182 |
|
Sundry | 328 |
| | 176 |
|
Total other assets | 1,906 |
| | 3,397 |
|
| | | |
Property, plant and equipment: | |
| | |
|
Property, plant and equipment | 19,787 |
| | 17,844 |
|
Less accumulated depreciation and amortization | (4,949 | ) | | (4,594 | ) |
Property, plant and equipment, net ($321 and $354 at December 31, 2017 | |
| | |
|
and 2016, respectively, related to VIE) | 14,838 |
| | 13,250 |
|
Total assets | $ | 17,844 |
| | $ | 17,719 |
|
| |
(1) | Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Consolidated Financial Statements.
|
| | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED BALANCE SHEETS (CONTINUED) |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016(1) |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Short-term debt | $ | 253 |
| | $ | — |
|
Accounts payable | 501 |
| | 460 |
|
Due to unconsolidated affiliates | 40 |
| | 15 |
|
Interest payable | 41 |
| | 40 |
|
Accrued compensation and benefits | 122 |
| | 121 |
|
Accrued franchise fees | 59 |
| | 43 |
|
Current portion of long-term debt | 220 |
| | 191 |
|
Asset retirement obligations | 77 |
| | 79 |
|
Regulatory liabilities | 18 |
| | — |
|
Fixed-price contracts and other derivatives | 60 |
| | 61 |
|
Customer deposits | 69 |
| | 76 |
|
Greenhouse gas obligations | 116 |
| | 16 |
|
Other | 46 |
| | 66 |
|
Total current liabilities | 1,622 |
| | 1,168 |
|
| | | |
Long-term debt ($284 and $293 at December 31, 2017 and 2016, respectively, | |
| | |
|
related to VIE) | 5,335 |
| | 4,658 |
|
| | | |
Deferred credits and other liabilities: | |
| | |
|
Customer advances for construction | 57 |
| | 52 |
|
Pension and other postretirement benefit plan obligations, net of plan assets | 182 |
| | 232 |
|
Deferred income taxes | 1,530 |
| | 2,829 |
|
Deferred investment tax credits | 18 |
| | 16 |
|
Regulatory liabilities | 2,225 |
| | 1,725 |
|
Asset retirement obligations | 762 |
| | 751 |
|
Fixed-price contracts and other derivatives | 153 |
| | 189 |
|
Greenhouse gas obligations | — |
| | 72 |
|
Deferred credits and other | 334 |
| | 349 |
|
Total deferred credits and other liabilities | 5,261 |
| | 6,215 |
|
| | | |
Commitments and contingencies (Note 15) | | | |
| | | |
Equity: | |
| | |
|
Preferred stock (45 million shares authorized; none issued) | — |
| | — |
|
Common stock (255 million shares authorized; 117 million shares outstanding; | |
| | |
|
no par value) | 1,338 |
| | 1,338 |
|
Retained earnings | 4,268 |
| | 4,311 |
|
Accumulated other comprehensive income (loss) | (8 | ) | | (8 | ) |
Total SDG&E shareholder’s equity | 5,598 |
| | 5,641 |
|
Noncontrolling interest | 28 |
| | 37 |
|
Total equity | 5,626 |
| | 5,678 |
|
Total liabilities and equity | $ | 17,844 |
| | $ | 17,719 |
|
| |
(1) | Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016(1) | | 2015(1) |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | $ | 421 |
| | $ | 565 |
| | $ | 606 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
Depreciation and amortization | 670 |
| | 646 |
| | 604 |
|
Deferred income taxes and investment tax credits | (10 | ) | | 258 |
| | 195 |
|
Write-off of wildfire regulatory asset | 351 |
| | — |
| | — |
|
Plant closure adjustment | — |
| | — |
| | (26 | ) |
Fixed-price contracts and other derivatives | (2 | ) | | (3 | ) | | (4 | ) |
Other | (22 | ) | | (35 | ) | | (16 | ) |
Changes in other assets | (108 | ) | | (20 | ) | | (125 | ) |
Changes in other liabilities | 78 |
| | 11 |
| | 13 |
|
Changes in working capital components: | |
| | |
| | |
|
Accounts receivable | (76 | ) | | (31 | ) | | (10 | ) |
Due to/from affiliates, net | (10 | ) | | (19 | ) | | 21 |
|
Inventories | (25 | ) | | (5 | ) | | (2 | ) |
Other current assets | 9 |
| | 25 |
| | (24 | ) |
Income taxes | 136 |
| | (115 | ) | | — |
|
Accounts payable | 75 |
| | 39 |
| | (28 | ) |
Regulatory balancing accounts | 56 |
| | 35 |
| | 474 |
|
Other current liabilities | 4 |
| | (28 | ) | | (17 | ) |
Net cash provided by operating activities | 1,547 |
| | 1,323 |
| | 1,661 |
|
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| | |
|
Expenditures for property, plant and equipment | (1,555 | ) | | (1,399 | ) | | (1,133 | ) |
Purchases of nuclear decommissioning trust assets | (1,314 | ) | | (1,034 | ) | | (526 | ) |
Proceeds from sales by nuclear decommissioning trusts | 1,314 |
| | 1,134 |
| | 577 |
|
Decrease (increase) in loans to affiliate, net | 31 |
| | (31 | ) | | — |
|
Other | 9 |
| | 6 |
| | 5 |
|
Net cash used in investing activities | (1,515 | ) | | (1,324 | ) | | (1,077 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| | |
|
Common dividends paid | (450 | ) | | (175 | ) | | (300 | ) |
Issuances of debt (maturities greater than 90 days) | 398 |
| | 498 |
| | 444 |
|
Payments on debt (maturities greater than 90 days) | (186 | ) | | (204 | ) | | (547 | ) |
Increase (decrease) in short-term debt, net | 253 |
| | (114 | ) | | (131 | ) |
Capital distributions made by VIE, net | (34 | ) | | (21 | ) | | (30 | ) |
Other | (4 | ) | | (6 | ) | | (4 | ) |
Net cash used in financing activities | (23 | ) | | (22 | ) | | (568 | ) |
| | | | | |
Increase (decrease) in cash, cash equivalents and restricted cash | 9 |
| | (23 | ) | | 16 |
|
Cash, cash equivalents and restricted cash, January 1 | 20 |
| | 43 |
| | 27 |
|
Cash, cash equivalents and restricted cash, December 31 | $ | 29 |
| | $ | 20 |
| | $ | 43 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | |
Interest payments, net of amounts capitalized | $ | 195 |
| | $ | 187 |
| | $ | 199 |
|
Income tax payments, net | 27 |
| | 137 |
| | 88 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |
| | |
| | |
|
Accrued capital expenditures | $ | 217 |
| | $ | 227 |
| | $ | 191 |
|
Increase in capital lease obligations for investment in property, plant and equipment | 500 |
| | — |
| | 15 |
|
| |
(1) | As adjusted for the retrospective adoption of ASU 2016-15 and ASU 2016-18, which we discuss in Note 2. |
See Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | |
SAN DIEGO GAS & ELECTRIC COMPANY |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(Dollars in millions) |
| Years ended December 31, 2017, 2016 and 2015 |
| Common stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | SDG&E shareholder's equity | | Noncontrolling interest | | Total equity |
Balance at December 31, 2014 | $ | 1,338 |
| | $ | 3,606 |
| | $ | (12 | ) | | $ | 4,932 |
| | $ | 60 |
| | $ | 4,992 |
|
| | | | | | | | | | | |
Net income | | | 587 |
| | | | 587 |
| | 19 |
| | 606 |
|
Other comprehensive income | | | | | 4 |
| | 4 |
| | 6 |
| | 10 |
|
| | | | | | | | | | | |
Common stock dividends declared | | | (300 | ) | | | | (300 | ) | | | | (300 | ) |
Distributions to noncontrolling interest | |
| | |
| | |
| | | | (32 | ) | | (32 | ) |
Balance at December 31, 2015 | 1,338 |
| | 3,893 |
| | (8 | ) | | 5,223 |
| | 53 |
| | 5,276 |
|
Cumulative-effect adjustment from | | | | | | | | | | | |
change in accounting principle | | | 23 |
| | | | 23 |
| | | | 23 |
|
| | | | | | | | | | | |
Net income (loss) | | | 570 |
| | | | 570 |
| | (5 | ) | | 565 |
|
Other comprehensive income | | | | |
|
| |
|
| | 10 |
| | 10 |
|
| | | | | | | | | | | |
Common stock dividends declared | | | (175 | ) | | | | (175 | ) | | | | (175 | ) |
Distributions to noncontrolling interest | |
| | |
| | |
| | | | (23 | ) | | (23 | ) |
Equity contributed by noncontrolling | | | | | | | | | | | |
interest | | | | | | | | | 2 |
| | 2 |
|
Balance at December 31, 2016 | 1,338 |
| | 4,311 |
| | (8 | ) | | 5,641 |
| | 37 |
| | 5,678 |
|
| | | | | | | | | | | |
Net income | | | 407 |
| | | | 407 |
| | 14 |
| | 421 |
|
Other comprehensive income | | | | |
|
| |
|
| | 11 |
| | 11 |
|
| | | | | | | | | | | |
Common stock dividends declared | | | (450 | ) | | | | (450 | ) | | | | (450 | ) |
Distributions to noncontrolling interest | |
| | |
| | |
| | | | (35 | ) | | (35 | ) |
Equity contributed by noncontrolling | | | | | | | | | | | |
interest | | | | | | | | | 1 |
| | 1 |
|
Balance at December 31, 2017 | $ | 1,338 |
| | $ | 4,268 |
| | $ | (8 | ) | | $ | 5,598 |
| | $ | 28 |
| | $ | 5,626 |
|
See Notes to Consolidated Financial Statements. |
|
| | | | | | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
STATEMENTS OF OPERATIONS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Operating revenues | $ | 3,785 |
| | $ | 3,471 |
| | $ | 3,489 |
|
Operating expenses | |
| | |
| | |
|
Cost of natural gas | 1,025 |
| | 891 |
| | 921 |
|
Operation and maintenance | 1,479 |
| | 1,385 |
| | 1,361 |
|
Depreciation and amortization | 515 |
| | 476 |
| | 461 |
|
Franchise fees and other taxes | 144 |
| | 140 |
| | 129 |
|
Impairment losses | — |
| | 22 |
| | 9 |
|
Total operating expenses | 3,163 |
| | 2,914 |
| | 2,881 |
|
Operating income | 622 |
| | 557 |
| | 608 |
|
Other income, net | 36 |
| | 32 |
| | 30 |
|
Interest income | 1 |
| | 1 |
| | 4 |
|
Interest expense | (102 | ) | | (97 | ) | | (84 | ) |
Income before income taxes | 557 |
| | 493 |
| | 558 |
|
Income tax expense | (160 | ) | | (143 | ) | | (138 | ) |
Net income | 397 |
| | 350 |
| | 420 |
|
Preferred dividend requirements | (1 | ) | | (1 | ) | | (1 | ) |
Earnings attributable to common shares | $ | 396 |
| | $ | 349 |
| | $ | 419 |
|
See Notes to Financial Statements. |
|
| | | | | | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) |
| Years ended December 31, 2017, 2016 and 2015 |
| Pretax amount | | Income tax (expense) benefit | | Net-of-tax amount |
2017: | | | | | |
Net income | $ | 557 |
| | $ | (160 | ) | | $ | 397 |
|
Other comprehensive income (loss): | |
| | |
| | |
|
Pension and other postretirement benefits | 1 |
| | — |
| | 1 |
|
Total other comprehensive income | 1 |
| | — |
| | 1 |
|
Comprehensive income | $ | 558 |
| | $ | (160 | ) | | $ | 398 |
|
2016: | |
| | |
| | |
|
Net income | $ | 493 |
| | $ | (143 | ) | | $ | 350 |
|
Other comprehensive income (loss): | |
| | |
| | |
|
Financial instruments | 1 |
| | — |
| | 1 |
|
Pension and other postretirement benefits | (6 | ) | | 2 |
| | (4 | ) |
Total other comprehensive loss | (5 | ) | | 2 |
| | (3 | ) |
Comprehensive income | $ | 488 |
| | $ | (141 | ) | | $ | 347 |
|
2015: | |
| | |
| | |
|
Net income | $ | 558 |
| | $ | (138 | ) | | $ | 420 |
|
Other comprehensive income (loss): | | | | | |
Financial instruments | 1 |
| | (1 | ) | | — |
|
Pension and other postretirement benefits | (2 | ) | | 1 |
| | (1 | ) |
Total other comprehensive loss | (1 | ) | | — |
| | (1 | ) |
Comprehensive income | $ | 557 |
| | $ | (138 | ) | | $ | 419 |
|
See Notes to Financial Statements. |
|
| | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016 (1) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 8 |
| | $ | 12 |
|
Accounts receivable – trade, net | 517 |
| | 608 |
|
Accounts receivable – other, net | 90 |
| | 77 |
|
Due from unconsolidated affiliates | 4 |
| | 8 |
|
Income taxes receivable | 10 |
| | 2 |
|
Inventories | 124 |
| | 58 |
|
Regulatory assets | 9 |
| | 8 |
|
Greenhouse gas allowances | 179 |
| | 24 |
|
Other | 38 |
| | 39 |
|
Total current assets | 979 |
| | 836 |
|
| | | |
Other assets: | |
| | |
|
Regulatory assets | 983 |
| | 1,331 |
|
Insurance receivable for Aliso Canyon costs | 418 |
| | 606 |
|
Greenhouse gas allowances | 9 |
| | 109 |
|
Sundry | 364 |
| | 290 |
|
Total other assets | 1,774 |
| | 2,336 |
|
| | | |
Property, plant and equipment: | |
| | |
|
Property, plant and equipment | 16,772 |
| | 15,344 |
|
Less accumulated depreciation and amortization | (5,366 | ) | | (5,092 | ) |
Property, plant and equipment, net | 11,406 |
| | 10,252 |
|
Total assets | $ | 14,159 |
| | $ | 13,424 |
|
| |
(1) | Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Financial Statements.
|
| | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
BALANCE SHEETS (CONTINUED) |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016 (1) |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term debt | $ | 116 |
| | $ | 62 |
|
Accounts payable – trade | 502 |
| | 481 |
|
Accounts payable – other | 93 |
| | 74 |
|
Due to unconsolidated affiliates | 35 |
| | 28 |
|
Accrued compensation and benefits | 151 |
| | 150 |
|
Regulatory liabilities | 91 |
| | 122 |
|
Current portion of long-term debt | 501 |
| | — |
|
Customer deposits | 89 |
| | 76 |
|
Reserve for Aliso Canyon costs | 84 |
| | 53 |
|
Greenhouse gas obligations | 179 |
| | 24 |
|
Other | 205 |
| | 171 |
|
Total current liabilities | 2,046 |
| | 1,241 |
|
| | | |
Long-term debt | 2,485 |
| | 2,982 |
|
| | | |
Deferred credits and other liabilities: | |
| | |
|
Customer advances for construction | 92 |
| | 99 |
|
Pension obligation, net of plan assets | 789 |
| | 762 |
|
Deferred income taxes | 995 |
| | 1,709 |
|
Deferred investment tax credits | 10 |
| | 12 |
|
Regulatory liabilities | 1,697 |
| | 1,151 |
|
Asset retirement obligations | 1,885 |
| | 1,616 |
|
Greenhouse gas obligations | — |
| | 96 |
|
Deferred credits and other | 253 |
| | 246 |
|
Total deferred credits and other liabilities | 5,721 |
| | 5,691 |
|
| | | |
Commitments and contingencies (Note 15) | | | |
| | | |
Shareholders’ equity: | |
| | |
|
Preferred stock (11 million shares authorized; 1 million shares outstanding) | 22 |
| | 22 |
|
Common stock (100 million shares authorized; 91 million shares outstanding; | |
| | |
|
no par value) | 866 |
| | 866 |
|
Retained earnings | 3,040 |
| | 2,644 |
|
Accumulated other comprehensive income (loss) | (21 | ) | | (22 | ) |
Total shareholders’ equity | 3,907 |
| | 3,510 |
|
Total liabilities and shareholders’ equity | $ | 14,159 |
| | $ | 13,424 |
|
| |
(1) | Reflects reclassifications to conform to current year presentation, which we discuss in Note 1. |
See Notes to Financial Statements.
|
| | | | | | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
STATEMENTS OF CASH FLOWS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | $ | 397 |
| | $ | 350 |
| | $ | 420 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
Depreciation and amortization | 515 |
| | 476 |
| | 461 |
|
Deferred income taxes and investment tax credits | 137 |
| | 103 |
| | 127 |
|
Impairment losses | — |
| | 22 |
| | 9 |
|
Other | 11 |
| | (26 | ) | | (20 | ) |
Insurance receivable for Aliso Canyon costs | 188 |
| | (281 | ) | | (325 | ) |
Changes in other assets | (80 | ) | | 35 |
| | (91 | ) |
Changes in other liabilities | (13 | ) | | 7 |
| | (7 | ) |
Changes in working capital components: | |
| | |
| | |
|
Accounts receivable | 72 |
| | 37 |
| | (90 | ) |
Inventories | (66 | ) | | 4 |
| | 102 |
|
Other current assets | — |
| | (13 | ) | | 8 |
|
Accounts payable | 39 |
| | 36 |
| | (143 | ) |
Income taxes | (5 | ) | | (2 | ) | | 8 |
|
Due to/from affiliates, net | 7 |
| | 6 |
| | (11 | ) |
Regulatory balancing accounts | 53 |
| | 163 |
| | 112 |
|
Reserve for Aliso Canyon costs | 31 |
| | (221 | ) | | 274 |
|
Other current liabilities | 20 |
| | (25 | ) | | 46 |
|
Net cash provided by operating activities | 1,306 |
| | 671 |
| | 880 |
|
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| | |
|
Expenditures for property, plant and equipment | (1,367 | ) | | (1,319 | ) | | (1,352 | ) |
Decrease (increase) in loans to affiliate, net | — |
| | 50 |
| | (50 | ) |
Other | 4 |
| | — |
| | — |
|
Net cash used in investing activities | (1,363 | ) | | (1,269 | ) | | (1,402 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| | |
|
Common dividends paid | — |
| | — |
| | (50 | ) |
Preferred dividends paid | (1 | ) | | (1 | ) | | (1 | ) |
Issuances of long-term debt | — |
| | 499 |
| | 599 |
|
Payments on long-term debt | — |
| | (3 | ) | | — |
|
Increase (decrease) in short-term debt, net | 54 |
| | 62 |
| | (50 | ) |
Debt issuance costs | — |
| | (5 | ) | | (3 | ) |
Net cash provided by financing activities | 53 |
| | 552 |
| | 495 |
|
| | | | | |
Decrease in cash and cash equivalents | (4 | ) | | (46 | ) | | (27 | ) |
Cash and cash equivalents, January 1 | 12 |
| | 58 |
| | 85 |
|
Cash and cash equivalents, December 31 | $ | 8 |
| | $ | 12 |
| | $ | 58 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | |
| | |
|
Interest payments, net of amounts capitalized | $ | 97 |
| | $ | 92 |
| | $ | 79 |
|
Income tax payments, net | 28 |
| | 41 |
| | 1 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY | |
| | |
| | |
|
Accrued capital expenditures | $ | 208 |
| | $ | 207 |
| | $ | 189 |
|
See Notes to Financial Statements. |
|
| | | | | | | | | | | | | | | | | | | |
SOUTHERN CALIFORNIA GAS COMPANY |
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
(Dollars in millions) |
| Years ended December 31, 2017, 2016 and 2015 |
| Preferred stock | | Common stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity |
Balance at December 31, 2014 | $ | 22 |
| | $ | 866 |
| | $ | 1,911 |
| | $ | (18 | ) | | $ | 2,781 |
|
| | | | | | | | | |
Net income | | | | | 420 |
| | | | 420 |
|
Other comprehensive loss | | | | | | | (1 | ) | | (1 | ) |
| | | | | | | | | |
Preferred stock dividends declared | | | | | (1 | ) | | | | (1 | ) |
Common stock dividends declared | | | | | (50 | ) | | | | (50 | ) |
Balance at December 31, 2015 | 22 |
| | 866 |
| | 2,280 |
| | (19 | ) | | 3,149 |
|
Cumulative-effect adjustment from change | | | | | | | | | |
in accounting principle | | | | | 15 |
| | | | 15 |
|
| | | | | | | | | |
Net income | | | | | 350 |
| | | | 350 |
|
Other comprehensive loss | | | | | | | (3 | ) | | (3 | ) |
| | | | | | | | | |
Preferred stock dividends declared | | | | | (1 | ) | | | | (1 | ) |
Balance at December 31, 2016 | 22 |
| | 866 |
| | 2,644 |
| | (22 | ) | | 3,510 |
|
| | | | | | | | | |
Net income | | | | | 397 |
| | | | 397 |
|
Other comprehensive income | | | | | | | 1 |
| | 1 |
|
| | | | | | | | | |
Preferred stock dividends declared | | | | | (1 | ) | | | | (1 | ) |
Balance at December 31, 2017 | $ | 22 |
| | $ | 866 |
| | $ | 3,040 |
| | $ | (21 | ) | | $ | 3,907 |
|
See Notes to Financial Statements. |
SEMPRA ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER FINANCIAL DATA
PRINCIPLES OF CONSOLIDATION
Sempra Energy
Sempra Energy’s Consolidated Financial Statements include the accounts of Sempra Energy, a California-based Fortune 500 energy-services holding company, and its consolidated subsidiaries and VIEs. Sempra Energy’s principal operating units are
| |
▪ | 10.5Sempra Utilities, which includes our SDG&E, SoCalGas and Sempra South American Utilities reportable segments; and |
| |
▪ | AmendedSempra Infrastructure, which includes our Sempra Mexico, Sempra Renewables and RestatedSempra LNG & Midstream reportable segments. |
We provide descriptions of each of our segments in Note 16.
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include our South American utilities or the utilities in our Sempra Infrastructure operating unit. 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 Utilities,” “Sempra Infrastructure” 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, IEnova, as well as certain holding companies and risk management activity. IEnova is a separate legal entity comprised of Sempra Energy’s operations in Mexico. IEnova is included within our Sempra Mexico reportable segment, but is not the same in its entirety as the reportable segment. IEnova’s financial results are reported in Mexico under International Financial Reporting Standards, as required by the Mexican Stock Exchange, where its shares are traded under the symbol IENOVA.
Sempra Energy uses the equity method to account for investments in companies over which we have the ability to exercise significant influence, but not control. We discuss our investments in unconsolidated entities in Notes 3, 4 and 10.
SDG&E
SDG&E’s Consolidated Financial Statements include its accounts and the accounts of a VIE of which SDG&E is the primary beneficiary, as we discuss below in “Variable Interest Entities.” SDG&E’s common stock is wholly owned by Enova, which is a wholly owned subsidiary of Sempra Energy.
SoCalGas
SoCalGas’ common stock is wholly owned by PE, which is a wholly owned subsidiary of Sempra Energy.
BASIS OF PRESENTATION
This is a combined report of Sempra Energy, SDG&E and SoCalGas. We provide separate information for SDG&E and SoCalGas as required. References in this report to “we,” “our” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, unless otherwise indicated by the context. We have eliminated intercompany accounts and transactions within the consolidated financial statements of each reporting entity.
Throughout this report, we refer to the following as Consolidated Financial Statements and Notes to Consolidated Financial Statements when discussed together or collectively:
| |
▪ | the Consolidated Financial Statements and related Notes of Sempra Energy 2013 Long-Term Incentive Plan.and its subsidiaries and VIEs; |
| |
▪ | the Consolidated Financial Statements and related Notes of SDG&E and its VIE; and |
| |
▪ | the Financial Statements and related Notes of SoCalGas. |
Balance Sheet Reclassifications
We have made certain balance sheet reclassifications at December 31, 2016 to conform to the current year presentation. Line item captions for various types of regulatory assets and liabilities have been combined or separated into four new line items: current
and noncurrent regulatory assets and current and noncurrent regulatory liabilities. The details of regulatory assets and liabilities are provided in Note 14. Additionally, greenhouse gas allowances have been separated from other current assets and sundry assets and greenhouse gas obligations have been separated from other current liabilities and deferred credits and other into four new line items: current and noncurrent greenhouse gas allowances and current and noncurrent greenhouse gas obligations. These reclassifications and related disclosures had no effect on our financial position as of December 31, 2016 and are intended to provide additional clarity into the financial position of Sempra Energy, SDG&E and SoCalGas. The following tables summarize the balance sheet line items affected by these reclassifications:
|
| | | | | | | | | | | | |
SEMPRA ENERGY CONSOLIDATED – BALANCE SHEET RECLASSIFICATIONS AT DECEMBER 31, 2016 |
(Dollars in millions) | | |
| | | | | As previously presented | | As currently presented |
Current assets: | | | | | | | |
Regulatory assets | | | | | $ | — |
| | $ | 348 |
|
Greenhouse gas allowances | | | | | — |
| | 40 |
|
Regulatory balancing accounts – undercollected | | | | | 259 |
| | — |
|
Other | | | | | 271 |
| | 142 |
|
Other assets: | | | | | | | |
Greenhouse gas allowances | | | | | — |
| | 295 |
|
Sundry | | | | | 815 |
| | 520 |
|
Current liabilities: | | | | | | | |
Regulatory liabilities | | | | | — |
| | 122 |
|
Greenhouse gas obligations | | | | | — |
| | 40 |
|
Regulatory balancing accounts – overcollected | | | | | 122 |
| | — |
|
Other | | | | | 557 |
| | 517 |
|
Deferred credits and other liabilities: | | | | | | | |
Regulatory liabilities | | | | | — |
| | 2,876 |
|
Greenhouse gas obligations | | | | | — |
| | 171 |
|
Regulatory liabilities arising from removal obligations | | | | | 2,697 |
| | — |
|
Deferred credits and other | | | | | 1,523 |
| | 1,173 |
|
|
| | | | | | | | | | | | |
SDG&E – BALANCE SHEET RECLASSIFICATIONS AT DECEMBER 31, 2016 | | |
(Dollars in millions) | | |
| | | | | As previously presented | | As currently presented |
Current assets: | | | | | | | |
Regulatory assets | | | | | $ | 81 |
| | $ | 340 |
|
Greenhouse gas allowances | | | | | — |
| | 16 |
|
Regulatory balancing accounts – net undercollected | | | | | 259 |
| | — |
|
Other | | | | | 19 |
| | 3 |
|
Other assets: | | | | | | | |
Regulatory assets | | | | | — |
| | 2,012 |
|
Greenhouse gas allowances | | | | | — |
| | 182 |
|
Deferred taxes recoverable in rates | | | | | 1,014 |
| | — |
|
Other regulatory assets | | | | | 998 |
| | — |
|
Sundry | | | | | 358 |
| | 176 |
|
Current liabilities: | | | | | | | |
Greenhouse gas obligations | | | | | — |
| | 16 |
|
Other | | | | | 82 |
| | 66 |
|
Deferred credits and other liabilities: | | | | | | | |
Regulatory liabilities | | | | | — |
| | 1,725 |
|
Greenhouse gas obligations | | | | | — |
| | 72 |
|
Regulatory liabilities arising from removal obligations | | | | | 1,725 |
| | — |
|
Deferred credits and other | | | | | 421 |
| | 349 |
|
|
| | | | | | | | | | | | |
SOCALGAS – BALANCE SHEET RECLASSIFICATIONS AT DECEMBER 31, 2016 | | |
(Dollars in millions) | | |
| | | | | As previously presented | | As currently presented |
Current assets: | | | | | | | |
Greenhouse gas allowances | | | | | $ | — |
| | $ | 24 |
|
Other | | | | | 63 |
| | 39 |
|
Other assets: | | | | | | | |
Regulatory assets | | | | | — |
| | 1,331 |
|
Greenhouse gas allowances | | | | | — |
| | 109 |
|
Regulatory assets arising from pension obligations | | | | | 742 |
| | — |
|
Other regulatory assets | | | | | 589 |
| | — |
|
Sundry | | | | | 399 |
| | 290 |
|
Current liabilities: | | | | | | | |
Regulatory liabilities | | | | | — |
| | 122 |
|
Greenhouse gas obligations | | | | | — |
| | 24 |
|
Regulatory balancing accounts – net overcollected | | | | | 122 |
| | — |
|
Other | | | | | 195 |
| | 171 |
|
Deferred credits and other liabilities: | | | | | | | |
Regulatory liabilities | | | | | — |
| | 1,151 |
|
Greenhouse gas obligations | | | | | — |
| | 96 |
|
Regulatory liabilities arising from removal obligations | | | | | 972 |
| | — |
|
Deferred credits and other | | | | | 521 |
| | 246 |
|
Use of Estimates in the Preparation of the Financial Statements
We have prepared our Consolidated Financial Statements in conformity with U.S. GAAP. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including the disclosure of contingent assets and liabilities at the date of the financial statements. Although we believe the estimates and assumptions are reasonable, actual amounts ultimately may differ significantly from those estimates.
Subsequent Events
We evaluated events and transactions that occurred after December 31, 2017 through the date the financial statements were issued, and in the opinion of management, the accompanying statements reflect all adjustments and disclosures necessary for a fair presentation. See Note 18 for a discussion of certain financing transactions that were completed in January 2018.
EFFECTS OF REGULATION
The California Utilities’ accounting policies and financial statements reflect the application of U.S. GAAP provisions governing rate-regulated operations and the policies of the CPUC and the FERC. Under these provisions, a regulated utility records regulatory assets, which are generally costs that would otherwise be charged to expense, if it is probable that, through the ratemaking process, the utility will recover those assets from customers. To the extent that recovery is no longer probable, the related regulatory assets are written off. Regulatory liabilities generally represent amounts collected from customers in advance of the actual expenditure by the utility. If the actual expenditures are less than amounts previously collected from ratepayers, the excess would be refunded to customers, generally by reducing future rates. Regulatory liabilities may also arise from other transactions such as unrealized gains on fixed price contracts and other derivatives or certain deferred income tax benefits that are passed through to customers in future rates. In addition, the California Utilities record regulatory liabilities when the CPUC or the FERC requires a refund to be made to customers or has required that a gain or other transaction of net allowable costs be given to customers over future periods.
Determining probability of recovery of regulatory assets requires significant judgment by management and may include, but is not limited to, consideration of:
| |
▪ | the nature of the event giving rise to the assessment; |
| |
▪ | existing statutes and regulatory code; |
| |
▪ | regulatory principles and analogous regulatory actions; |
| |
▪ | testimony presented in regulatory hearings; |
| |
▪ | a commission-authorized mechanism established for the accumulation of costs; |
| |
▪ | status of applications for rehearings or state court appeals; |
| |
▪ | specific approval from a commission; and |
Sempra Mexico’s natural gas distribution utility, Ecogas, also applies U.S. GAAP for rate-regulated utilities to its operations, including the same evaluation of probability of recovery of regulatory assets described above.
We provide information concerning regulatory assets and liabilities in Notes 13 and 14.
Sempra South American Utilities has controlling interests in two electric distribution utilities in South America, Chilquinta Energía in Chile and Luz del Sur in Peru, and their subsidiaries. Revenues 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. Because the tariffs are based on a model and are intended to cover the costs of the model company, but are not based on the costs of the specific utility and may not result in full cost recovery, these utilities do not meet the requirements necessary for, and therefore do not apply, regulatory accounting treatment under U.S. GAAP.
Certain business activities at IEnova are regulated by the CRE and meet the regulatory accounting requirements of U.S. GAAP. Pipeline projects currently under construction by IEnova that meet the regulatory accounting requirements of U.S. GAAP record the impact of AFUDC related to equity. We discuss AFUDC below in “Property, Plant and Equipment.”
Sempra LNG & Midstream owned Mobile Gas in southwest Alabama and Willmut Gas in Mississippi until they were sold in September 2016, as we discuss in Note 3. Mobile Gas and Willmut Gas also prepared their financial statements in accordance with the provisions of U.S. GAAP governing rate-regulated operations.
We discuss revenue recognition at our utilities in “Revenues” below.
FAIR VALUE MEASUREMENTS
We measure certain assets and liabilities at fair value on a recurring basis, primarily nuclear decommissioning and benefit plan trust assets and derivatives. We also measure certain assets at fair value on a non-recurring basis in certain circumstances. These assets can include goodwill, intangible assets, equity method investments and other long-lived assets.
“Fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
A fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Also, we consider an issuer’s credit standing when measuring its liabilities at fair value.
We establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 – Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 financial instruments primarily consist of listed equities, U.S. government treasury securities, primarily in the NDT and benefit plan trusts, and exchange-traded derivatives.
Level 2– Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including:
| |
▪ | quoted forward prices for commodities |
| |
▪ | current market and contractual prices for the underlying instruments |
| |
▪ | other relevant economic measures |
Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Our financial instruments in this category include listed equities, domestic corporate bonds, municipal bonds and other foreign bonds, primarily in the NDT and benefit plan trusts, and non-exchange-traded derivatives such as interest rate instruments and over-the-counter forwards and options.
Level 3– Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. Our Level 3 financial instruments consist of CRRs and fixed-price electricity positions at SDG&E.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of three months or less at the date of purchase.
RESTRICTED CASH
Restricted cash at Sempra Energy was $76 million at both December 31, 2017 and 2016, and includes:
| |
▪ | for SDG&E, $17 million and $12 million at December 31, 2017 and 2016, respectively, representing funds held by a trustee for Otay Mesa VIE to pay certain operating costs. |
| |
▪ | for Sempra Mexico, $56 million and $61 million at December 31, 2017 and 2016, respectively, primarily denominated in Mexican pesos, representing funds to pay for rights-of-way, license fees, permits, topographic surveys and other costs pursuant to trust and debt agreements related to pipeline projects. |
| |
▪ | for Sempra Renewables, $3 million at both December 31, 2017 and 2016, primarily representing funds held in accordance with debt agreements at our wholly owned solar project. |
| |
▪ | for Sempra South American Utilities, negligible amounts at both December 31, 2017 and 2016. |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets to the sum of such amounts reported on the Consolidated Statements of Cash Flows.
|
| | | | | | | |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | |
(Dollars in millions) |
| At December 31, |
| 2017 | | 2016 |
Sempra Energy Consolidated: | | | |
Cash and cash equivalents | $ | 288 |
| | $ | 349 |
|
Restricted cash, current | 62 |
| | 66 |
|
Restricted cash, noncurrent | 14 |
| | 10 |
|
Total cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows | $ | 364 |
| | $ | 425 |
|
SDG&E: | |
| | |
|
Cash and cash equivalents | $ | 12 |
| | $ | 8 |
|
Restricted cash, current | 6 |
| | 11 |
|
Restricted cash, noncurrent | 11 |
| | 1 |
|
Total cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows | $ | 29 |
| | $ | 20 |
|
COLLECTION ALLOWANCES
We record allowances for the collection of trade and other accounts and notes receivable, which include allowances for doubtful customer accounts and for other receivables. We show the changes in these allowances in the table below:
|
| | | | | | | | | | | |
COLLECTION ALLOWANCES |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Allowances for collection of receivables at January 1 | $ | 35 |
| | $ | 32 |
| | $ | 34 |
|
|
| | | | | | | | | | | |
Provisions for uncollectible accounts | 16 |
| | 23 |
| | 20 |
|
Write-offs of uncollectible accounts | (18 | ) | | (20 | ) | | (22 | ) |
Allowances for collection of receivables at December 31 | $ | 33 |
| | $ | 35 |
| | $ | 32 |
|
SDG&E: | |
| | |
| | |
|
Allowances for collection of receivables at January 1 | $ | 8 |
| | $ | 9 |
| | $ | 7 |
|
Provisions for uncollectible accounts | 8 |
| | 6 |
| | 7 |
|
Write-offs of uncollectible accounts | (7 | ) | | (7 | ) | | (5 | ) |
Allowances for collection of receivables at December 31 | $ | 9 |
| | $ | 8 |
| | $ | 9 |
|
SoCalGas: | |
| | |
| | |
|
Allowances for collection of receivables at January 1 | $ | 21 |
| | $ | 17 |
| | $ | 17 |
|
Provisions for uncollectible accounts | 4 |
| | 14 |
| | 11 |
|
Write-offs of uncollectible accounts | (9 | ) | | (10 | ) | | (11 | ) |
Allowances for collection of receivables at December 31 | $ | 16 |
| | $ | 21 |
| | $ | 17 |
|
We evaluate accounts receivable collectability using a combination of factors, including past due status based on contractual terms, trends in write-offs, the age of the receivable, counterparty creditworthiness, economic conditions and specific events, such as bankruptcies. Adjustments to collection allowances are made when necessary based on the results of analysis, the aging of receivables, and historical and industry trends.
We write off accounts receivable in the period in which we deem the receivable to be uncollectible. We record recoveries of accounts receivable previously written off when it is known that they will be received.
INVENTORIES
The California Utilities value natural gas inventory using the LIFO method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. These differences are generally temporary, but may become permanent if the natural gas inventory withdrawn from storage during the year is not replaced by year end. At December 31, 2016, SoCalGas recognized a permanent LIFO liquidation of $33 million. The California Utilities generally value materials and supplies at the lower of average cost or net realizable value.
Sempra South American Utilities, Sempra Mexico, Sempra Renewables and Sempra LNG & Midstream value natural gas inventory and materials and supplies at the lower of average cost or net realizable value. Sempra Mexico and Sempra LNG & Midstream value LNG inventory using the first-in first-out method.
The components of inventories by segment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INVENTORY BALANCES AT DECEMBER 31 |
(Dollars in millions) |
| Natural gas | | LNG | | Materials and supplies | | Total |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
SDG&E | $ | 4 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 101 |
| | $ | 78 |
| | $ | 105 |
| | $ | 80 |
|
SoCalGas(1) | 75 |
| | 11 |
| | — |
| | — |
| | 49 |
| | 47 |
| | 124 |
| | 58 |
|
Sempra South American Utilities | — |
| | — |
| | — |
| | — |
| | 30 |
| | 27 |
| | 30 |
| | 27 |
|
Sempra Mexico | — |
| | — |
| | 7 |
| | 6 |
| | 2 |
| | 1 |
| | 9 |
| | 7 |
|
Sempra Renewables | — |
| | — |
| | — |
| | — |
| | 5 |
| | 4 |
| | 5 |
| | 4 |
|
Sempra LNG & Midstream | 30 |
| | 79 |
| | 4 |
| | 3 |
| | — |
| | — |
| | 34 |
| | 82 |
|
Sempra Energy Consolidated | $ | 109 |
| | $ | 92 |
| | $ | 11 |
| | $ | 9 |
| | $ | 187 |
| | $ | 157 |
| | $ | 307 |
| | $ | 258 |
|
| |
(1) | At December 31, 2016, SoCalGas’ natural gas inventory for core customers is net of an inventory loss related to the Aliso Canyon natural gas storage facility leak, which we discuss in Note 15. |
INCOME TAXES
Income tax expense includes current and deferred income taxes. We record deferred income taxes for temporary differences between the book and the tax basis of assets and liabilities. ITCs from prior years are amortized to income by the California Utilities over the estimated service lives of the properties as required by the CPUC. At our other businesses, we reduce the book basis of the related asset by the amount of ITCs earned. At Sempra Renewables, PTCs are recognized in income tax expense as earned.
Under the regulatory accounting treatment required for flow-through temporary differences, as discussed in Note 6, the California Utilities and Sempra Mexico recognize
| |
▪ | regulatory assets to offset deferred tax liabilities if it is probable that the amounts will be recovered from customers; and |
| |
▪ | regulatory liabilities to offset deferred tax assets if it is probable that the amounts will be returned to customers. |
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take has to have at least a more likely than not chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, we may not recognize any of the potential tax benefit associated with the position. We recognize a benefit for a tax position that meets the more likely than not criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution.
Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our ETR.
On December 22, 2017, the TCJA was signed into law. As a result, all cumulative undistributed earnings from non-U.S. subsidiaries were deemed repatriated and subjected to a one-time U.S. federal deemed repatriation tax. To the extent we intend to repatriate cash into the U.S., incremental U.S. state and non-U.S. withholding taxes are accrued. We currently do not record deferred income taxes for other basis differences between financial statement and income tax investment amounts in non-U.S. subsidiaries to the extent the related cumulative undistributed earnings are indefinitely reinvested.
We provide additional information about income taxes in Note 6.
GREENHOUSE GAS ALLOWANCES AND OBLIGATIONS
The California Utilities, Sempra Mexico and Sempra LNG & Midstream are required by California AB 32 to acquire GHG allowances for every metric ton of carbon dioxide equivalent emitted into the atmosphere during electric generation and natural gas transportation. At the California Utilities, many GHG allowances are allocated to us on behalf of our customers at no cost. We record purchased and allocated GHG allowances at the lower of weighted-average cost or market. We measure the compliance obligation, which is based on emissions, at the carrying value of allowances held plus the fair value of additional allowances necessary to satisfy the obligation. The California Utilities balance costs and revenues associated with the GHG program through regulatory balancing accounts. Sempra Mexico and Sempra LNG & Midstream record the cost of GHG obligations in cost of sales. We remove the assets and liabilities from the balance sheets as the allowances are surrendered.
RENEWABLE ENERGY CERTIFICATES
RECs are energy rights established by governmental agencies for the environmental and social promotion of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source in certain markets.
Retail sellers of electricity obtain RECs through renewable energy PPAs, internal generation or separate purchases in the market to comply with the RPS established by the governmental agencies. RECs provide documentation for the generation of a unit of renewable energy that is used to verify compliance with the RPS. The cost of RECs at SDG&E is recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Consolidated Statements of Operations.
PROPERTY, PLANT AND EQUIPMENT
PP&E primarily represents the buildings, equipment and other facilities used by the Sempra Utilities to provide natural gas and electric utility services, and by the Sempra Infrastructure businesses in their operations, including construction work in progress at these operating units. PP&E also includes lease improvements and other equipment at Parent and Other, as well as property acquired under a build-to-suit lease, which we discuss further in Note 15.
Our plant costs include
| |
▪ | materials and contract services |
| |
▪ | expenditures for replacement parts incurred during a major maintenance outage of a generating plant |
In addition, the cost of utility plant at our rate-regulated businesses and PP&E under regulated projects that meet the regulatory accounting requirements of U.S. GAAP at Sempra Mexico and Sempra LNG & Midstream includes AFUDC. We discuss AFUDC below. The cost of other PP&E includes capitalized interest.
Maintenance costs are expensed as incurred. The cost of most retired depreciable utility plant assets less salvage value is charged to accumulated depreciation.
We discuss assets collateralized as security for certain indebtedness in Note 5.
|
| | | | | | | | | | | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT BY MAJOR FUNCTIONAL CATEGORY | |
(Dollars in millions) | |
| PP&E at December 31, | | Depreciation rates for years ended December 31, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2015 | |
SDG&E: | | | | | | | | | | |
Natural gas operations | $ | 2,186 |
| | $ | 1,897 |
| | 2.40 | % | | 2.40 | % | | 2.52 | % | |
Electric distribution | 6,975 |
| | 6,497 |
| | 3.92 |
| | 3.86 |
| | 3.79 |
| |
Electric transmission(1) | 5,626 |
| | 5,152 |
| | 2.71 |
| | 2.66 |
| | 2.62 |
| |
Electric generation(2) | 2,435 |
| | 1,932 |
| | 4.05 |
| | 4.00 |
| | 3.89 |
| |
Other electric(3) | 1,114 |
| | 1,059 |
| | 5.54 |
| | 5.66 |
| | 5.73 |
| |
Construction work in progress(1) | 1,451 |
| | 1,307 |
| | NA |
| | NA |
| | NA |
| |
Total SDG&E | 19,787 |
| | 17,844 |
| | |
| | |
| | |
| |
SoCalGas: | |
| | |
| | |
| | |
| | |
| |
Natural gas operations(4) | 15,759 |
| | 14,428 |
| | 3.63 |
| | 3.64 |
| | 3.83 |
| |
Other non-utility | 32 |
| | 34 |
| | 5.28 |
| | 6.55 |
| | 3.95 |
| |
Construction work in progress | 981 |
| | 882 |
| | NA |
| | NA |
| | NA |
| |
Total SoCalGas | 16,772 |
| | 15,344 |
| | |
| | |
| | |
| |
| | | | | | | | | | |
| | | | | Estimated | Weighted-average |
Other operating units and parent(5): | |
| | |
| | useful lives | useful life |
Land and land rights | 416 |
| | 381 |
| | 22 to 55 years(6) | 33 |
Machinery and equipment: | |
| | |
| | | |
|
| | | |
Utility electric distribution operations | 1,751 |
| | 1,519 |
| | 12 to 60 years | 52 |
Generating plants | 2,242 |
| | 1,874 |
| | 2 to 100 years | 31 |
LNG terminals | 1,133 |
| | 1,129 |
| | 43 years | 43 |
Pipelines and storage | 4,408 |
| | 3,242 |
| | 3 to 55 years | 43 |
Other | 269 |
| | 235 |
| | 1 to 50 years | 13 |
Construction work in progress | 691 |
| | 1,488 |
| | NA | NA |
Other(7) | 639 |
| | 568 |
| | 1 to 80 years | 33 |
| 11,549 |
| | 10,436 |
| | | | |
| | | |
Total Sempra Energy Consolidated | $ | 48,108 |
| | $ | 43,624 |
| | | | |
| | | |
| |
(1) | At December 31, 2017, includes $440 million in electric transmission assets and $29 million in construction work in progress related to SDG&E’s 92-percent interest in the Southwest Powerlink transmission line, jointly owned by SDG&E with other utilities. 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 its share of the project and participates in decisions concerning operations and capital expenditures. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Consolidated Statements of Operations. |
| |
(2) | Includes capital lease assets of $757 million and $258 million at December 31, 2017 and 2016, respectively. |
| |
(3) | Includes capital lease assets of $22 million and $21 million at December 31, 2017 and 2016, respectively. |
| |
(4) | Includes capital lease assets of $34 million and $32 million at December 31, 2017 and 2016, respectively. |
| |
(5) | Includes $145 million and $128 million at December 31, 2017 and 2016, respectively, of utility plant, primarily pipelines and other distribution assets, at Ecogas. |
| |
(6) | Estimated useful lives are for land rights. |
| |
(7) | Includes capital lease assets of $136 million at both December 31, 2017 and 2016, related to a build-to-suit lease. |
Depreciation expense is computed using the straight-line method over the asset’s estimated original composite useful life, the CPUC-prescribed period for the California Utilities, or the remaining term of the site leases, whichever is shortest.
Depreciation expense on our Consolidated Statements of Operations is as follows: |
| | | | | | | | | | | |
DEPRECIATION EXPENSE |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 1,422 |
| | $ | 1,236 |
| | $ | 1,178 |
|
SDG&E | 621 |
| | 583 |
| | 544 |
|
SoCalGas | 514 |
| | 474 |
| | 459 |
|
Accumulated depreciation on our Consolidated Balance Sheets is as follows:
|
| | | | | | | |
ACCUMULATED DEPRECIATION |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
SDG&E: | | | |
Accumulated depreciation: | | | |
Electric(1) | $ | 4,193 |
| | $ | 3,873 |
|
Natural gas | 756 |
| | 721 |
|
Total SDG&E | 4,949 |
| | 4,594 |
|
SoCalGas: | |
| | |
|
Accumulated depreciation of natural gas utility plant in service(2) | 5,352 |
| | 5,079 |
|
Accumulated depreciation – other non-utility | 14 |
| | 13 |
|
Total SoCalGas | 5,366 |
| | 5,092 |
|
Other operating units and parent and other: | |
| | |
|
Accumulated depreciation – other(3) | 972 |
| | 755 |
|
Accumulated depreciation of utility electric distribution operations | 318 |
| | 252 |
|
| 1,290 |
| | 1,007 |
|
Total Sempra Energy Consolidated | $ | 11,605 |
| | $ | 10,693 |
|
| |
(1) | Includes accumulated depreciation for capital lease assets of $47 million and $39 million at December 31, 2017 and 2016, respectively. Includes $241 million at December 31, 2017 related to SDG&E’s 92-percent interest in the Southwest Powerlink transmission line, jointly owned by SDG&E and other utilities. |
| |
(2) | Includes accumulated depreciation for capital lease assets of $33 million and $31 million at December 31, 2017 and 2016, respectively. |
| |
(3) | Includes $39 million and $33 million at December 31, 2017 and 2016, respectively, of accumulated depreciation for utility plant at Ecogas. |
The California Utilities finance their construction projects with debt and equity funds. The CPUC and the FERC allow the recovery of the cost of these funds by the capitalization of AFUDC, calculated using rates authorized by the CPUC and the FERC, as a cost component of PP&E. The California Utilities earn a return on the capitalized AFUDC after the utility property is placed in service and recover the AFUDC from their customers over the expected useful lives of the assets.
Pipeline projects currently under construction by Sempra Mexico and Sempra LNG & Midstream that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC.
We capitalize interest costs incurred to finance capital projects. We also capitalize interest on equity method investments that have not commenced planned principal operations.
Interest capitalized and AFUDC are as follows:
|
| | | | | | | | | | | |
CAPITALIZED FINANCING COSTS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 256 |
| | $ | 236 |
| | $ | 201 |
|
SDG&E | 85 |
| | 62 |
| | 51 |
|
SoCalGas | 60 |
| | 55 |
| | 49 |
|
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is the excess of the purchase price over the fair value of the identifiable net assets of acquired companies measured at the time of acquisition. Goodwill is not amortized, but we test it for impairment annually on October 1 or whenever events or changes in circumstances necessitate an evaluation. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, and the book value of goodwill is greater than its fair value on the test date, we record a goodwill impairment loss.
For our annual goodwill impairment testing, under current U.S. GAAP guidance we have the option to first make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step, quantitative goodwill impairment test. If we elect to perform the qualitative assessment, we evaluate relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, changes in key personnel and the overall financial performance of the reporting unit. If, after assessing these qualitative factors, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the two-step goodwill impairment test. When we perform the two-step, quantitative goodwill impairment test, we exercise judgment to develop estimates of the fair value of the reporting unit and the corresponding goodwill. Our fair value estimates are developed from the perspective of a knowledgeable market participant. We consider observable transactions in the marketplace for similar investments, if available, as well as an income-based approach such as discounted cash flow analysis. A discounted cash flow analysis may be based directly on anticipated future revenues and expenses and may be performed based on free cash flows generated within the reporting unit. Critical assumptions that affect our estimates of fair value may include
| |
▪ | consideration of market transactions |
| |
▪ | the appropriate risk-adjusted discount rate |
Changes in the carrying amount of goodwill on the Sempra Energy Consolidated Balance Sheets are as follows:
|
| | | | | | | | | | | | | | | |
GOODWILL | | | | | | | |
(Dollars in millions) | | | | | | | |
| Sempra South American Utilities | | Sempra Mexico | | Sempra LNG & Midstream | | Total |
Balance at December 31, 2015 | $ | 722 |
| | $ | 25 |
| | $ | 72 |
| | $ | 819 |
|
Acquisition of businesses | — |
| | 1,590 |
| | — |
| | 1,590 |
|
Sale of business | — |
| | — |
| | (72 | ) | | (72 | ) |
Foreign currency translation(1) | 27 |
| | — |
| | — |
| | 27 |
|
Balance at December 31, 2016 | 749 |
| | 1,615 |
| | — |
| | 2,364 |
|
Acquisition of business – measurement period adjustment | — |
| | (13 | ) | | — |
| | (13 | ) |
Foreign currency translation(1) | 46 |
| | — |
| | — |
| | 46 |
|
Balance at December 31, 2017 | $ | 795 |
| | $ | 1,602 |
|
| $ | — |
| | $ | 2,397 |
|
| |
(1) | We record the offset of this fluctuation to Other Comprehensive Income (Loss). |
In 2016, Sempra Mexico recorded goodwill of $1,590 million in connection with the acquisitions of IEnova Pipelines and Ventika. In 2017, Sempra Mexico recorded a reduction to goodwill of $13 million for a measurement period adjustment in connection with the acquisition of Ventika. Also in 2016, Sempra LNG & Midstream reduced goodwill by $72 million in connection with the sale of EnergySouth. We discuss these acquisitions and the divestiture in Note 3.
Other Intangible Assets
Other Intangible Assets included on the Sempra Energy Consolidated Balance Sheets are as follows:
|
| | | | | | | | | |
OTHER INTANGIBLE ASSETS | | | | | |
(Dollars in millions) | | | | | |
| Amortization period (years) | | December 31, |
| | 2017 | | 2016 |
Development rights | 50 | | $ | 322 |
| | $ | 322 |
|
Renewable energy transmission and consumption permit | 19 | | 154 |
| | 154 |
|
|
| | | | | | | | | |
Storage rights | 46 | | 138 |
| | 138 |
|
O&M agreement | 23 | | 66 |
| | — |
|
Other | 10 years to indefinite | | 18 |
| | 18 |
|
| | | 698 |
| | 632 |
|
Less accumulated amortization: | | | |
| | |
|
Development rights | | | (60 | ) | | (53 | ) |
Renewable energy transmission and consumption permit | | | (8 | ) | | — |
|
Storage rights | | | (28 | ) | | (25 | ) |
Other | | | (6 | ) | | (6 | ) |
| | | (102 | ) | | (84 | ) |
| | | $ | 596 |
| | $ | 548 |
|
Other Intangible Assets primarily includes
| |
▪ | storage and development rights related to the Bay Gas and Mississippi Hub natural gas storage facilities. |
| |
▪ | a renewable energy transmission and consumption permit previously granted by the CRE that was acquired in connection with the acquisition of the Ventika wind power generation facilities. |
| |
▪ | a favorable O&M agreement acquired in connection with the acquisition of DEN, which we discuss in Note 3. |
Amortization expense for intangible assets in 2017, 2016 and 2015 was $18 million, $11 million and $10 million, respectively. We estimate the amortization expense for the next five years to be $21 million per year.
LONG-LIVED ASSETS
We test long-lived assets for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include intangible assets subject to amortization, but do not include investments in unconsolidated subsidiaries. Events or changes in circumstances that indicate that the carrying amount of a long-lived asset may not be recoverable may include
| |
▪ | significant decreases in the market price of an asset |
| |
▪ | a significant adverse change in the extent or manner in which we use an asset or in its physical condition |
| |
▪ | a significant adverse change in legal or regulatory factors or in the business climate that could affect the value of an asset |
| |
▪ | a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of continuing losses associated with the use of a long-lived asset |
| |
▪ | a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life |
A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the fair value of the asset. This evaluation is performed at the lowest level for which separately identifiable cash flows exist.
VARIABLE INTEREST ENTITIES
We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess
| |
▪ | the purpose and design of the VIE; |
| |
▪ | the nature of the VIE’s risks and the risks we absorb; |
| |
▪ | the power to direct activities that most significantly impact the economic performance of the VIE; and |
| |
▪ | the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. |
SDG&E
SDG&E’s power procurement is subject to reliability requirements that may require SDG&E to enter into various PPAs which include variable interests. SDG&E evaluates the respective entities to determine if variable interests exist and, based on the qualitative and quantitative analyses described above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary.
Tolling Agreements
SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements). SDG&E’s obligation to absorb natural gas costs may be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on a qualitative approach in which we consider the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE.
Otay Mesa VIE
SDG&E has an agreement to purchase power generated at OMEC, a 605-MW generating facility. In addition to tolling, the agreement provides SDG&E with the option to purchase OMEC at the end of the contract term in April 2019, or upon earlier termination of the PPA, 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 for $280 million, which we refer to as the put option.
The facility owner, OMEC LLC, is a VIE, which we refer to as 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 consolidate Otay Mesa VIE. Otay Mesa VIE’s equity of $28 million at December 31, 2017 and $37 million at December 31, 2016 is included on the Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E.
OMEC LLC has a loan outstanding of $295 million at December 31, 2017, the proceeds of which were used for the construction of OMEC. The loan is with third party lenders and is collateralized by OMEC’s assets. 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 9.
The Consolidated Financial Statements 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 tables below correspond to SDG&E’s Consolidated Balance Sheets and Consolidated Statements of Operations.
|
| | | | | | | |
AMOUNTS ASSOCIATED WITH OTAY MESA VIE |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
Cash and cash equivalents | $ | 4 |
| | $ | 6 |
|
Restricted cash | 6 |
| | 11 |
|
Inventories | 4 |
| | 3 |
|
Other | 1 |
| | 2 |
|
Total current assets | 15 |
| | 22 |
|
Restricted cash | 11 |
| | 1 |
|
Property, plant and equipment, net | 321 |
| | 354 |
|
Total assets | $ | 347 |
| | $ | 377 |
|
| | | |
Current portion of long-term debt | $ | 10 |
| | $ | 10 |
|
Fixed-price contracts and other derivatives | 10 |
| | 13 |
|
Other | 5 |
| | 5 |
|
Total current liabilities | 25 |
| | 28 |
|
Long-term debt | 284 |
| | 293 |
|
Fixed-price contracts and other derivatives | 3 |
| | 12 |
|
Deferred credits and other | 7 |
| | 7 |
|
Noncontrolling interest | 28 |
| | 37 |
|
Total liabilities and equity | $ | 347 |
| | $ | 377 |
|
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Operating expenses | | | | | |
Cost of electric fuel and purchased power | $ | (79 | ) | | $ | (79 | ) | | $ | (83 | ) |
Operation and maintenance | 17 |
| | 29 |
| | 19 |
|
Depreciation and amortization | 28 |
| | 35 |
| | 26 |
|
Total operating expenses | (34 | ) | | (15 | ) | | (38 | ) |
Operating income | 34 |
| | 15 |
| | 38 |
|
Other income | 2 |
| | — |
| | — |
|
Interest expense | (22 | ) | | (20 | ) | | (19 | ) |
Income (loss) before income taxes/Net Income (loss) | 14 |
| | (5 | ) | | 19 |
|
(Earnings) losses attributable to noncontrolling interest | (14 | ) | | 5 |
| | (19 | ) |
Earnings attributable to common shares | $ | — |
| | $ | — |
| | $ | — |
|
SDG&E has determined that no contracts, other than the one relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary of a VIE at December 31, 2017. In addition to the tolling agreements described above, other variable interests involve various elements of fuel and power costs, and other components of cash flows 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. 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. 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 could be significant to the financial position and liquidity of SDG&E and Sempra Energy. We provide additional information about PPAs with power plant facilities that are VIEs of which SDG&E is not the primary beneficiary in Note 15.
Sempra Renewables
In the fourth quarters of 2017 and 2016, certain of Sempra Renewables’ wind and solar power generation projects became held by limited liability companies whose members are Sempra Renewables and financial institutions. The financial institutions are noncontrolling tax equity investors to which earnings, tax attributes and cash flows are allocated in accordance with the respective limited liability company agreements. These entities are VIEs and Sempra Energy is the primary beneficiary, generally due to Sempra Energy’s power as the operator of the renewable energy projects to direct the activities that most significantly impact the economic performance of these VIEs. As the primary beneficiary of these tax equity limited liability companies, we consolidate them.
The Consolidated Financial Statements of Sempra Energy include the following amounts associated with these entities.
|
| | | | | | |
AMOUNTS ASSOCIATED WITH TAX EQUITY ARRANGEMENTS | |
(Dollars in millions) | |
| December 31, |
| 2017 | 2016 |
Cash and cash equivalents | $ | 23 |
| $ | 88 |
|
Accounts receivable – trade, net | 5 |
| 3 |
|
Inventories | 1 |
| — |
|
Other | 1 |
| — |
|
Total current assets | 30 |
| 91 |
|
Sundry | 2 |
| — |
|
Property, plant and equipment, net | 1,412 |
| 926 |
|
Total assets | 1,444 |
| 1,017 |
|
| | |
Accounts payable | 42 |
| 68 |
|
Other | 1 |
| 7 |
|
Total current liabilities | 43 |
| 75 |
|
Asset retirement obligations | 40 |
| 27 |
|
Deferred income taxes | 10 |
| — |
|
Deferred credits and other | 1 |
| — |
|
Total deferred credits and other liabilities | 94 |
| 102 |
|
| | |
Other noncontrolling interests | 631 |
| 468 |
|
Net assets less other noncontrolling interests | $ | 719 |
| $ | 447 |
|
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | 2016 |
REVENUES | | |
Energy-related businesses | $ | 61 |
| $ | 2 |
|
EXPENSES | | |
Operation and maintenance | (9 | ) | (1 | ) |
Depreciation and amortization | (32 | ) | — |
|
Income before income taxes | 20 |
| 1 |
|
Income tax expense | (4 | ) | — |
|
Net income | 16 |
| 1 |
|
Losses attributable to noncontrolling interests(1) | 23 |
| 4 |
|
Earnings | $ | 39 |
| $ | 5 |
|
(1)Net income or loss attributable to the noncontrolling interests is computed using the HLBV method and is not based on ownership percentages.
Sempra LNG & Midstream
Sempra Energy’s equity method investment in Cameron LNG JV is considered to be a VIE principally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary because we do not have the power to direct the most significant activities of Cameron LNG JV. We will continue to evaluate Cameron LNG JV for any changes that may impact our determination of the primary beneficiary. The carrying value of our investment in Cameron LNG JV, including amounts recognized in AOCI related to interest-rate cash flow hedges at Cameron LNG JV, was $997 million at both December 31, 2017 and 2016. Our maximum exposure to loss includes the carrying value of our investment and guarantees we have provided. We discuss our investment in the Cameron LNG JV, including related guarantees, in Note 4.
Other Variable Interest Entities
Sempra Energy’s other businesses 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 or project companies that are VIEs. As the primary beneficiary of these 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.
ASSET RETIREMENT OBLIGATIONS
For tangible long-lived assets, we record asset retirement obligations for the present value of liabilities of future costs expected to be incurred when assets are retired from service, if the retirement process is legally required and if a reasonable estimate of fair value can be made. We also record a liability if a legal obligation to perform an asset retirement exists and can be reasonably estimated, but performance is conditional upon a future event. We record the estimated retirement cost over the life of the related asset by depreciating the asset retirement cost (measured as the present value of the obligation at the time the asset is placed into service), and accreting the obligation until the liability is settled. Our rate-regulated entities, including the California Utilities, record regulatory assets or liabilities as a result of the timing difference between the recognition of costs in accordance with U.S. GAAP and costs recovered through the rate-making process.
We have recorded asset retirement obligations related to various assets, including:
SDG&E and SoCalGas
| |
▪ | natural gas transmission systems |
| |
▪ | natural gas distribution systems |
| |
▪ | hazardous waste storage facilities |
| |
▪ | asbestos-containing construction materials |
SDG&E
| |
▪ | decommissioning of nuclear power facilities |
| |
▪ | electric distribution and transmission systems |
| |
▪ | site restoration of a former power plant |
| |
▪ | power generation plant (natural gas) |
SoCalGas
| |
▪ | underground natural gas storage facilities and wells |
Sempra South American Utilities
| |
▪ | electric distribution and transmission systems |
Sempra Mexico
| |
▪ | power generation plant (natural gas) (classified as held for sale at December 31, 2017) |
| |
▪ | natural gas distribution and transportation systems |
Sempra Renewables
| |
▪ | certain power generation plants (solar and wind) |
Sempra LNG & Midstream
| |
▪ | natural gas transportation systems |
| |
▪ | underground natural gas storage facilities |
The changes in asset retirement obligations are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
CHANGES IN ASSET RETIREMENT OBLIGATIONS |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Balance as of January 1(1) | $ | 2,553 |
| | $ | 2,255 |
| | $ | 830 |
| | $ | 828 |
| | $ | 1,659 |
| | $ | 1,383 |
|
Accretion expense | 109 |
| | 101 |
| | 39 |
| | 38 |
| | 66 |
| | 61 |
|
Liabilities incurred and acquired | 34 |
| | 35 |
| | 17 |
| | — |
| | — |
| | — |
|
Deconsolidation and reclassification(2) | — |
| | (16 | ) | | — |
| | — |
| | — |
| | — |
|
Payments | (63 | ) | | (47 | ) | | (61 | ) | | (46 | ) | | (2 | ) | | — |
|
Revisions(3) | 244 |
| | 225 |
| | 14 |
| | 10 |
| | 230 |
| | 215 |
|
Balance at December 31(1) | $ | 2,877 |
| | $ | 2,553 |
| | $ | 839 |
| | $ | 830 |
| | $ | 1,953 |
| | $ | 1,659 |
|
| |
(1) | Current portions of the obligations for Sempra Energy Consolidated and SoCalGas are included in Other Current Liabilities on the Consolidated Balance Sheets. |
| |
(2) | Deconsolidated $12 million due to the September 2016 sale of EnergySouth and reclassified $4 million to Liabilities Held for Sale, as we discuss in Note 3. |
| |
(3) | In 2017, revised estimates were primarily related to underground natural gas storage facilities and wells at SoCalGas. In 2016, revised estimates were related to changes in the cost of removal rates primarily for natural gas assets based on updated cost studies approved in the 2016 GRC FD. |
CONTINGENCIES
We accrue losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. For loss contingencies, we accrue the loss if an event has occurred on or before the balance sheet date and:
| |
▪ | information available through the date we file our financial statements indicates it is probable that a loss has been incurred, given the likelihood of uncertain future events; and |
| |
▪ | the amount of the loss can be reasonably estimated. |
We do not accrue contingencies that might result in gains. We continuously assess contingencies for litigation claims, environmental remediation and other events.
LEGAL FEES
Legal fees that are associated with a past event for which a liability has been recorded are accrued when it is probable that fees also will be incurred and amounts are estimable.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in the equity of a business enterprise (except those resulting from investments by owners and distributions to owners), including:
| |
▪ | foreign currency translation adjustments |
| |
▪ | certain hedging activities |
| |
▪ | changes in unamortized net actuarial gain or loss and prior service cost related to pension and other postretirement benefits plans |
| |
▪ | unrealized gains or losses on available-for-sale securities |
The Consolidated Statements of Comprehensive Income (Loss) show the changes in the components of OCI, including the amounts attributable to noncontrolling interests. The following tables present the changes in AOCI by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to noncontrolling interests, for the years ended December 31:
|
| | | | | | | | | | | | | | | |
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1) |
(Dollars in millions) |
| Foreign currency translation adjustments | Financial instruments | | Pension and other postretirement benefits | | Total accumulated other comprehensive income (loss) |
Sempra Energy Consolidated: | | | | | | | |
Balance as of December 31, 2014 | $ | (322 | ) | | $ | (90 | ) | | $ | (85 | ) | | $ | (497 | ) |
| | | | | | | |
OCI before reclassifications | (260 | ) | | (57 | ) | | (10 | ) | | (327 | ) |
Amounts reclassified from AOCI | — |
| | 10 |
| | 8 |
| | 18 |
|
Net OCI | (260 | ) | | (47 | ) | | (2 | ) | | (309 | ) |
Balance as of December 31, 2015 | (582 | ) | | (137 | ) | | (87 | ) | | (806 | ) |
| | | | | | | |
OCI before reclassifications | 42 |
| | (7 | ) | | (15 | ) | | 20 |
|
Amounts reclassified from AOCI(2) | 13 |
| | 19 |
| | 6 |
| | 38 |
|
Net OCI | 55 |
| | 12 |
| | (9 | ) | | 58 |
|
Balance as of December 31, 2016 | (527 | ) | | (125 | ) | | (96 | ) | | (748 | ) |
| | | | | | | |
OCI before reclassifications | 107 |
| | (4 | ) | | — |
| | 103 |
|
Amounts reclassified from AOCI | — |
| | 7 |
| | 12 |
| | 19 |
|
Net OCI | 107 |
| | 3 |
| | 12 |
| | 122 |
|
Balance as of December 31, 2017 | $ | (420 | ) | | $ | (122 | ) |
| $ | (84 | ) |
| $ | (626 | ) |
SDG&E: | | | | | | | |
Balance as of December 31, 2014 |
|
| |
|
| | $ | (12 | ) | | $ | (12 | ) |
| | | | | | | |
OCI before reclassifications |
|
| |
|
| | 3 |
| | 3 |
|
Amounts reclassified from AOCI |
|
| |
|
| | 1 |
| | 1 |
|
Net OCI |
|
| |
|
| | 4 |
| | 4 |
|
Balance as of December 31, 2015 |
|
| |
|
| | (8 | ) | | (8 | ) |
| | | | | | | |
OCI before reclassifications |
|
| |
|
| | (1 | ) | | (1 | ) |
Amounts reclassified from AOCI |
|
| |
|
| | 1 |
| | 1 |
|
Net OCI |
|
| |
|
| | — |
| | — |
|
Balance as of December 31, 2016 |
|
| |
|
| | (8 | ) | | (8 | ) |
| | | | | | | |
OCI before reclassifications |
|
| |
|
| | (1 | ) | | (1 | ) |
Amounts reclassified from AOCI |
|
| |
|
| | 1 |
| | 1 |
|
Net OCI |
|
| |
|
| | — |
| | — |
|
Balance as of December 31, 2017 |
|
| |
|
| | $ | (8 | ) | | $ | (8 | ) |
SoCalGas: | | | | | | | |
Balance as of December 31, 2014 |
|
| | $ | (14 | ) | | $ | (4 | ) | | $ | (18 | ) |
| | | | | | | |
OCI before reclassifications |
|
| | — |
| | (1 | ) | | (1 | ) |
Net OCI |
|
| | — |
| | (1 | ) | | (1 | ) |
Balance as of December 31, 2015 |
|
| | (14 | ) | | (5 | ) | | (19 | ) |
| | | | | | | |
OCI before reclassifications |
|
| | — |
| | (4 | ) | | (4 | ) |
Amounts reclassified from AOCI | | | 1 |
| | — |
| | 1 |
|
Net OCI |
|
| | 1 |
| | (4 | ) | | (3 | ) |
Balance as of December 31, 2016 |
|
| | (13 | ) | | (9 | ) | | (22 | ) |
| | | | | | | |
Amounts reclassified from AOCI |
|
| | — |
| | 1 |
| | 1 |
|
Net OCI |
|
| | — |
| | 1 |
| | 1 |
|
Balance as of December 31, 2017 |
|
| | $ | (13 | ) | | $ | (8 | ) | | $ | (21 | ) |
| |
(1) | All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests. |
| |
(2) | Total AOCI includes $20 million associated with the October 2016 sale of noncontrolling interests, discussed below in “Sale of Noncontrolling Interests – Sempra Mexico – Follow-On Offerings,” which does not impact the Consolidated Statement of Comprehensive Income. |
|
| | | | | | | | | | | | | |
RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) |
Details about accumulated other comprehensive income (loss) components | Amounts reclassified from accumulated other comprehensive income (loss) | | Affected line item on Consolidated Statements of Operations |
| Years ended December 31, | | |
| 2017 | | 2016 | | 2015 | | |
Sempra Energy Consolidated: | | | | | | | |
Financial instruments: | |
| | |
| | |
| | |
Interest rate and foreign exchange instruments(1) | $ | (4 | ) | | $ | 17 |
| | $ | 18 |
| | Interest Expense |
Interest rate instruments | 8 |
| | 10 |
| | 12 |
| | Equity Earnings, Before Income Tax |
Interest rate and foreign exchange instruments | — |
| | 7 |
| | — |
| | Remeasurement of Equity Method Investment |
Interest rate and foreign exchange instruments | 12 |
| | 5 |
| | 13 |
| | Equity Earnings, Net of Income Tax |
Foreign exchange instruments | (2 | ) | | — |
| | — |
| | Revenues: Energy-Related Businesses |
Commodity contracts not subject to rate recovery | 9 |
| | (6 | ) | | (14 | ) | | Revenues: Energy-Related Businesses |
Total before income tax | 23 |
| | 33 |
| | 29 |
| | |
| (6 | ) | | (6 | ) | | (4 | ) | | Income Tax Expense |
Net of income tax | 17 |
| | 27 |
| | 25 |
| | |
| (10 | ) | | (15 | ) | | (15 | ) | | Earnings Attributable to Noncontrolling Interests |
| $ | 7 |
| | $ | 12 |
|
| $ | 10 |
| | |
Pension and other postretirement benefits: | |
| | |
| | | | |
Amortization of actuarial loss(2) | $ | 18 |
| | $ | 10 |
| | $ | 14 |
| | |
Amortization of prior service cost(2) | 1 |
| | 1 |
| | — |
| | |
Total before income tax | 19 |
| | 11 |
| | 14 |
| | |
| (7 | ) | | (5 | ) | | (6 | ) | | Income Tax Expense |
Net of income tax | $ | 12 |
| | $ | 6 |
|
| $ | 8 |
| | |
| | | | | | | |
Total reclassifications for the period, net of tax | $ | 19 |
| | $ | 18 |
| | $ | 18 |
|
| |
SDG&E: | |
| | |
| | |
| | |
Financial instruments: | |
| | |
| | |
| | |
Interest rate instruments(1) | $ | 13 |
| | $ | 12 |
| | $ | 12 |
| | Interest Expense |
| (13 | ) | | (12 | ) | | (12 | ) | | (Earnings) Losses Attributable to Noncontrolling Interest |
| $ | — |
| | $ | — |
|
| $ | — |
| | |
Pension and other postretirement benefits: | |
| | |
| | |
| | |
Amortization of actuarial loss(2) | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | |
| | | | | | | |
Total reclassifications for the period, net of tax | $ | 1 |
| | $ | 1 |
|
| $ | 1 |
|
| |
SoCalGas: | |
| | |
| | |
| | |
Financial instruments: | |
| | |
| | |
| | |
Interest rate instruments | $ | — |
| | $ | 1 |
| | $ | 1 |
| | Interest Expense |
| — |
| | — |
| | (1 | ) | | Income Tax Expense |
Net of income tax | $ | — |
| | $ | 1 |
|
| $ | — |
| | |
Pension and other postretirement benefits: | |
| | |
| | |
| | |
Amortization of prior service cost(2) | $ | 1 |
| | $ | — |
| | $ | — |
| | |
| | | | | | | |
Total reclassifications for the period, net of tax | $ | 1 |
| | $ | 1 |
|
| $ | — |
|
| |
| |
(1) | Amounts include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE. |
| |
(2) | Amounts are included in the computation of net periodic benefit cost (see “Net Periodic Benefit Cost” in Note 7). |
NONCONTROLLING INTERESTS
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. Noncontrolling interests are reported as a separate component of equity on the Consolidated Balance Sheets. Earnings/losses attributable to the noncontrolling interests are separately identified on the Consolidated Statements of Operations, and net income/loss and comprehensive income/loss attributable to noncontrolling
interests are separately identified on the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Equity.
Sale of Noncontrolling Interests
Sempra Mexico – Follow-On Offerings
On October 13, 2016, IEnova priced a private follow-on offering of its common stock (which trades under the symbol IENOVA on the Mexican Stock Exchange) in the U.S. and outside of Mexico (the International Offering) and a concurrent public common stock offering in Mexico (the Mexican Offering) at 80.00 Mexican pesos per share. The initial purchasers in the International Offering and the underwriters in the Mexican Offering were granted a 30-day option to purchase additional common shares at the global offering price, less the underwriting discount, to cover overallotments. These options were exercised on October 17, 2016. Sempra Energy also participated in the Mexican Offering by purchasing 83,125,000 shares of common stock for approximately $351 million. After the offerings, including the issuance of shares pursuant to the exercise of the overallotment options, the aggregate shares of common stock sold in the offerings totaled 380,000,000.
The net proceeds of the offerings were approximately $1.57 billion in U.S. dollars or 29.86 billion Mexican pesos. IEnova used the net proceeds of the offerings to repay debt financing, including the $1.15 billion bridge loan from Sempra Global that was used to finance the IEnova Pipelines acquisition, $100 million in loans from its parent and $250 million of borrowings under its revolving credit facility. Additionally, $50 million of net proceeds was used to partially fund the Ventika acquisition. Remaining proceeds were used to fund capital expenditures and for general corporate purposes. We discuss these acquisitions in Note 3.
All U.S. dollar equivalents presented here are based on an exchange rate of 18.96 Mexican pesos to 1.00 U.S. dollar as of October 13, 2016, the pricing date for the offerings. Net proceeds are after reduction for underwriting discounts and commissions and offering expenses. Upon completion of the offerings on October 19, 2016 (including the issuance of shares pursuant to the exercise of the overallotment options), Sempra Energy’s beneficial ownership of IEnova decreased from approximately 81.1 percent to 66.4 percent, which did not result in a change in control. When there are changes in noncontrolling interests of a subsidiary that do not result in a change of control, any difference between carrying value and fair value related to the change in ownership is recorded as an adjustment to shareholders’ equity. As a result of the offerings, we recorded an increase in Sempra Energy’s shareholders’ equity of $281 million, net of $351 million for our participation in the Mexican Offering, and a $948 million increase in Other Noncontrolling Interests for the sale of IEnova shares to third parties.
The International Offering was exempt from registration under the U.S. Securities Act of 1933, as amended (the Securities Act), and shares in the International Offering were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside of the U.S., in accordance with Regulation S under the Securities Act. The shares were not registered under the Securities Act or any state securities laws, and may not be offered or sold in the U.S. absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable securities laws.
Sempra Renewables – Tax Equity Arrangements
In the fourth quarter of 2017, Sempra Renewables entered into membership interest purchase agreements with financial institutions to form two separate tax equity limited liability companies: one that includes a Sempra Renewables’ portfolio of four solar power generation projects located in Fresno County, California and one for a wind power generation project located in Huron County, Michigan. For the solar power generation projects, Sempra Renewables received $104 million, net of offering costs, in tax equity funding for three of the four phases in the fourth quarter of 2017. Additional funding for the fourth phase of the tax equity arrangement is subject to conditions precedent that we expect to occur in the first half of 2018. Under the purchase agreement for the wind power generation project, Sempra Renewables received cash proceeds of $92 million, net of offering costs, and the formation of the tax equity arrangement occurred in December 2017.
In December 2016, Sempra Renewables closed a transaction with a financial institution to form a portfolio tax equity limited liability company that includes three Sempra Renewables solar power generation projects. Also in December 2016, Sempra Renewables closed another transaction with two financial institutions to form a tax equity limited liability company involving a Sempra Renewables wind power generation project. Sempra Renewables received cash proceeds of $474 million, net of offering costs, for the sale of noncontrolling interests relating to these transactions.
Sempra Renewables consolidates these entities and after the funding dates, reports noncontrolling interests representing the financial institutions’ respective membership interests in the tax equity arrangements.
The financial institutions are noncontrolling, tax equity investors that are allocated earnings, tax attributes and cash flows in accordance with the respective limited liability company agreements. Sempra Renewables has determined that these tax equity arrangements represent substantive profit-sharing arrangements. Sempra Renewables has further determined that the appropriate
method for attributing income and loss to the noncontrolling interests each period is a balance sheet approach referred to as the HLBV method. Under the HLBV method, the amounts of income and loss attributable to the noncontrolling interests in Sempra Energy’s Consolidated Statements of Operations reflect changes in the amounts the members would hypothetically receive at each balance sheet date under the liquidation provisions of the respective limited liability company agreements, assuming the net assets of these entities were liquidated at recorded amounts, after taking into account any capital transactions, such as contributions or distributions, between the entities and the members.
Preferred Stock
The preferred stock at SoCalGas is presented at Sempra Energy as a noncontrolling interest at December 31, 2017 and 2016. Sempra Energy records charges against income related to noncontrolling interests for preferred stock dividends declared by SoCalGas. We provide additional information regarding SoCalGas’ preferred stock in Note 11.
Other Noncontrolling Interests
At December 31, 2017 and 2016, 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 Consolidated Balance Sheets:
|
| | | | | | | | | | | | | |
OTHER NONCONTROLLING INTERESTS | | |
(Dollars in millions) | | |
| Percent ownership held by others | | Equity held by noncontrolling interests |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
SDG&E: | | | | | | | |
Otay Mesa VIE | 100 | % | | 100 | % | | $ | 28 |
| | $ | 37 |
|
Sempra South American Utilities: | |
| | |
| | |
| | |
|
Chilquinta Energía subsidiaries(1) | 22.9 - 43.4 | | 23.1 - 43.4 | | 24 |
| | 22 |
|
Luz del Sur | 16.4 |
| | 16.4 |
| | 189 |
| | 173 |
|
Tecsur | 9.8 |
| | 9.8 |
| | 4 |
| | 4 |
|
Sempra Mexico: | |
| | |
| | |
| | |
|
IEnova(2) | 33.6 |
| | 33.6 |
| | 1,532 |
| | 1,524 |
|
Sempra Renewables: | | | | | | | |
Tax equity arrangements – wind(3) | NA | | NA | | 181 |
| | 92 |
|
Tax equity arrangements – solar(3) | NA | | NA | | 450 |
| | 376 |
|
Sempra LNG & Midstream: | |
| | |
| | |
| | |
|
Bay Gas | 9.1 |
| | 9.1 |
| | 28 |
| | 27 |
|
Liberty Gas Storage, LLC | 23.3 |
| | 23.3 |
| | 14 |
| | 14 |
|
Southern Gas Transmission Company(4) | — |
| | 49.0 |
| | — |
| | 1 |
|
Total Sempra Energy | |
| | |
| | $ | 2,450 |
| | $ | 2,270 |
|
| |
(1) | Chilquinta Energía has four subsidiaries with noncontrolling interests held by others. Percentage range reflects the highest and lowest ownership percentages among these subsidiaries. |
| |
(2) | IEnova has a subsidiary with a 10-percent noncontrolling interest held by others. The equity held by noncontrolling interests is negligible at December 31, 2017 and 2016. |
| |
(3) | Net income or loss attributable to the noncontrolling interests is computed using the HLBV method and is not based on ownership percentages. |
| |
(4) | We sold our assets in Southern Gas Transmission Company in August 2017. |
REVENUES
California Utilities
Our California Utilities generate revenues primarily from deliveries to their customers of electricity by SDG&E and natural gas by both SoCalGas and SDG&E and from related services. We record these revenues following the accrual method and recognize them upon delivery and performance. As described below, recorded revenues include those authorized by the CPUC to support our operations (“decoupled revenue”), as well as commodity costs that are passed through to core gas customers and electric customers:
| |
▪ | Decoupled revenue – The regulatory framework permits the California Utilities to recover authorized revenue based on estimated annual demand forecasts approved in regular proceedings before the CPUC. Any difference between actual demand and the annual demand approved in the proceedings is recovered or refunded in authorized revenue in a subsequent period. This design, commonly known as “decoupling,” is intended to minimize any impact on earnings due to variability in volumetric demand for electricity and natural gas. |
| |
▪ | Commodity costs – The regulatory framework authorizes the California Utilities to recover the actual cost of natural gas procured and delivered to their core customers in rates substantially as incurred. Actual electricity procurement costs are recovered as power is delivered, or to the extent actual amounts vary from forecasts, generally recovered or refunded within a subsequent period. The California Utilities may also record revenue from CPUC-approved incentive awards, some of which require approval by the CPUC prior to being recognized. SDG&E bids and self-schedules its generation into the CAISO energy market on a day-ahead and real-time basis and self-schedules power to serve the demand of its customers. Generally, SDG&E is a net purchaser of power. The CAISO settles SDG&E costs and revenues on an hourly and real-time net basis. |
Sempra South American Utilities
Our electric distribution utilities in South America, Chilquinta Energía and Luz del Sur, serve primarily regulated customers, and their revenues are based on tariffs that are set by the CNE in Chile and the OSINERGMIN in Peru.
The tariffs charged are based on an efficient model distribution company defined by Chilean law in the case of Chilquinta Energía, and OSINERGMIN in the case of Luz del Sur. The tariffs include O&M, an internal rate of return on the new replacement value of depreciable assets, charges for the use of transmission systems, and a component for the value added by the distributor. Tariffs are designed to provide for a pass-through to customers of transmission and energy charges, recovery of reasonable operating and administrative costs, incentives to reduce costs and make needed capital investments and a regulated rate of return on the distributor’s regulated asset base.
Sempra Infrastructure
Our natural gas utilities outside of California apply U.S. GAAP for revenue recognition consistent with the California Utilities, namely Ecogas, our natural gas utility in Mexico, and Mobile Gas and Willmut Gas, our natural gas utilities in Alabama and Mississippi, respectively, that were sold in September 2016.
The table below shows the total utilities revenues in Sempra Energy’s Consolidated Statements of Operations for each of the last three years. The revenues include amounts for services rendered but unbilled (approximately one-half month’s deliveries) at the end of each year.
|
| | | | | | | | | | | |
TOTAL UTILITIES REVENUES AT SEMPRA ENERGY CONSOLIDATED(1) |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Electric revenues | $ | 5,415 |
| | $ | 5,211 |
| | $ | 5,158 |
|
Natural gas revenues | 4,361 |
| | 4,050 |
| | 4,096 |
|
Total | $ | 9,776 |
| | $ | 9,261 |
| | $ | 9,254 |
|
| |
(1) | Excludes intercompany revenues. |
We provide additional information about our utility revenue recognition in “Effects of Regulation” above.
Energy-Related Businesses
Sempra South American Utilities
Sempra South American Utilities generates revenues from energy-services companies that provide electric construction services and recognizes these revenues when services are provided in accordance with contractual agreements. The energy-services company in Chile also generates revenue from selling electricity to non-regulated customers.
Sempra Mexico
Sempra Mexico recognizes revenues from:
| |
▪ | pipeline transportation and storage of natural gas, LPG and ethane as capacity is provided. Certain of the revenues recognized from pipelines are under contracts that are accounted for as operating leases; |
| |
▪ | sale of natural gas as deliveries are made; |
| |
▪ | an LNG regasification terminal that generates revenues from reservation and usage fees under terminal capacity agreements and nitrogen injection service agreements as capacity is provided; |
| |
▪ | wind power generation facilities that generate revenues from selling electricity as the power is delivered at the interconnection point; and |
| |
▪ | TdM, a natural gas-fired power plant that generates revenues from selling electricity and/or capacity to the CAISO and to governmental, public utility and wholesale power marketing entities as the power is delivered at the interconnection point. At December 31, 2017, TdM is classified as held for sale, as we discuss in Note 3. |
Sempra Mexico reports revenue net of VAT in Mexico. Sempra Mexico’s revenues also include net realized gains and losses on settlements of energy derivatives and net unrealized gains and losses from the change in fair values of energy derivatives.
Sempra Renewables
For consolidated entities, Sempra Renewables generates revenues from the sale of solar and wind power and related green attributes pursuant to PPAs, and recognizes these revenues when the power is delivered. It also generates revenues for managing certain of its solar and wind project joint ventures. Approximately half of the revenues generated from assets under PPAs are accounted for as operating leases.
Sempra LNG & Midstream
Sempra LNG & Midstream records revenues from contractual counterparty obligations for non-delivery of LNG cargoes, as well as revenues from the sale of LNG and natural gas as deliveries are made to counterparties. Sempra LNG & Midstream also recognizes revenues from natural gas storage and transportation operations for services provided in accordance with contractual agreements. Sempra LNG & Midstream revenues also include net realized gains and losses on settlements of energy derivatives and net unrealized gains and losses from the change in fair values of energy derivatives. Prior to April 2015, Sempra LNG & Midstream generated revenues from selling electricity and/or capacity from its Mesquite Power plant (see Note 3) to the CAISO and to governmental, public utility and wholesale power marketing entities. Sempra LNG & Midstream recognized these revenues as the electricity was delivered and capacity was provided.
OTHER COST OF SALES
Other Cost of Sales primarily includes
| |
▪ | pipeline capacity costs, including the permanent release of pipeline capacity in 2016 and the associated recoveries in 2017, at Sempra LNG & Midstream; |
| |
▪ | pipeline transportation and natural gas marketing costs at Sempra LNG & Midstream; |
| |
▪ | electric construction services costs at Sempra South American Utilities’ energy-services companies; and |
| |
▪ | energy management service fees and costs associated with construction performed for and invoiced to third parties at Sempra Mexico. |
OPERATION AND MAINTENANCE EXPENSES
Operation and Maintenance includes O&M and general and administrative costs, consisting primarily of personnel costs, purchased materials and services, litigation expense and rent.
FOREIGN CURRENCY TRANSLATION
Our operations in South America and our natural gas distribution utility in Mexico use their local currency as their functional currency. The assets and liabilities of their foreign operations are translated into U.S. dollars at current exchange rates at the end of the reporting period, and revenues and expenses are translated at average exchange rates for the year. The resulting noncash translation adjustments do not enter into the calculation of earnings or retained earnings, but are reflected in OCI and in AOCI.
Cash flows of these consolidated foreign subsidiaries are translated into U.S. dollars using average exchange rates for the period. We report the effect of exchange rate changes on cash balances held in foreign currencies in “Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash” on the Sempra Energy Consolidated Statements of Cash Flows.
Currency transaction losses in a currency other than the entity’s functional currency were $35 million, $1 million and $7 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in Other Income, Net, on the Sempra Energy Consolidated Statements of Operations.
TRANSACTIONS WITH AFFILIATES
Amounts due from and to unconsolidated affiliates at Sempra Energy Consolidated, SDG&E and SoCalGas are as follows:
|
| | | | | | | |
AMOUNTS DUE FROM (TO) UNCONSOLIDATED AFFILIATES |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
Sempra Energy Consolidated: | | | |
Total due from various unconsolidated affiliates – current | $ | 37 |
| | $ | 26 |
|
| | | |
Sempra South American Utilities(1): | |
| | |
|
Eletrans – 4% Note(2) | $ | 103 |
| | $ | 96 |
|
Other related party receivables | 1 |
| | 1 |
|
Sempra Mexico(1): | |
| | |
|
IMG – Note due March 15, 2022(3) | 487 |
| | — |
|
DEN – Notes due November 14, 2018(4) | — |
| | 90 |
|
Energía Sierra Juárez – Note(5) | 7 |
| | 14 |
|
Total due from unconsolidated affiliates – noncurrent | $ | 598 |
| | $ | 201 |
|
| | | |
Total due to various unconsolidated affiliates – current | $ | (7 | ) | | $ | (11 | ) |
| | | |
Sempra Mexico(1): | | | |
Total due to unconsolidated affiliates – noncurrent – TAG – Note due December 20, 2021(6) | $ | (35 | ) | | $ | — |
|
SDG&E: | |
| | |
|
Sempra Energy(7) | $ | — |
| | $ | 3 |
|
Various affiliates | — |
| | 1 |
|
Total due from unconsolidated affiliates – current | $ | — |
| | $ | 4 |
|
| | | |
Sempra Energy | $ | (30 | ) | | $ | — |
|
SoCalGas | (4 | ) | | (8 | ) |
Various affiliates | (6 | ) | | (7 | ) |
Total due to unconsolidated affiliates – current | $ | (40 | ) | | $ | (15 | ) |
| | | |
Income taxes due from Sempra Energy(8) | $ | 27 |
| | $ | 159 |
|
SoCalGas: | |
| | |
|
Total due from unconsolidated affiliates – current – SDG&E | $ | 4 |
| | $ | 8 |
|
| | | |
Total due to unconsolidated affiliates – current – Sempra Energy
| $ | (35 | ) | | $ | (28 | ) |
| | | |
Income taxes due from Sempra Energy(8) | $ | 10 |
| | $ | 5 |
|
| |
(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, comprising joint ventures of Chilquinta Energía. |
| |
(3) | Mexican peso-denominated revolving line of credit for up to $14.0 billion Mexican pesos or approximately $718 million U.S. dollar-equivalent, at a variable interest rate based on the 91-day Interbank Equilibrium Interest Rate plus 220 bps (9.87 percent at December 31, 2017), to finance construction of the natural gas marine pipeline. |
| |
(4) | Four U.S. dollar-denominated loans, at a variable interest rate based on the 30-day LIBOR plus 450 bps (5.27 percent at December 31, 2016), to finance the Los Ramones Norte pipeline project. In November 2017, IEnova acquired the remaining 50-percent interest in DEN and DEN became a wholly owned, consolidated subsidiary of IEnova. |
| |
(5) | U.S. dollar-denominated loan, at a variable interest rate based on the 30-day LIBOR plus 637.5 bps (7.94 percent at December 31, 2017) with no stated maturity date, to finance the first phase of the Energía Sierra Juárez wind project, which is a joint venture of IEnova. |
| |
(6) | U.S. dollar-denominated loan, at a variable interest rate based on 6-month LIBOR plus 290 bps (4.74 percent at December 31, 2017). |
| |
(7) | At December 31, 2016, net receivable included outstanding advances to Sempra Energy of $31 million at an interest rate of 0.68 percent. |
| |
(8) | 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. |
Revenues and cost of sales from unconsolidated affiliates are as follows:
|
| | | | | | | | | | | |
REVENUES AND COST OF SALES FROM UNCONSOLIDATED AFFILIATES |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Revenues: | | | | | |
Sempra Energy Consolidated | $ | 43 |
| | $ | 25 |
| | $ | 26 |
|
SDG&E | 8 |
| | 7 |
| | 10 |
|
SoCalGas | 74 |
| | 76 |
| | 75 |
|
Cost of Sales: | | | | | |
Sempra Energy Consolidated | $ | 47 |
| | $ | 72 |
| | $ | 107 |
|
SDG&E | 71 |
| | 64 |
| | 49 |
|
California Utilities
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 make short-term advances of surplus cash to Sempra Energy at interest rates based on the federal funds rate plus a margin of 13 to 20 bps, depending on the loan balance.
SoCalGas provides natural gas transportation and storage services for SDG&E and charges SDG&E for such services monthly. SoCalGas records revenues and SDG&E records a corresponding amount to cost of sales.
SDG&E and SoCalGas charge one another, as well as other Sempra Energy affiliates, for shared asset depreciation. SoCalGas and SDG&E record revenues and the affiliates record corresponding amounts to O&M.
The natural gas supply for SDG&E’s and SoCalGas’ core natural gas customers is purchased by SoCalGas as a combined procurement portfolio managed by SoCalGas. Core customers are primarily residential and small commercial and industrial customers. This core gas procurement function is considered a shared service; therefore, revenues and costs related to SDG&E are presented net in SoCalGas’ Statements of Operations.
SDG&E has a 20-year contract for up to 155 MW of renewable power supplied from the Energía Sierra Juárez wind power generation facility. Energía Sierra Juárez is a 50-percent owned and unconsolidated joint venture of Sempra Mexico that commenced operations in June 2015.
Sempra Mexico
Sempra Mexico, through its wholly owned subsidiaries, DEN and IEnova Pipelines, provides operating and maintenance services to TAG, and also provides personnel under an administrative services arrangement.
Sempra Renewables
Sempra Renewables, through its wholly owned subsidiary, Sempra Renewables Services, Inc. (formerly known as Sempra Global Services, Inc.), provides project administration and operating and maintenance services to certain of its renewable energy unconsolidated joint ventures.
Sempra LNG & Midstream
Sempra LNG & Midstream provides project administration and operating and maintenance services to Cameron LNG JV, and also provides personnel under an administrative services arrangement.
Sempra LNG & Midstream has an agreement with Rockies Express for capacity on REX. In the second quarter of 2016, Sempra LNG & Midstream permanently released certain pipeline capacity with Rockies Express and others, as we discuss in Note 15.
Guarantees
Sempra Energy has provided guarantees to certain of its joint ventures as we discuss in Note 4.
RESTRICTED NET ASSETS
Sempra Energy Consolidated
As we discuss below, the California Utilities have restrictions on the amount of funds that can be transferred to Sempra Energy by dividend, advance or loan as a result of conditions imposed by various regulators. Additionally, certain other Sempra Energy subsidiaries are subject to various financial and other covenants and other restrictions contained in debt and credit agreements (described in Note 5) and in other agreements that limit the amount of funds that can be transferred to Sempra Energy. At December 31, 2017, Sempra Energy was in compliance with all covenants related to its debt agreements.
At December 31, 2017, the amount of restricted net assets of consolidated entities of Sempra Energy, including the California Utilities discussed below, that may not be distributed to Sempra Energy in the form of a loan or dividend is $8.6 billion. Additionally, the amount of restricted net assets of our unconsolidated entities is $7.4 billion. Although the restrictions cap the amount of funding that the various operating subsidiaries can provide to Sempra Energy, we do not believe these restrictions will have a significant impact on our ability to access cash to pay dividends and fund operating needs.
As we discuss in Note 4, $89 million of Sempra Energy’s consolidated retained earnings balance represents undistributed earnings of equity method investments at December 31, 2017.
Sempra Utilities
The CPUC’s regulation of the California Utilities’ capital structures limits the amounts available for dividends and loans to Sempra Energy. At December 31, 2017, Sempra Energy could have received combined loans and dividends of approximately $469 million, funded by long-term debt issuance, from SDG&E and approximately $736 million from SoCalGas.
The payment and amount of future dividends by SDG&E and SoCalGas are at the discretion of their respective boards of directors. The following restrictions limit the amount of retained earnings that may be paid as common stock dividends or loaned to Sempra Energy from either utility:
| |
▪ | The CPUC requires that SDG&E’s and SoCalGas’ common equity ratios be no lower than one percentage point below the CPUC-authorized percentage of each entity’s authorized capital structure. The authorized percentage at December 31, 2017 is 52 percent at both SDG&E and SoCalGas. |
| |
▪ | The FERC requires SDG&E to maintain a common equity ratio of 30 percent or above. |
| |
▪ | The California Utilities have a combined revolving credit line that requires each utility to maintain a ratio of consolidated indebtedness to consolidated capitalization (as defined in the agreement) of no more than 65 percent, as we discuss in Note 5. |
Based on these restrictions, at December 31, 2017, SDG&E’s restricted net assets were $5.1 billion and SoCalGas’ restricted net assets were $3.2 billion, which could not be transferred to Sempra Energy.
At Sempra South American Utilities, Peru requires domestic corporations to maintain minimum legal reserves as a percentage of capital stock, resulting in restricted net assets of $35 million at Luz del Sur at December 31, 2017.
Sempra Infrastructure
Significant restrictions of Sempra Infrastructure subsidiaries include
| |
▪ | Mexico requires domestic corporations to maintain minimum legal reserves as a percentage of capital stock, resulting in restricted net assets of $198 million at Sempra Energy’s consolidated Mexican subsidiaries at December 31, 2017. |
| |
▪ | Wholly owned IEnova Pipelines has a long-term debt agreement that requires it to maintain a reserve account to pay the projects’ debt. Under this restriction, net assets totaling $19 million are restricted at December 31, 2017. |
| |
▪ | Wholly owned Ventika has long-term debt agreements that require it to maintain reserve accounts to pay the projects’ debt. The debt agreements may limit the project companies’ ability to incur liens, incur additional indebtedness, make investments, pay cash dividends and undertake certain additional actions. Under these restrictions, net assets totaling $34 million are restricted at December 31, 2017. |
| |
▪ | Energía Sierra Juárez, a 50-percent owned and unconsolidated joint venture of Sempra Mexico, has long-term debt agreements that require the establishment and funding of project and reserve accounts to which the proceeds of loans, letter of credit borrowings, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The long-term debt agreements also limit the joint venture’s ability to incur liens, incur additional indebtedness, make acquisitions and undertake certain actions. Under these restrictions, net assets totaling $9 million are restricted at December 31, 2017. |
| |
▪ | TAG, a 50-percent owned and unconsolidated joint venture of Sempra Mexico, has a long-term debt agreement that requires it to maintain a reserve account to pay projects’ debt. Under these restrictions, net assets totaling $82 million are restricted at December 31, 2017. |
| |
▪ | Wholly owned Copper Mountain Solar 1 has a long-term debt agreement that requires the establishment and funding of project accounts to which the proceeds of loans, project revenues and other amounts are deposited and applied in accordance with the debt agreement. This long-term debt agreement also limits the solar project’s ability to incur liens, incur additional |
indebtedness, make acquisitions and undertake certain actions, while also requiring maintenance of certain debt ratios. Under these restrictions, net assets totaling $8 million are restricted at December 31, 2017.
| |
▪ | Tax equity limited liability companies at Sempra Renewables are required to maintain completion reserve depository accounts to be used to pay for trailing construction costs that become due subsequent to the tax equity transaction closing. At December 31, 2017, as a result of these requirements, there were total restricted net assets at these tax equity limited liability companies of approximately $19 million. |
| |
▪ | 50- and 25-percent owned and unconsolidated joint ventures at Sempra Renewables have debt agreements that require each joint venture to maintain reserve accounts in order to pay the projects’ debt service and O&M requirements. We discuss Sempra Energy guarantees associated with these requirements in Note 4. At December 31, 2017, as a result of these requirements, there were total restricted net assets at these joint ventures of approximately $265 million. |
| |
▪ | Sempra LNG & Midstream has an equity method investment in Cameron LNG JV, which has debt agreements that require the establishment and funding of project accounts to which the proceeds of loans, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The debt agreements require the joint venture to maintain reserve accounts in order to pay the project debt service, and also contain restrictions related to the payment of dividends and other distributions to the members of the joint venture. We discuss Sempra Energy guarantees associated with Cameron LNG JV’s debt agreements in Note 4. Under these restrictions, net assets of Cameron LNG JV of approximately $7.0 billion are restricted at December 31, 2017. |
OTHER INCOME, NET
Other Income, Net on the Consolidated Statements of Operations consists of the following:
|
| | | | | | | | | | | |
OTHER INCOME, NET |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Allowance for equity funds used during construction | $ | 168 |
| | $ | 116 |
| | $ | 107 |
|
Investment gains(1) | 56 |
| | 23 |
| | 3 |
|
Gains (losses) on interest rate and foreign exchange instruments, net | 47 |
| | (32 | ) | | (4 | ) |
Foreign currency transaction losses(2) | (35 | ) | | (1 | ) | | (7 | ) |
Sale of other investments | 3 |
| | 5 |
| | 11 |
|
Electrical infrastructure relocation income | 3 |
| | 10 |
| | 7 |
|
Interest on regulatory balancing accounts, net | 3 |
| | 4 |
| | 3 |
|
Sundry, net | 9 |
| | 7 |
| | 6 |
|
Total | $ | 254 |
| | $ | 132 |
| | $ | 126 |
|
SDG&E: | |
| | |
| | |
|
Allowance for equity funds used during construction | $ | 63 |
| | $ | 46 |
| | $ | 37 |
|
Interest on regulatory balancing accounts, net | 3 |
| | 3 |
| | 3 |
|
Sundry, net | — |
| | 1 |
| | (4 | ) |
Total | $ | 66 |
| | $ | 50 |
| | $ | 36 |
|
SoCalGas: | |
| | |
| | |
|
Allowance for equity funds used during construction | $ | 44 |
| | $ | 40 |
| | $ | 36 |
|
Interest on regulatory balancing accounts, net | — |
| | 1 |
| | — |
|
Sundry, net | (8 | ) | | (9 | ) | | (6 | ) |
Total | $ | 36 |
| | $ | 32 |
| | $ | 30 |
|
| |
(1) | Represents investment 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, recorded in Operation and Maintenance on the Consolidated Statements of Operations. |
| |
(2) | Includes $35 million loss from translation of Mexican peso-denominated loan to IMG JV to U.S. dollars. |
NOTE 2. NEW ACCOUNTING STANDARDS
We describe below recent pronouncements that have had or may have a significant effect on our financial condition, results of operations, cash flows or disclosures.
ASU 2014-09, “Revenue from Contracts with Customers,” ASU 2015-14, “Deferral of the Effective Date,” ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”: ASU 2014-09 adds ASC 606 to provide accounting guidance for the recognition of revenue from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. Amending ASU 2014-09, ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10 clarifies the determination of whether a good or service is separately identifiable from other promises and revenue recognition related to licenses of intellectual property, and ASU 2016-12 provides guidance on transition, collectability, noncash consideration, and the presentation of sales and other similar taxes. The ASUs are codified in ASC 606.
ASU 2015-14 defers the effective date of ASC 606 by one year for all entities and permits early adoption on a limited basis. For public entities, ASC 606 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016, and is effective for interim periods in the year of adoption. We adopted ASC 606 on January 1, 2018, applying the modified retrospective transition method to all contracts as of January 1, 2018 and elected to use certain practical expedients available under the transition guidance. The impact from adoption was not material to our financial statements, and the timing of our revenue recognition has remained materially consistent before and after the adoption of ASC 606. The new revenue standard provides specific guidance for combining contracts, which will result in a prospective reclassification between cost of sales and revenues within our Sempra LNG & Midstream segment. This reclassification has no impact on Sempra Energy’s consolidated revenues or cost of sales. Our additional disclosures about the nature, amount, timing and uncertainty of revenues arising from contracts with customers will be included in our Notes to Consolidated Financial Statements beginning in the first quarter of 2018.
ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”: In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using net asset value per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively. There is an outstanding FASB exposure draft which clarifies that the prospective transition approach for equity investments without readily determinable fair values is meant only for instances in which the measurement alternative is elected.
For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. We adopted ASU 2016-01 on January 1, 2018 and it will not materially affect our financial condition, results of operations or cash flows.
ASU 2016-02, “Leases” and ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”: ASU 2016-02 requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating, and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting and ASC 606. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. ASU 2018-01 allows entities to elect a transition practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP.
For public entities, these ASUs are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes practical expedients that may be elected, which would allow entities to continue to account for leases that commence before the effective date of the standard in accordance with previous U.S. GAAP unless the lease is modified, except for the lessee requirement to begin recognizing right-of-use assets and lease liabilities for all operating leases on the balance sheet
at the reporting date. We are currently evaluating the effect of the standards on our ongoing financial reporting and plan to adopt the standards on January 1, 2019. As part of our evaluation, we formed a steering committee comprised of members from relevant Sempra Energy business units, are compiling our population of contracts and are preparing our lease accounting assessments. Based on our assessment to date, we have determined that we will elect the practical expedients available under the transition guidance described above. We continue to monitor outstanding issues currently being addressed by the FASB, including guidance under a FASB exposure draft that would allow entities an optional transition method to apply ASU 2016-02 in the period of adoption rather than in the earliest period presented. Conclusions that the FASB reaches on outstanding issues may impact our application of these ASUs.
ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”: ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments. The standard introduces an “expected credit loss” impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the credit losses.
For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect of the standard on our ongoing financial reporting and have not yet selected the year in which we will adopt the standard.
ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments” and ASU 2016-18, “Restricted Cash”: ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows to reduce diversity in practice. Of the eight issues addressed in ASU 2016-15, we were impacted by the following issues:
10.6 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2016 Performance-Based Restricted |
▪ | Issue 1 – debt prepayment or debt extinguishment costs |
| |
▪ | Stock Unit Award - Relative Total Shareholder Return Performance Measure.Issue 3 – contingent consideration payments made after a business combination |
| |
▪ | Issue 5 – proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies) |
ASU 2016-18 requires amounts classified as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. A reconciliation between the balance sheet and the statement of cash flows must be disclosed when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. ASU 2016-15 and ASU 2016-18 must be adopted retrospectively. We early adopted ASU 2016-15 and ASU 2016-18 in the fourth quarter of 2017. Neither ASU impacted SoCalGas’ Statements of Cash Flows.
Upon adoption of ASU 2016-15 and ASU 2016-18, the Sempra Energy and SDG&E Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 were impacted as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
IMPACT FROM ADOPTION OF ASU 2016-15 AND ASU 2016-18 |
(Dollars in millions) |
| Years ended December 31, | |
| 2016 | | 2015 | |
| As previously reported | | Effect of adoption | | As adjusted | | As previously reported | | Effect of adoption | | As adjusted | |
Sempra Energy Consolidated Statements of Cash Flows: | |
Cash flows from operating activities: | | | | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities – other | $ | 63 |
| | $ | (1 | ) | | $ | 62 |
| | $ | 66 |
| | $ | — |
| | $ | 66 |
| |
Changes in other assets | 56 |
| | (7 | ) | | 49 |
| | (162 | ) | | (7 | ) | | (169 | ) | |
Net cash provided by operating activities | 2,319 |
| | (8 | ) | | 2,311 |
| | 2,905 |
| | (7 | ) | | 2,898 |
| |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Expenditures for investments and acquisition of businesses, net of cash and cash equivalents acquired | (1,582 | ) | | 1,582 |
| | — |
| | (200 | ) | | 200 |
| | — |
| |
Expenditures for investments and acquisitions, net of cash, cash equivalents and restricted cash acquired | — |
| | (1,504 | ) | | (1,504 | ) | | — |
| | (198 | ) | | (198 | ) | |
Increases in restricted cash | (139 | ) | | 139 |
| | — |
| | (100 | ) | | 100 |
| | — |
| |
Decreases in restricted cash | 175 |
| | (175 | ) | | — |
| | 93 |
| | (93 | ) | | — |
| |
Other | — |
| | 9 |
| | 9 |
| | 1 |
| | 8 |
| | 9 |
| |
Net cash used in investing activities | (4,886 | ) | | 51 |
| | (4,835 | ) | | (2,885 | ) | | 17 |
| | (2,868 | ) | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Other | (10 | ) | | (11 | ) | | (21 | ) | | (17 | ) | | (3 | ) | | (20 | ) | |
Net cash provided by (used in) financing activities | 2,513 |
| | (11 | ) | | 2,502 |
| | (173 | ) | | (3 | ) | | (176 | ) | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| | (14 | ) | | 14 |
| | — |
| |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (3 | ) | | (3 | ) | | — |
| | (14 | ) | | (14 | ) | |
| | | | | | | | | | | | |
Decrease in cash and cash equivalents | (54 | ) | | 54 |
| | — |
| | (167 | ) | | 167 |
| | — |
| |
Decrease in cash, cash equivalents, and restricted cash | — |
| | (25 | ) | | (25 | ) | | — |
| | (160 | ) | | (160 | ) | |
| | | | | | | | | | | | |
Cash and cash equivalents, January 1 | 403 |
| | (403 | ) | | — |
| | 570 |
| | (570 | ) | | — |
| |
Cash, cash equivalents and restricted cash, January 1 | — |
| | 450 |
| | 450 |
| | — |
| | 610 |
| | 610 |
| |
Cash and cash equivalents, December 31 | 349 |
| | (349 | ) | | — |
| | 403 |
| | (403 | ) | | — |
| |
Cash, cash equivalents and restricted cash, December 31 | — |
| | 425 |
| | 425 |
| | — |
| | 450 |
| | 450 |
| |
SDG&E Consolidated Statements of Cash Flows: | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Changes in other assets | $ | (16 | ) | | $ | (4 | ) | | $ | (20 | ) | | $ | (122 | ) | | $ | (3 | ) | | $ | (125 | ) | |
Net cash provided by operating activities | 1,327 |
| | (4 | ) | | 1,323 |
| | 1,664 |
| | (3 | ) | | 1,661 |
| |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Increases in restricted cash | (49 | ) | | 49 |
| | — |
| | (39 | ) | | 39 |
| | — |
| |
Decreases in restricted cash | 60 |
| | (60 | ) | | — |
| | 35 |
| | (35 | ) | | — |
| |
Other | — |
| | 6 |
| | 6 |
| | — |
| | 5 |
| | 5 |
| |
Net cash used in investing activities | (1,319 | ) | | (5 | ) | | (1,324 | ) | | (1,086 | ) | | 9 |
| | (1,077 | ) | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Other(1) | (4 | ) | | (2 | ) | | (6 | ) | | (2 | ) | | (2 | ) | | (4 | ) | |
Net cash used in financing activities | (20 | ) | | (2 | ) | | (22 | ) | | (566 | ) | | (2 | ) | | (568 | ) | |
| | | | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | (12 | ) | | 12 |
| | — |
| | 12 |
| | (12 | ) | | — |
| |
(Decrease) increase in cash, cash equivalents, and restricted cash | — |
| | (23 | ) | | (23 | ) | | — |
| | 16 |
| | 16 |
| |
| | | | | | | | | | | | |
Cash and cash equivalents, January 1 | 20 |
| | (20 | ) | | — |
| | 8 |
| | (8 | ) | | — |
| |
Cash, cash equivalents and restricted cash, January 1 | — |
| | 43 |
| | 43 |
| | — |
| | 27 |
| | 27 |
| |
Cash and cash equivalents, December 31 | 8 |
| | (8 | ) | | — |
| | 20 |
| | (20 | ) | | — |
| |
Cash, cash equivalents and restricted cash, December 31 | — |
| | 20 |
| | 20 |
| | — |
| | 43 |
| | 43 |
| |
(1) Previously labeled “Debt issuance costs.”
ASU 2017-01, “Clarifying the Definition of a Business”: ASU 2017-01 narrows the definition of a business and provides a framework to assist entities in determining whether a transaction involves an asset or a business. Specifically, the ASU provides a “screen” for determining when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If the screen threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 must be applied prospectively on or after the effective date. Early adoption is permitted. We early adopted ASU 2017-01 on July 1, 2017.
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”: ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will be required to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. For public entities, ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments are to be applied on a prospective basis. We have not yet selected the year in which we will adopt the standard.
ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”: ASU 2017-05 clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. For public entities, ASU 2017-05 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. Entities may apply a full retrospective or modified retrospective approach. Under a modified retrospective approach, entities are required to apply the guidance to any transactions that are not completed as of the adoption date. We adopted the standard in conjunction with our adoption of ASC 606 on January 1, 2018 using the modified retrospective transition method. As we discuss in Note 1, Sempra Renewables expects the formation of a tax equity arrangement to be completed in the first half of 2018. While the arrangement would be in the scope of this ASU, we do not expect it to have a material impact on our financial condition, results of operations or cash flows.
ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”: ASU 2017-07 requires the service cost component of net periodic benefit costs to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and the other components of net periodic benefit costs to be presented separately outside of operating income. The guidance also allows only the service cost component to be eligible for capitalization. For public entities, ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Amendments are to be applied retrospectively for presentation of costs and prospectively for capitalization of service costs. The guidance allows a practical expedient that permits use of previously disclosed service costs and other costs from the pension and other postretirement benefit plan note in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the statements of operations. We adopted the standard on January 1, 2018 and elected the practical expedient available under the transition guidance.
In 2018, we expect the adoption of ASU 2017-07 to have the following impact on our Consolidated Statements of Operations for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | |
EXPECTED IMPACT FROM ADOPTION OF ASU 2017-07 |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 |
| As reported | Recast | | As reported | Recast |
Sempra Energy Consolidated Statements of Operations: | | | | | |
Operation and maintenance | $ | 3,117 |
| $ | 3,096 |
| | $ | 2,970 |
| $ | 2,976 |
|
Other income, net | 254 |
| 233 |
| | 132 |
| 138 |
|
SDG&E Consolidated Statements of Operations: | | | | | |
Operation and maintenance | $ | 1,020 |
| $ | 1,024 |
| | $ | 1,048 |
| $ | 1,062 |
|
Operating income | 713 |
| 709 |
| | 990 |
| 976 |
|
Other income, net | 66 |
| 70 |
| | 50 |
| 64 |
|
SoCalGas Statements of Operations: | | | | | |
|
| | | | | | | | | | | | | |
Operation and maintenance | $ | 1,479 |
| $ | 1,474 |
| | $ | 1,385 |
| $ | 1,391 |
|
Operating income | 622 |
| 627 |
| | 557 |
| 551 |
|
Other income, net | 36 |
| 31 |
| | 32 |
| 38 |
|
ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”: ASU 2017-12 changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge accounting results. More specifically, the guidance expands the exposures that can be hedged to align with an entity’s risk management strategies, alleviates documentation requirements, eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges and requires entities to present the entire change in the fair value of a hedging instrument in the same income statement line item as the earnings effect of the hedged item. For public entities, ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. If an entity early adopts ASU 2017-12 in an interim period, any transition adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Entities will adopt ASU 2017-12 by applying a modified retrospective approach to the accounting for existing hedging relationships and will prospectively apply the new presentation and disclosure requirements. Transition elections are available for all hedges that exist at the date of adoption. We early adopted ASU 2017-12 on January 1, 2018, and it will not materially affect our financial condition, results of operations or cash flows.
ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”:ASU 2018-02 contains amendments that allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the TCJA. Under ASU 2018-02, an entity will be required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from AOCI. The amendments in this update can be applied either as of the beginning of the period of adoption or retrospectively as of the date of enactment of the TCJA and to each period in which the effect of the TCJA is recognized. For public entities, ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted. We are currently evaluating the effect of the standard on our financial reporting and have not yet selected the adoption method or the year in which we will adopt the standard.
NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY
We consolidate assets acquired and liabilities assumed as of the purchase date and include earnings from acquisitions in consolidated earnings after the purchase date.
ACQUISITIONS
SEMPRA MEXICO
2017 Acquisition
Ductos y Energéticos del Norte, S. de R.L. de C.V.
On November 15, 2017, IEnova completed the asset acquisition of PEMEX’s 50-percent interest in DEN, a joint venture that holds a 50-percent interest in the Los Ramones Norte pipeline through TAG, for a purchase price of $165 million (exclusive of $18 million of cash and cash equivalents acquired), plus the assumption of $96 million of short-term debt. This acquisition increased IEnova’s ownership interest in DEN through IEnova Pipelines from 50 percent to 100 percent, and increased IEnova’s indirect ownership interest in TAG from 25 percent to 50 percent. IEnova Pipelines previously accounted for its 50-percent interest in DEN as an equity method investment. At closing, DEN became a wholly owned, consolidated subsidiary of IEnova Pipelines. DEN will continue to account for its interest in TAG as an equity method investment. This acquisition also included a $66 million intangible asset that represents a favorable O&M agreement, which has an amortization period of 23 years.
2016 Acquisitions
The following table summarizes the total fair value of the 2016 business combinations at Sempra Mexico, described below, and the final purchase price allocations of the assets acquired and liabilities assumed at the dates of acquisition:
|
| | | | | | | | | |
PURCHASE PRICE ALLOCATIONS | | |
(Dollars in millions) | | |
| | IEnova Pipelines | | Ventika |
| | At September 26, 2016(1) | | At December 14, 2016(2) |
Fair value of business combination: | | | | |
Cash consideration (fair value of total consideration) | | $ | 1,144 |
| | $ | 310 |
|
Fair value of equity interest in IEnova Pipelines immediately prior to acquisition | | 1,144 |
| | — |
|
Total fair value of business combination | | $ | 2,288 |
| | $ | 310 |
|
| | | | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | |
Cash and cash equivalents | | $ | 66 |
| | $ | — |
|
Restricted cash | | — |
| | 68 |
|
Accounts receivable | | 39 |
| | 14 |
|
Other current assets | | 6 |
| | 1 |
|
Other intangible assets | | — |
| | 154 |
|
Deferred income taxes | | — |
| | 36 |
|
Regulatory assets | | 33 |
| | — |
|
Property, plant and equipment | | 1,248 |
| | 673 |
|
Other noncurrent assets | | 1 |
| | 3 |
|
Short-term debt | | — |
| | (125 | ) |
Accounts payable | | (11 | ) | | (1 | ) |
Due to unconsolidated affiliates | | (3 | ) | | — |
|
Current portion of long-term debt | | (49 | ) | | (7 | ) |
Fixed-price contracts and other derivatives, current | | (6 | ) | | (4 | ) |
Other current liabilities | | (20 | ) | | (8 | ) |
Long-term debt | | (315 | ) | | (478 | ) |
Asset retirement obligations | | (5 | ) | | (2 | ) |
Deferred income taxes | | (127 | ) | | (120 | ) |
Fixed-price contracts and other derivatives, noncurrent | | (19 | ) | | (10 | ) |
Other noncurrent liabilities | | (11 | ) | | — |
|
Total identifiable net assets | | 827 |
| | 194 |
|
Goodwill | | 1,461 |
| | 116 |
|
Total fair value of business combination | | $ | 2,288 |
| | $ | 310 |
|
10.7 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2016 Performance-Based Restricted |
(1) | During the fourth quarter of 2016, we received additional information regarding IEnova Pipelines’ deferred income taxes as of the acquisition date, primarily related to basis differences in IEnova Pipelines’ PP&E. As a result, we recorded measurement period adjustments that resulted in a net increase to goodwill of $86 million, an increase in deferred income tax liabilities of $119 million and $33 million of regulatory assets related to deferred income taxes on AFUDC. |
| | Stock Unit Award - EPS Growth Performance Measure. |
(2) | During the fourth quarter of 2017, we received additional information regarding Ventika’s deferred income taxes as of the acquisition date, primarily related to net operating loss carryforwards. As a result, we recorded a measurement period adjustment that resulted in a decrease to goodwill and an increase in deferred income tax assets of $13 million. |
IEnova Pipelines, S. de R.L. de C.V. (formerly known as Gasoductos de Chihuahua, S. de R.L. de C.V., or GdC)
Background and Financing. On September 26, 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, which develops and operates energy infrastructure in Mexico, for a purchase price of $1.144 billion (exclusive of $66 million of cash and cash equivalents acquired), plus the assumption of $364 million of long-term debt, increasing IEnova’s ownership interest in IEnova Pipelines to 100 percent. IEnova Pipelines became a consolidated subsidiary of IEnova on this date. Prior to the acquisition date, IEnova owned 50 percent of IEnova Pipelines and accounted for its interest as an equity method investment.
The assets involved in the acquisition included three natural gas pipelines, an ethane pipeline, and a liquid petroleum gas pipeline and associated storage terminal. The transaction excluded the Los Ramones Norte pipeline, in which IEnova continued to hold an indirect 25-percent ownership interest through IEnova Pipelines’ interest in DEN until November 2017, as we discuss above.
IEnova paid $1.078 billion in cash ($1.144 billion purchase price less $66 million of cash and cash equivalents acquired), which was funded using interim financing provided by Sempra Global through a $1.15 billion bridge loan to IEnova. Sempra Global funded the majority of the transaction using commercial paper borrowings. As we discuss in Note 1, in October 2016, IEnova completed a private follow-on offering of its common stock in the U.S. and outside of Mexico and a concurrent public common stock offering in Mexico. IEnova used a portion of the net proceeds from the offerings to fully repay the Sempra Global bridge loan.
Purchase Price Allocation. We accounted for this business combination using the acquisition method of accounting whereby the total fair value of the business acquired is allocated to identifiable assets acquired and liabilities assumed based on their respective fair values, with any excess recognized as goodwill at the Sempra Mexico reportable segment. None of the goodwill is expected to be deductible in Mexico or the U.S. for income tax purposes.
Gain on Remeasurement of Equity Method Investment. In the year ended December 31, 2016, we recorded a pretax gain of $617 million ($432 million after-tax) for the excess of the acquisition-date fair value of Sempra Mexico’s previously held equity interest in IEnova Pipelines over the carrying value of that interest, included as Remeasurement of Equity Method Investment on the Sempra Energy Consolidated Statement of Operations. We used a market approach to measure the acquisition-date fair value of IEnova’s equity interest in IEnova Pipelines immediately prior to the business acquisition. We discuss non-recurring fair value measures and the associated accounting impact of the IEnova Pipelines acquisition in Note 10.
Valuation of IEnova Pipelines’ Assets and Liabilities. Based on the nature of the Mexico regulatory environment and the oversight surrounding the establishment and maintenance of rates that IEnova Pipelines charges for services on its assets, IEnova Pipelines applies the guidance under the provisions of U.S. GAAP governing rate-regulated operations. Therefore, when determining the fair value of the acquired assets and liabilities assumed, we considered the effect of regulation on a market participant’s view of the highest and best use of the assets, in particular for the fair value of IEnova Pipelines’ PP&E. Under U.S. GAAP, regulation is viewed as being a characteristic (restriction) of a regulated entity’s PP&E, and the impact of regulation is considered a fundamental input to measuring the fair value of PP&E in a business combination involving a regulated business.
Under this premise, the fair value of the PP&E of a regulated business is generally assumed to be equivalent to carrying value for financial reporting purposes. Management concluded that the carrying value of IEnova Pipelines’ PP&E is representative of fair value.
We applied an income approach, specifically the discounted cash flow method, to measure the fair value of debt and derivatives. We valued debt by discounting future debt payments by a market yield, and we valued derivatives by discounting the future interest payments under the fixed and floating rates using current market data.
For substantially all other assets and liabilities, we determined that historical carrying value approximates fair value due to their short-term nature.
Impact on Operating Results. We incurred acquisition costs of $4 million and $1 million in the years ended December 31, 2016 and 2015, respectively. These costs are included in Operation and Maintenance on the Sempra Energy Consolidated Statements of Operations.
For the year ended December 31, 2016, the Sempra Energy Consolidated Statement of Operations includes $82 million of revenues and $33 million of earnings (after noncontrolling interests) from IEnova Pipelines since the September 26, 2016 date of acquisition.
Ventika, S.A.P.I. de C.V. and Ventika II, S.A.P.I. de C.V.
Background and Financing. On December 14, 2016, IEnova acquired 100 percent of the equity interests in the Ventika wind power generation facilities for cash consideration of $310 million and the assumption of $610 million of existing debt. Ventika is a 252-MW wind farm located in Nuevo Leon, Mexico, that began commercial operations in April 2016. All of Ventika’s generation capacity is contracted under 20-year, U.S. dollar-denominated PPAs with five private off-takers. The acquisition was funded using $50 million of net proceeds from the IEnova equity offerings that we discuss in Note 1, $250 million of borrowings against Sempra Mexico’s revolving credit facility, and $10 million of available cash at IEnova. The acquisition also included $68 million of restricted cash that represents funds set aside for servicing debt, operations, and other costs pursuant to the long-term debt agreements.
Purchase Price Allocation. We accounted for this business combination using the acquisition method of accounting whereby the total fair value of the business acquired is allocated to identifiable assets acquired and liabilities assumed based on their respective fair values, with any excess recognized as goodwill at the Sempra Mexico reportable segment. None of the goodwill is expected to be deductible in Mexico or in the U.S. for income tax purposes.
Valuation of Ventika’s Assets and Liabilities. The fair values of the tangible and intangible assets acquired and liabilities assumed were recognized based on their preliminary values at the acquisition date. Significant inputs used to measure the fair values of the acquired PP&E, intangible asset, debt, and derivatives are as follows:
| | |
▪ | 10.8PP&E – We applied an income approach using market-based discounted cash flows. We used the pricing included in the existing PPAs, which was determined to reflect current market rates in the Mexican renewable energy market. |
| | Form of Sempra Energy 2013 Long-Term Incentive Plan 2016 Restricted Stock Unit Award. |
▪ | Intangible asset – Ventika is the holder of a renewable energy transmission and consumption permit that allows it to transmit its generated power to various locations within Mexico at beneficial rates and reduces the administrative burden to manage transmitting power to off-takers. With recent renewable energy market reforms in Mexico, these transmission and consumption permits are no longer available, resulting in higher tariffs for generators. We applied an income approach based on a cash flow differential approach that measures the fair value of the transmission rights by comparing the operating expenses under the transmission and consumption permit as compared to under the new, higher tariffs. This acquired intangible asset has an amortization period of 19 years, reflecting the remaining life of the transmission and consumption transmission permit at the time of acquisition. |
| | |
▪ | 10.9Debt – Using an income approach, we valued debt by discounting future debt payments by a market yield commensurate with the remaining term of the loans. |
| | Form of Sempra Energy 2013 Long-Term Incentive Plan 2015 Performance-Based Restricted |
▪ | Derivatives – Using an income approach, we valued derivatives by discounting the future interest payments under the fixed and floating rates using current market data. |
Additionally, we recognized deferred income taxes on Ventika’s existing NOLs, and for the difference between the fair values and tax bases of the net assets acquired using the Mexican statutory rate.
For substantially all other assets and liabilities, we determined that historical carrying value approximates fair value due to their short-term nature.
Impact on Operating Results. We incurred acquisition costs of $1 million in the year ended December 31, 2016, which are included in Operation and Maintenance on the Sempra Energy Consolidated Statement of Operations.
For the year ended December 31, 2016, the Sempra Energy Consolidated Statement of Operations includes $4 million of revenues and $3 million of earnings (after noncontrolling interests) from Ventika since the December 14, 2016 date of acquisition.
Unaudited Pro Forma Information
The following table presents unaudited pro forma information for the years ended December 31, 2016 and 2015, combining the historical results of operations of Sempra Energy, IEnova Pipelines and Ventika as though the acquisitions occurred on January 1, 2015. The pro forma information is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented or the results that we will experience going forward.
|
| | | | | | | | | | | | |
UNAUDITED PRO FORMA INFORMATION – SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| | | Years ended December 31, |
| | | | | 2016 | | 2015 |
Revenues | | | | | $ | 10,463 |
| | $ | 10,473 |
|
Net income | | | | | 1,145 |
| | 1,938 |
|
Earnings | | | | | 1,058 |
| | 1,641 |
|
The unaudited pro forma information above assumes
| | Stock Unit Award - Relative Total Shareholder Return Performance Measure (2014 Sempra |
▪ | | | Energy Form 10-K, Exhibit 10.19). |
| | | |
| 10.10 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2015 Performance-Based Restricted |
| | | Stock Unit Award - EPS Growth Performance Measure (2014 Sempra Energy Form 10-K, |
| | | Exhibit 10.20). |
| | | |
| 10.11 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2015 Performance-Based Restricted |
| | | Stock Unit Award (2014 Sempra Energy Form 10-K, Exhibit 10.21). |
| | | |
| 10.12 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2015 Restricted Stock Unit Award |
| | | Agreement. |
| | | |
| 10.13 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2014 Restricted Stock Unit Award |
| | | (Sempra Energy March 31, 2014 Form 10-Q, Exhibit 10.1). |
| | | |
| 10.14 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2014 Performance-Based Restricted |
| | | Stock Unit Award - EPS Growth Performance Measure (Sempra Energy March 31, 2014 |
| | | Form 10-Q, Exhibit 10.2). |
| | | |
| 10.15 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2014 Performance-Based Restricted |
| | | Stock Unit Award - Relative Total Shareholder Return Performance Measure (Sempra |
| | | Energy March 31, 2014 Form 10-Q, Exhibit 10.3). |
| | | |
| 10.16 | | Form of Sempra Energy 2013 Long-Term Incentive Plan 2013 Performance-Based Restricted |
| | | Stock Unit Award (Sempra Energy September 30, 2013 Form 10-Q, Exhibit 10.1). |
| | | |
| 10.17 | | Sempra Energy 2008 Long Term Incentive Plan (Appendix A to the 2008 Sempra Energy |
| | | Definitive Proxy Statement, filedrelated IEnova equity offerings, discussed above and in Note 1, occurred on April 15, 2008). |
| | | |
| 10.18 | | Sempra Energy 2008 Long Term Incentive Plan for EnergySouth, Inc. Employees and Other |
| | | Eligible Individuals (Registration Statement on Form S-8 Sempra Energy Registration |
| | | Statement No. 333-155191 dated November 7, 2008, Exhibit 10.1). |
| | | |
| 10.19 | | Form of Sempra Energy 2008 Long-Term Incentive Plan 2013 Restricted Stock |
| | | Unit Award Agreement. |
| | | |
| 10.20 | | Form of Sempra Energy 2008 Long Term Incentive Plan 2012 Performance-Based Restricted |
| | | Stock Unit Award (March 31, 2012 Sempra Energy Form 10-Q, Exhibit 10.1). |
| | | |
| 10.21 | | Form of Sempra Energy 2008 Long Term Incentive Plan, 2009 Nonqualified Stock Option |
| | | Agreement (March 31, 2009 Sempra Energy Form 10-Q, Exhibit 10.2). |
| | | |
| 10.22 | | Form of Sempra Energy 2008 Long Term Incentive Plan, 2008 Nonqualified Stock Option |
| | | Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.4). |
| | | |
| 10.23 | | Amended and Restated Sempra Energy 1998 Long-Term Incentive Plan (June 30, 2003 |
| | | Sempra Energy Form 10-Q, Exhibit 10.2). |
| | | |
| 10.24 | | Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Non-Qualified Stock Option |
| | | Agreement (2007 Sempra Energy Form 10-K, Exhibit 10.10). |
| | | |
| 10.25 | | Amended and Restated Sempra Energy 2005 Deferred Compensation Plan, |
| | | now known as Sempra Energy Employee and Director Retirement |
| | | Savings Plan (June 30, 2015 Sempra Energy Form 10-Q, Exhibit 10.1). |
| | | |
| 10.26 | | Amendment to the Amended and Restated Sempra Energy Deferred Compensation and |
| | | Excess Savings Plan (2008 Sempra Energy Form 10-K, Exhibit 10.25). |
| | | |
| 10.27 | | Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan |
| | | (September 30, 2002 Sempra Energy Form 10-Q, Exhibit 10.3). |
| | | |
| 10.28 | | 2009 Amendment and Restatement of the Sempra Energy Supplemental |
| | | Executive Retirement Plan effective July 1, 2009. |
| | | |
| 10.29 | | First Amendment to the 2009 Amendment and Restatement of the Sempra Energy Supplemental |
| | | Executive Retirement Plan effective February 11, 2010. |
| | | |
| 10.30 | | Second Amendment to the 2009 Amendment and Restatement of the Sempra Energy |
| | | Supplemental Executive Retirement Plan effective January 1, 2014 |
| | | (2014 Sempra Energy Form 10-K, Exhibit 10.43). |
| | | |
| 10.31 | | 2015 Amendment and Restatement of the Sempra Energy Cash Balance Restoration Plan |
| | | effective November 10, 2015. |
| | | |
| 10.32 | | Sempra Energy Amended and Restated Executive Life Insurance Plan (2012 Sempra Energy |
| | | Form 10-K, Exhibit 10.22). |
| | | |
| 10.33 | | Sempra Energy Executive Personal Financial Planning Program Policy Document (September |
| | | 30, 2004 Sempra Energy Form 10-Q, Exhibit 10.11). |
| | | |
| 10.34 | | Form of Indemnification Agreement with Directors and Executive Officers (June 30, 2008 |
| | | Sempra Energy Form 10-Q, Exhibit 10.2). |
| | | |
| 10.35 | | Sempra Energy Amended and Restated Executive Medical Plan (2008 Sempra Energy Form |
| | | 10-K, Exhibit 10.26). |
| | | |
| 10.36 | | Sempra Energy Employee Stock Ownership Plan and Trust Agreement effective January 1, |
| | | 2001 (September 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.1). |
| | | |
| Sempra Energy |
| | | |
| 10.37 | | Sempra Energy Executive Incentive Plan effective January 1, 2003 (2002 Sempra Energy |
| | | Form 10-K, Exhibit 10.09). |
| | | |
| 10.38 | | Amended and Restated Sempra Energy Severance Pay Agreement between Sempra Energy |
| | | and Debra L. Reed (Sempra Energy Form 8-K filed on July 1, 2011, Exhibit 10.1). |
| | | |
| 10.39 | | Amendment to the Amended and Restated Severance Pay Agreement |
| | | between Sempra Energy and Mark A. Snell (Sempra Energy Form 8-K filed on |
| | | September 15, 2011, Exhibit 10.1). |
| | | |
| 10.40 | | Amended and Restated Sempra Energy Severance Pay Agreement between Sempra Energy |
| | | and Mark A. Snell, dated November 4, 2008 (2014 Sempra Energy Form 10-K, Exhibit 10.53). |
| | | |
| 10.41 | | Severance Pay Agreement between Sempra Energy and Joseph A. Householder (Sempra |
| | | Energy Form 8-K filed on September 15, 2011, Exhibit 10.2). |
| | | |
| 10.42 | | Severance Pay Agreement between Sempra Energy and Martha B. Wyrsch, dated September |
| | | 3, 2013 (2013 Sempra Energy Form 10-K, Exhibit 10.57). |
| | | |
| 10.43 | | Severance Pay Agreement between Sempra Energy and Steven D. Davis, dated December 31, |
| | | 2011 (2014 Sempra Energy Form 10-K, Exhibit 10.68). |
| | | |
| 10.44 | | Severance Pay Agreement between Sempra Energy and G. Joyce Rowland (2011 Sempra |
| | | Energy Form 10-K, Exhibit 10.26). |
| | | |
| 10.45 | | Severance Pay Agreement between Sempra Energy and Trevor Mihalik (June 30, 2012 |
| | | Sempra Energy Form 10-Q, Exhibit 10.3). |
| | | |
| 10.46 | | Form of Sempra Energy Non-Employee Directors’ Restricted Stock Unit Award (2014 Sempra |
| | | Energy Form 10-K, Exhibit 10.59). |
| | | |
| 10.47 | | Form of Sempra Energy Long Term Incentive Plan, Restricted Stock Unit Award |
| | | for Sempra Energy’s Board of Directors (Sempra Energy June 30, 2010 Form 10-Q, Exhibit |
| | | 10.2). |
| | | |
| 10.48 | | Form of Sempra Energy 2008 Non-Employee Directors’ Stock Plan, Nonqualified Stock |
| | | Option Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.5). |
| | | |
| 10.49 | | Form of Sempra Energy 1998 Non-Employee Directors’ Stock Plan Non-Qualified Stock |
| | | Option Agreement (2006 Sempra Energy Form 10-K, Exhibit 10.09). |
| | | |
| 10.50 | | Amendment and Restatement of Sempra Energy 1998 Non-Employee Directors’ Stock Plan |
| | | effective March 2, 1999 (2014 Sempra Energy Form 10-K, Exhibit 10.63). |
| | | |
| 10.51 | | Sempra Energy 1998 Non-Employee Directors’ Stock Plan (Registration Statement on Form |
| | | S-8 Sempra Energy Registration Statement No. 333-56161 dated June 5, 1998, Exhibit 4.2). |
| | | |
| 10.52 | | Sempra Energy Amended and Restated Sempra Energy Retirement Plan for Directors (June |
| | | 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.7). |
| | | |
| Sempra Energy / San Diego Gas & Electric Company |
| 10.53 | | Form of Sempra Energy and San Diego Gas & Electric Company Executive Incentive |
| | | Compensation Plan (2013 Sempra Energy Form 10-K, Exhibit 10.64). |
| | | |
| 10.54 | | Severance Pay Agreement between Sempra Energy and Jeffrey W. Martin, dated April 3, |
| | | 2010 (2013 Sempra Energy Form 10-K, Exhibit 10.65). |
| | | |
| 10.55 | | Severance Pay Agreement between Sempra Energy and James P. Avery, dated February 18, |
| | | 2013 (Sempra Energy March 31, 2013 Form 10-Q, Exhibit 10.2). |
| | | |
| 10.56 | | Severance Pay Agreement between Sempra Energy and Erbin Keith, dated February 18, 2013 |
| | | (Sempra Energy March 31, 2013 Form 10-Q, Exhibit 10.5). |
| | | |
| Sempra Energy / Southern California Gas Company |
| 10.57 | | Form of Sempra Energy and Southern California Gas Company Executive Incentive |
| | | Compensation Plan (2013 Sempra Energy Form 10-K, Exhibit 10.71). |
| | | |
| 10.58 | | Severance Pay Agreement between Sempra Energy and John C. Baker, dated February 18, |
| | | 2013 (2014 Sempra Energy Form 10-K, Exhibit 10.67). |
| | | |
| 10.59 | | Severance Pay Agreement between Sempra Energy and Lee Schavrien, dated February 18, |
| | | 2013 (Sempra Energy March 31, 2013 Form 10-Q, Exhibit 10.3). |
| | | |
| 10.60 | | Severance Pay Agreement between Sempra Energy and Dennis Arriola (September 30, 2012 |
| | | Sempra Energy Form 10-Q, Exhibit 10.1). |
| | | |
| 10.61 | | Severance Pay Agreement between Sempra Energy and J. Bret Lane, dated August 4, 2012 |
| | | (2013 Sempra Energy Form 10-K, Exhibit 10.72). |
| | | |
| 10.62 | | Severance Pay Agreement between Sempra Energy and Robert M. Schlax, dated January 17, |
| | | 2014 (2013 Sempra Energy Form 10-K, Exhibit 10.66). |
| | | |
| 10.63 | | Severance Pay Agreement between Sempra Energy and Bruce Folkmann, dated |
| | | August 4, 2012. |
| | | |
| 10.64 | | Severance Pay Agreement between Sempra Energy and Sharon L. Tomkins, dated |
| | | August 30, 2014. |
| | | |
| Nuclear |
| | | |
| Sempra Energy / San Diego Gas & Electric Company |
| 10.65 | | Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre |
| | | Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit |
| | | 10.7). |
| | | |
| 10.66 | | Amendment No. 1 to the Qualified CPUC Decommissioning Master Trust Agreement dated |
| | | September 22, 1994 (see Exhibit 10.65 above) (1994 SDG&E Form 10-K, Exhibit 10.56). |
| | | |
| 10.67 | | Second Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.65 above) (1994 SDG&E Form 10-K, Exhibit 10.57). |
| | | |
| 10.68 | | Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.65 above) (1996 SDG&E Form 10-K, Exhibit 10.59). |
| | | |
| 10.69 | | Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.65 above) (1996 SDG&E Form 10-K, Exhibit 10.60). |
| | | |
| 10.70 | | Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.65 above) (1999 SDG&E Form 10-K, Exhibit 10.26). |
| | | |
| 10.71 | | Sixth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.65 above) (1999 SDG&E Form 10-K, Exhibit 10.27). |
| | | |
| 10.72 | | Seventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated December 24, 2003 (see Exhibit 10.65 above) (2003 Sempra Energy Form 10-K, Exhibit |
| | | 10.42). |
| | | |
| 10.73 | | Eighth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated October 12, 2011 (see Exhibit 10.65 above) (2011 SDG&E Form 10-K, Exhibit 10.70). |
| | | |
| 10.74 | | Ninth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated January 9, 2014 (see Exhibit 10.65 above) (2013 Sempra Energy Form 10-K, |
| | | Exhibit 10.83). |
| | | |
| 10.75 | | Tenth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated August 27, 2014 (see Exhibit 10.65 above) (Sempra Energy September 30, 2014 Form |
| | | 10-Q, Exhibit 10.1). |
| | | |
| 10.76 | | Eleventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated August 27, 2014 (see Exhibit 10.65 above) (Sempra Energy September 30, 2014 Form |
| | | 10-Q, Exhibit 10.2). |
| | | |
| 10.77 | | Twelfth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated August 27, 2014 (see Exhibit 10.65 above) (Sempra Energy September 30, 2014 Form |
| | | 10-Q, Exhibit 10.3). |
| | | |
| 10.78 | | Thirteenth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated January 1, 2015, (see Exhibit 10.65 above).which results in a change in Sempra Energy’s noncontrolling interest in IEnova from 18.9 percent to 33.6 percent for all periods presented; |
| |
▪ | the proceeds from the IEnova equity offerings were used to fund the acquisitions, instead of the bridge loan that was provided by Sempra Global to IEnova for the IEnova Pipelines acquisition, therefore interest expense on the commercial paper borrowings supporting the bridge loan is excluded for all periods presented; |
| | |
▪ | 10.79interest expense on the borrowings against Sempra Mexico’s revolving credit facility began when Ventika’s commercial operations commenced in April 2016; |
| | Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San |
▪ | equity earnings, net of income tax, from IEnova Pipelines that were previously included in Sempra Energy’s results have been excluded for both periods presented; |
| | Onofre Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, |
▪ | | | Exhibit 10.8). |
| | | |
| 10.80 | | First Amendmentthe gain related to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | (see Exhibit 10.79 above) (1996 SDG&E Form 10-K, Exhibit 10.62). |
| | | |
| 10.81 | | Second Amendment toremeasurement of our previously held equity interest in IEnova Pipelines has been included in the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station (see Exhibit 10.79 above) (1996 SDG&E Form 10-K, Exhibit 10.63). |
| | | |
| 10.82 | | Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station (see Exhibit 10.79 above) (1999 SDG&E Form 10-K, Exhibit 10.31). |
| | | |
| 10.83 | | Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station (see Exhibit 10.79 above) (1999 SDG&E Form 10-K, Exhibit 10.32). |
| | | |
| 10.84 | | Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified |
| | | CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station |
| | | dated December 24, 2003 (see Exhibit 10.79 above) (2003 Sempra Energy Form 10-K, Exhibit |
| | | 10.48). |
| | | |
| 10.85 | | Sixth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated October 12, 2011 (see Exhibit 10.79 above) (2011 SDG&E Form 10- |
| | | K, Exhibit 10.77). |
| | | |
| 10.86 | | Seventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated January 9, 2014 (see Exhibit 10.79 above) (2013 Sempra Energy |
| | | Form 10-K, Exhibit 10.91). |
| | | |
| 10.87 | | Eighth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated August 27, 2014 (see Exhibit 10.79 above) (Sempra Energy |
| | | September 30, 2014 Form 10-Q, Exhibit 10.4). |
| | | |
| 10.88 | | Ninth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated August 27, 2014 (see Exhibit 10.79 above) (Sempra Energy |
| | | September 30, 2014 Form 10-Q, Exhibit 10.5). |
| | | |
| 10.89 | | Tenth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated August 27, 2014 (see Exhibit 10.79 above) (Sempra Energy |
| | | September 30, 2014 Form 10-Q, Exhibit 10.6). |
| | | |
| 10.90 | | Eleventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non- |
| | | Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear |
| | | Generating Station dated January 1, 2015 (see Exhibit 10.79 above). |
| | | |
| 10.91 | | U. S. Department of Energy contract for disposal of spent nuclear fuel and/or high-level |
| | | radioactive waste, entered into between the DOE and Southern California Edison Company, as |
| | | agent for SDG&E and others; Contract DE-CR01-83NE44418, dated June 10, 1983 (1988 |
| | | SDG&E Form 10-K, Exhibit 10N). |
| | | |
| | | |
| 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 for the yearsyear ended December 31, 2015, 2014, 2013, 2012 and 2011.accordingly, the year ended December 31, 2016 was adjusted to exclude the gain; and |
| |
▪ | | | |
| San Diego Gas & Electric Company |
| 12.2 | | San Diego Gas & Electric Computation of Ratio of Earnings to Combined Fixed Charges and |
| | | Preferred Stock Dividends foracquisition-related transaction costs have been included in the yearsyear ended December 31, 2015, 2014, 2013, 2012and accordingly, the year ended December 31, 2016 was adjusted to exclude them. |
Most of Sempra Mexico’s operations, including IEnova Pipelines and Ventika, use the U.S. dollar as their functional currency.
SEMPRA RENEWABLES
On July 10, 2017, Sempra Renewables paid $124 million in cash for an asset acquisition of a portfolio of four solar projects located in Fresno County, California, that were under construction. We placed three of the four projects into service in the fourth quarter of 2017 and expect to place the fourth project into service in the first half of 2018. When fully constructed, the portfolio will be capable of producing up to 200 MW of solar power. The solar projects are fully contracted under four long-term PPAs, with an average contract term of 18 years.
In July 2016, Sempra Renewables acquired a 100-percent interest in a 100-MW wind farm in Huron County, Michigan, with a 15-year PPA, for a total purchase price of $22 million. Sempra Renewables paid $18 million in cash on the acquisition date and paid the remaining $4 million in cash on achievement of certain construction milestones in the fourth quarter of 2016. We placed this wind farm into service in November 2017.
In March 2015, Sempra Renewables invested $8 million to acquire a 100-percent interest in a 78-MW wind development project in Stearns County, Minnesota. The wind farm has a 20-year PPA with a load serving entity and began commercial operation in December 2016.
PENDING ACQUISITION
SEMPRA ENERGY
Energy Future Holdings Corp.
On August 21, 2017, Sempra Energy entered into an Agreement and Plan of Merger, as supplemented by a Waiver Agreement dated October 3, 2017 and an amendment dated February 15, 2018 (together referred to as the Merger Agreement), with Energy Future Holdings Corp., the indirect owner of 80.03 percent of Oncor Electric Delivery Company LLC. Oncor is a regulated electric distribution and transmission business that operates the largest distribution and transmission system in Texas. Following closing, this acquisition will expand our regulated earnings base, while serving as a platform for future growth in the Texas energy market and U.S. Gulf Coast region. Under the Merger Agreement, we will pay the Merger Consideration of $9.45 billion in cash.
Pursuant to the Merger Agreement and subject to the satisfaction of certain closing conditions described below, EFH will be merged with an indirect subsidiary of Sempra Energy, with EFH continuing as the surviving company and an indirect, wholly owned subsidiary of Sempra Energy (the Merger), as follows:
|
| |
The foregoing is a simplified ownership structure that does not show all the subsidiaries of, or other equity interests owned by, these entities. |
TTI, an investment vehicle indirectly owned by third parties unaffiliated with EFH or Sempra Energy, owns 19.75 percent of Oncor’s outstanding membership interests, and certain current and former directors and officers of Oncor indirectly beneficially own 0.22 percent of Oncor’s outstanding membership interests through their ownership of Class B membership interests in OMI. On October 3, 2017, Sempra Energy provided written confirmation to Oncor Holdings and Oncor that, contemporaneously with the closing of the Merger, equivalent value (approximately $25.9 million) will be provided in exchange for the Class B membership interests in OMI for cash or, if mutually agreed by the parties, alternative benefit and/or incentive plans. The consummation of the Merger is not conditioned on the acquisition of the interest in OMI, and there has been no formal agreement by us or the owners of these interests to accept the terms of our written confirmation.
Merger Consideration and Financing
Under the Merger Agreement, Sempra Energy will pay Merger Consideration of $9.45 billion in cash. We intend to initially finance the Merger Consideration of $9.45 billion, as well as associated transaction costs, with the net proceeds from debt and equity issuances, including proceeds from the common stock, mandatory convertible preferred stock and debt offerings completed in January 2018, which we discuss in Note 18, and initial additional financing consisting of up to $2.7 billion aggregate principal amount of commercial paper, although we may reduce the amount of commercial paper by borrowings under our revolving credit facilities and cash from operations. We expect to ultimately fund approximately 65 percent of the Merger Consideration, along with the associated transaction costs, with the net proceeds from sales of Sempra Energy common stock and other equity securities and approximately 35 percent with the net proceeds from issuances of Sempra Energy debt securities. However, we
may use cash from operations and proceeds from asset sales in place of some of the equity financing. Some of the equity issuances will likely occur following the Merger, including common stock to be sold pursuant to the forward sale agreements entered into in connection with the common stock offering discussed in Note 18, to repay outstanding indebtedness, including indebtedness we incur to initially finance the Merger Consideration and associated transaction costs. The total amount of equity we ultimately issue may be reduced by cash from operations and proceeds from asset sales.
In addition, we have agreed that, within 60 days of the Merger, we will contribute our proportionate share of the aggregate investment in Oncor in an amount necessary for Oncor to achieve a capital structure consisting of 57.5 percent long-term debt and 42.5 percent equity, as calculated for regulatory purposes.
We have incurred transaction costs of $43 million as of December 31, 2017. These costs are included in Sundry on the Sempra Energy Consolidated Balance Sheet, and will be charged against related gross proceeds of equity offerings, debt offerings and/or included in the basis of EFH’s equity method investment in Oncor Holdings upon consummation of the Merger. If the Merger does not occur, the transaction costs that would be included in the basis of EFH’s equity method investment in Oncor Holdings will be expensed.
Ring-Fencing
In April 2014, EFH and the substantial majority of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. The bankruptcy does not include Oncor Holdings or Oncor. Certain existing “ring-fencing” measures, governance mechanisms and restrictions will remain in effect following the Merger, which are intended to enhance Oncor Holdings’ and Oncor’s separateness from their owners and to mitigate the risk that these entities would be negatively impacted by the bankruptcy of, or other adverse financial developments affecting, EFH or its other subsidiaries or the owners of EFH. In accordance with the ring-fencing measures and commitments made by Sempra Energy as part of the Joint Application to the PUCT for regulatory approval of the Merger, and the Stipulation with key stakeholders entered into in connection with that proceeding, Sempra Energy and Oncor will be subject to certain restrictions following the Merger. Sempra Energy will not control Oncor Holdings or Oncor, and the ring-fencing measures, governance mechanisms and restrictions will limit our ability to direct the management, policies and operations of Oncor Holdings and Oncor, including the deployment or disposition of their assets, declarations of dividends, strategic planning and other important corporate issues and actions. These limitations include limited representation on the Oncor Holdings and Oncor boards of directors. Following consummation of the Merger, if the Stipulation is approved by the PUCT, the board of directors of Oncor is expected to consist of thirteen members and be constituted as follows:
| |
▪ | seven members will be independent directors in all material respects under the rules of the New York Stock Exchange in relation to Sempra Energy and its subsidiaries and affiliated entities and any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings (and those directors must have no material relationship with Sempra Energy or its affiliates or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings at the time of the Merger or within the previous ten years) (“independent directors”); |
| |
▪ | two members will be designated by Sempra Energy; |
| |
▪ | two members will be appointed by TTI. If Sempra Energy acquires TTI’s interest in Oncor, the two board positions on the Oncor board of directors that TTI is entitled to appoint shall be eliminated, and the size of the Oncor board of directors will be reduced by two; and |
| |
▪ | two members will be current or former officers of Oncor (the Oncor Officer Directors). In order for a current or former officer of Oncor to be eligible to serve as an Oncor Officer Director, such officer cannot have worked for Sempra Energy or any of its affiliates (excluding Oncor Holdings and Oncor) or any other entity with a direct or indirect ownership interest in Oncor or Oncor Holdings in the ten years prior to such officer being employed by Oncor. Oncor Holdings, at the direction of EFIH (a subsidiary of EFH, which will be a wholly owned indirect subsidiary of, and controlled by, Sempra Energy following the Merger), will have the right to nominate and/or seek the removal of the Oncor Officer Directors, with such nomination or removal subject to approval by a majority of the Oncor board of directors. |
Oncor Holdings will also continue to have a majority of independent directors following the consummation of the Merger. Thus, Oncor Holdings and Oncor will continue to be managed independently (i.e., ring-fenced). Upon consummation of the acquisition, we will consolidate EFH, and EFH will continue to account for its ownership interest in Oncor Holdings as an equity method investment.
Settlement Agreement Regarding Joint Application
In December 2017 and January 2018, Sempra Energy and Oncor entered into a comprehensive Stipulation with 10 intervening parties, including the Staff of the PUCT, reflecting the parties’ settlement of all issues in the PUCT proceeding regarding the Joint
Application. Pursuant to the Stipulation, the parties have agreed that Sempra Energy’s acquisition of EFH is in the public interest and will bring substantial benefits.
The Stipulation includes regulatory commitments by Sempra Energy, most of which are similar to the regulatory commitments made by Sempra Energy as part of the Joint Application and are consistent with the “ring-fencing” measures currently in place. Sempra Energy and Oncor are entitled to seek modifications of the PUCT order to be entered in the proceedings regarding the Joint Application, which modifications would be subject to PUCT approval.
On January 5, 2018, Oncor, Sempra Energy and the Staff of the PUCT jointly filed with the PUCT, requesting that the PUCT approve the Merger consistent with the Stipulation. As of January 31, 2018, all 10 intervening parties including the Staff of the PUCT, had agreed to the Stipulation.
Closing Conditions
The Merger is subject to customary closing conditions, including the approval of the Bankruptcy Court, the PUCT, the Vermont Department of Financial Regulation, and the FERC, among others, as well as receipt of a private letter ruling from the IRS and the issuance of certain tax opinions regarding the Merger.
On September 6, 2017, the Bankruptcy Court approved EFH’s and EFIH’s entry into the Merger Agreement. Under the terms of the Merger Agreement, a $190 million termination fee would be owed to Sempra Energy if EFH or EFIH terminates the Merger Agreement in certain circumstances and consummates an alternative proposal with a third party.
On October 5, 2017, Sempra Energy and Oncor filed a joint application with the PUCT and an application with the FERC seeking approval of the Merger. On October 12, 2017, the ALJ in the PUCT proceeding issued an order deeming the joint application sufficient. On October 16, 2017, the PUCT set a procedural schedule to complete a review of Sempra Energy’s and Oncor’s change-in-control request within 180 days of the filing of the joint application on October 5, 2017.
On November 2, 2017, EFH received a supplemental private letter ruling from the IRS that provides that the Merger will not affect the tax-free treatment of the 2016 Vistra (formerly TCEH Corp.) spinoff from EFH. This ruling satisfies the closing condition described above.
On November 29, 2017, Sempra Energy received the necessary approval from the Vermont Department of Financial Regulation.
On December 11, 2017, the FERC issued an order authorizing the Merger, subject to customary conditions.
On February 26, 2018, the Bankruptcy Court held a hearing to consider confirmation of EFH’s plan of reorganization and final approval of the Merger. At the conclusion of the hearing, the Bankruptcy Court ruled that it will confirm the plan of reorganization and approve the Merger and that it will promptly enter an order reflecting such ruling.
We currently expect the Merger will close in the first half of 2018, although there can be no assurance that the Merger will be completed on that timetable, or at all.
ASSETS HELD FOR SALE
We classify assets as held for sale when management approves and commits to a formal plan to actively market an asset for sale and we expect the sale to close within the next 12 months. Upon classifying an asset as held for sale, we record the asset at the lower of its carrying value or its estimated fair value reduced for selling costs.
SEMPRA MEXICO
Termoeléctrica de Mexicali
In February 2016, management approved a plan to market and sell Sempra Mexico’s TdM, a 625-MW natural gas-fired power plant located in Mexicali, Baja California, Mexico. As a result, we stopped depreciating the plant and classified it as held for sale.
In connection with the sales process, in late September 2016 and early July 2017, Sempra Mexico received market information indicating that the fair value of TdM was less than its carrying value. After performing analysis of the information, Sempra Mexico reduced the carrying value of TdM by recognizing noncash impairment charges of $131 million ($111 million after-tax) in the third quarter of 2016 and $71 million in the second quarter of 2017, recorded in Impairment Losses on Sempra Energy’s Consolidated Statements of Operations. We discuss non-recurring fair value measures and the associated accounting impact on TdM in Note 10.
In connection with TdM’s classification as held for sale, we recognized an $8 million income tax benefit in 2017 and an $8 million income tax expense in 2016, for a deferred Mexican income tax liability related to the excess of carrying value over the tax basis. As the Mexican income tax on this outside basis difference is based on current carrying value, foreign exchange rates and inflation, such amount could change in future periods until the date of sale. We continue to actively pursue the sale of TdM, which we expect to be completed in 2018.
At December 31, 2017, the carrying amounts of the major classes of assets and related liabilities held for sale associated with TdM are as follows:
|
| | | |
ASSETS HELD FOR SALE AT DECEMBER 31, 2017 |
(Dollars in millions) |
| TdM |
Inventories | $ | 10 |
|
Other current assets | 59 |
|
Property, plant and equipment, net | 56 |
|
Other noncurrent assets | 2 |
|
Total assets held for sale | $ | 127 |
|
| |
Accounts payable | $ | 5 |
|
Other current liabilities | 38 |
|
Asset retirement obligations | 5 |
|
Other noncurrent liabilities | 1 |
|
Total liabilities held for sale | $ | 49 |
|
DIVESTITURES
SEMPRA RENEWABLES
Rosamond Solar
In December 2015, Sempra Renewables sold its 100-percent interest in Rosamond Solar, a development project located in Antelope Valley, California for $26 million in cash. Upon completion of the sale that was comprised of $18 million of net PP&E, Sempra Renewables recognized a pretax gain of $8 million ($5 million after-tax), which is included in Gain on Sale of Assets on our Consolidated Statement of Operations.
SEMPRA LNG & MIDSTREAM
EnergySouth Inc.
In September 2016, Sempra LNG & Midstream completed the sale of EnergySouth, the parent company of Mobile Gas and Willmut Gas, to Spire Inc. (formerly The Laclede Group, Inc.) for cash proceeds of $318 million, net of $2 million cash sold, with the buyer assuming debt of $67 million. We recognized a pretax gain on the sale of $130 million ($78 million after-tax) in the year ended December 31, 2016, in Gain on Sale of Assets on Sempra Energy’s Consolidated Statement of Operations. On September 12, 2016, Sempra LNG & Midstream deconsolidated EnergySouth.
The following table summarizes the deconsolidation:
|
| | | | |
DECONSOLIDATION OF SUBSIDIARY |
(Dollars in millions) |
| EnergySouth |
Proceeds from sale, net of transaction costs | $ | 304 |
|
Cash | (2 | ) |
Other current assets | (17 | ) |
Property, plant and equipment, net | (199 | ) |
Goodwill | (72 | ) |
Other noncurrent assets | (65 | ) |
Current liabilities | 25 |
|
Long-term debt | 67 |
|
Other noncurrent liabilities | 89 |
|
Gain on sale | $ | 130 |
|
Investment in Rockies Express
In March 2016, Sempra LNG & Midstream entered into an agreement to sell its 25-percent interest in Rockies Express to a subsidiary of Tallgrass Development, LP for cash consideration of $440 million, subject to adjustment at closing. The transaction closed in May 2016 for total cash proceeds of $443 million.
At the date of the agreement, the carrying value of Sempra LNG & Midstream’s investment in Rockies Express was $484 million. Following the execution of the agreement, Sempra LNG & Midstream measured the fair value of its equity method investment at $440 million, and recognized a $44 million ($27 million after-tax) impairment in Equity Earnings, Before Income Tax, on the Sempra Energy Consolidated Statement of Operations. We discuss non-recurring fair value measures and the associated accounting impact on our investment in Rockies Express in Note 10.
We discuss Sempra LNG & Midstream’s 2016 permanent release of pipeline capacity that it held with Rockies Express and others in Note 15.
Mesquite Power Plant
In April 2015, Sempra LNG & Midstream sold the remaining 625-MW block of the Mesquite Power plant that was classified as held for sale at December 31, 2014, together with a related power sales contract, for net cash proceeds of $347 million. We recognized a pretax gain on the sale of $61 million ($36 million after-tax), included in Gain on Sale of Assets on our Consolidated Statement of Operations.
|
| | | | |
| | | and 2011. |
| | | |
| Southern California Gas Company |
| 12.3 | | Southern California Gas Company Computation of Ratio of Earnings to Combined Fixed |
| | | Charges and Preferred Stock Dividends for the years ended December 31, 2015, 2014, 2013, |
| | | 2012 and 2011. |
| | | |
| | | |
| EXHIBIT 13 -- ANNUAL REPORT TO SECURITY HOLDERS |
| | | |
| Sempra Energy / San Diego Gas & Electric Company / Southern California Gas Company |
| 13.1 | | Sempra Energy 2015 Annual Report to Shareholders. (Such report, except for the portions |
| | | thereof which are expressly incorporated by reference in this Annual Report, is furnished for |
| | | the information of the Securities and Exchange Commission and is not to be deemed “filed” as |
| | | part of this Annual Report). |
| | | |
| | | |
| EXHIBIT 14 -- CODE OF ETHICS |
| | | |
| San Diego Gas & Electric Company / Southern California Gas Company |
| 14.1 | | Sempra Energy Code of Business Conduct and Ethics for Board of Directors and Senior |
| | | Officers (also applies to directors and officers of San Diego Gas & Electric Company and |
| | | Southern California Gas Company) (2006 SDG&E and SoCalGas Forms 10-K, Exhibit |
| | | 14.01). |
| | | |
| | | |
| EXHIBIT 21 -- SUBSIDIARIES |
| | | |
| Sempra Energy |
| 21.1 | | Sempra Energy Schedule of Certain Subsidiaries at December 31, 2015. |
| | | |
| | | |
| EXHIBIT 23 -- CONSENTS OF EXPERTS AND COUNSEL |
| | | |
| 23.1 | | Consents of Independent Registered Public Accounting Firm and Report on Schedule, pages |
| | | 52 through 54. |
| | | |
| | | |
| 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. |
| | | |
| | | |
NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
We generally account for investments under the equity method when we have significant influence over, but do not have control of, these entities. In these cases, our pro rata shares of the entities’ net assets are included in Investments on the Consolidated Balance Sheets. We adjust each investment for our share of each investee’s earnings or losses, dividends, and other comprehensive income or loss. We evaluate the carrying value of unconsolidated entities for impairment under the U.S. GAAP provisions for equity method investments.
We provide the carrying value of our investments and earnings (losses) on these investments below:
|
| | | | | | | |
EQUITY METHOD AND OTHER INVESTMENT BALANCES |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
Sempra South American Utilities: | | | |
Eletrans(1) | $ | 16 |
| | $ | (8 | ) |
Sempra Mexico: | |
| | |
|
DEN | — |
| | 42 |
|
Energía Sierra Juárez(2) | 39 |
| | 38 |
|
IMG(3) | 221 |
| | 100 |
|
TAG(4) | 364 |
| | — |
|
Sempra Renewables: | |
| | |
|
Wind: | | | |
Auwahi Wind | 42 |
| | 41 |
|
Broken Bow 2 Wind | 32 |
| | 35 |
|
Cedar Creek 2 Wind | 72 |
| | 75 |
|
Flat Ridge 2 Wind | 255 |
| | 271 |
|
Fowler Ridge 2 Wind | 44 |
| | 43 |
|
Mehoopany Wind | 89 |
| | 92 |
|
Solar: | | | |
California solar partnership | 107 |
| | 113 |
|
Copper Mountain Solar 2 | 35 |
| | 33 |
|
Copper Mountain Solar 3 | 44 |
| | 42 |
|
Mesquite Solar 1 | 81 |
| | 86 |
|
Other | 12 |
| | 13 |
|
Sempra LNG & Midstream: | |
| | |
|
Cameron LNG JV(5) | 997 |
| | 997 |
|
Parent and other: | |
| | |
|
RBS Sempra Commodities | 67 |
| | 67 |
|
Total equity method investments | 2,517 |
| | 2,080 |
|
Other | 10 |
| | 17 |
|
Total | $ | 2,527 |
| | $ | 2,097 |
|
| EXHIBIT 32 -- SECTION 906 CERTIFICATIONS |
(1) | Reflects losses on forward exchange contracts entered into to manage the foreign currency exchange rate risk of the CLF relative to the U.S. dollar, related to certain construction commitments that are denominated in CLF. The contracts settle based on anticipated payments to vendors, generally monthly, ending in July 2018. |
| | |
(2) | Sempra EnergyThe carrying value of our equity method investment is $12 million higher than the underlying equity in the net assets of the investee due to the remeasurement of our retained investment to fair value in 2014. |
| |
(3) | 32.1The carrying value of our equity method investment is $5 million higher than the underlying equity in the net assets of the investee due to guarantees, which we discuss below. |
| | Statement of Sempra Energy’s Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350. |
(4) | The carrying value of our equity method investment is $130 million higher than the underlying equity in the net assets of the investee due to equity method goodwill. |
| | |
(5) | 32.2 | | StatementThe carrying value 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 99 -- ADDITIONAL EXHIBITS |
| | | |
| Sempra Energy / Southern California Gas Company |
| 99.1 | | Press Release, includingour equity method investment is $237 million and $190 million higher than the Proclamation of a State of Emergency, byunderlying equity in the Governornet assets of the State |
| | | of California, dated January 6,investee at December 31, 2017 and 2016, (Sempra Energyrespectively, primarily due to guarantees, which we discuss below, and SoCalGas Combined Form 8-K |
| | | filedinterest capitalized on January 7, 2016, Exhibit 99.1). |
| | | |
| | | |
| EXHIBIT 101 -- INTERACTIVE DATA FILE |
| | | |
| 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 Documentthe investment, as the joint venture has not commenced its planned principal operations. |
|
| | | | | | | | | | | |
EARNINGS (LOSSES) FROM EQUITY METHOD INVESTMENTS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Earnings (losses) recorded before income tax: | | | | | |
Sempra Renewables: | | | | | |
Wind: | | | | | |
Auwahi Wind | $ | 5 |
| | $ | 4 |
| | $ | 4 |
|
Broken Bow 2 Wind | (2 | ) | | (2 | ) | | (2 | ) |
Cedar Creek 2 Wind | (2 | ) | | (2 | ) | | (6 | ) |
Flat Ridge 2 Wind | (13 | ) | | (7 | ) | | (12 | ) |
Fowler Ridge 2 Wind | 4 |
| | 4 |
| | 4 |
|
Mehoopany Wind | (1 | ) | | — |
| | (1 | ) |
Solar: | | | | | |
California solar partnership | 7 |
| | 7 |
| | 6 |
|
Copper Mountain Solar 2 | 5 |
| | 6 |
| | 7 |
|
Copper Mountain Solar 3 | 8 |
| | 8 |
| | 8 |
|
Mesquite Solar 1 | 18 |
| | 17 |
| | 16 |
|
Other | — |
| | (1 | ) | | — |
|
Sempra LNG & Midstream: | |
| | |
| | |
|
Cameron LNG JV | 5 |
| | (2 | ) | | 5 |
|
Rockies Express Pipeline | — |
| | (26 | ) | | 79 |
|
Parent and other: | |
| | |
| | |
|
RBS Sempra Commodities | — |
| | — |
| | (4 | ) |
| $ | 34 |
| | $ | 6 |
| | $ | 104 |
|
Earnings (losses) recorded net of income tax(1): | |
| | |
| | |
|
Sempra South American Utilities: | |
| | |
| | |
|
Eletrans | $ | 4 |
| | $ | 3 |
| | $ | (4 | ) |
Sempra Mexico: | |
| | |
| | |
|
DEN | (13 | ) | | 5 |
| | — |
|
Energía Sierra Juárez | — |
| | 6 |
| | 6 |
|
IEnova Pipelines | — |
| | 64 |
| | 83 |
|
IMG | 45 |
| | — |
| | — |
|
TAG | 6 |
| | — |
| | — |
|
| $ | 42 |
| | $ | 78 |
| | $ | 85 |
|
GLOSSARY | |
(1) | As the earnings (losses) from these investments are recorded net of income tax, they are presented below the income tax expense line, so as not to impact our ETR. |
Our share of the undistributed earnings of equity method investments was $89 million and $44 million at December 31, 2017 and 2016, respectively. These balances do not include remaining distributions of $67 million associated with our investment in RBS Sempra Commodities and expected to be received from the partnership as it is dissolved, as we discuss below.
SEMPRA SOUTH AMERICAN UTILITIES
In February 2017, Sempra South American Utilities recorded the equitization of its $19 million note receivable due from Eletrans,
resulting in an increase in its investment in this unconsolidated joint venture. During the year ended December 31, 2017, Sempra South American Utilities invested cash of $1 million in Eletrans.
SEMPRA MEXICO
IEnova Pipelines, DEN and TAG
On September 26, 2016, IEnova completed the acquisition of the remaining 50-percent interest in IEnova Pipelines and IEnova Pipelines became a consolidated subsidiary. Prior to the acquisition date, IEnova owned 50 percent of IEnova Pipelines and accounted for its interest as an equity method investment. As of the acquisition date, IEnova accounted for IEnova Pipelines’ 50-percent interest in DEN as an equity method investment.
On November 15, 2017, IEnova acquired the remaining 50-percent interest in DEN, and DEN became a consolidated subsidiary. Since the acquisition date, IEnova accounts for DEN’s 50-percent interest in TAG as an equity method investment. We discuss these acquisitions in Note 3.
IMG
In June 2016, IMG, a joint venture between IEnova and a subsidiary of TransCanada, was awarded the right to build, own and operate the Sur de Texas-Tuxpan natural gas marine pipeline by the CFE. IEnova has a 40-percent interest in the project and accounts for its interest as an equity method investment, and TransCanada owns the remaining 60-percent interest. The marine pipeline is fully contracted under a 25-year natural gas transportation service contract with the CFE. We expect the project to be completed in the second half of 2018. During the years ended December 31, 2017 and 2016, Sempra Mexico invested cash of $72 million and $100 million respectively, in the IMG joint venture.
SEMPRA RENEWABLES
Sempra Renewables has 50-percent interests in wind and solar energy generation facilities in operation in the U.S. The generating capacities of the facilities are contracted under long-term PPAs. These facilities are accounted for under the equity method. During the years ended December 31, 2016 and 2015, Sempra Renewables invested cash of $18 million and $21 million, respectively, in its unconsolidated joint ventures.
SEMPRA LNG & MIDSTREAM
Rockies Express
As we discuss in Note 3, in May 2016, Sempra LNG & Midstream sold its 25-percent interest in Rockies Express, a partnership that operates a natural gas pipeline, REX, that links the Rocky Mountain region to the upper Midwest and the eastern U.S. In 2015, Sempra LNG & Midstream invested $113 million of cash in Rockies Express to repay project debt that matured in early 2015.
Cameron LNG JV
The Cameron LNG JV is a joint venture partnership that was formed in October 2014 among Sempra Energy and three project partners. The Cameron LNG existing regasification terminal that was contributed to the joint venture included two marine berths and three LNG storage tanks, and facilities capable of processing 1.5 Bcf of natural gas per day. The current liquefaction project, which is utilizing Cameron LNG JV’s existing facilities, is comprised of three liquefaction trains and is being designed to a nameplate capacity of 13.9 Mtpa of LNG, with an expected export capability of 12 Mtpa of LNG, or approximately 1.7 Bcf per day. As of October 2014, Sempra LNG & Midstream began accounting for its investment in Cameron LNG JV under the equity method.
During the years ended December 31, 2017, 2016 and 2015, Sempra LNG & Midstream capitalized $47 million, $47 million and $49 million, respectively, of interest related to this equity method investment that has not commenced planned principal operations. During the years ended December 31, 2017 and 2015, Sempra LNG & Midstream invested $1 million and $10 million, respectively, of cash in Cameron LNG JV.
Cameron LNG JV Financing
General. In August 2014, Cameron LNG JV entered into finance documents (collectively, Loan Facility Agreements) for senior secured financing in an initial aggregate principal amount of up to $7.4 billion under three debt facilities provided by the Japan Bank for International Cooperation (JBIC) and 29 international commercial banks, some of which will benefit from insurance coverage provided by Nippon Export and Investment Insurance (NEXI).
The Cameron LNG JV Loan Facility Agreements and related finance documents provide senior secured term loans with a maturity date of July 15, 2030. The proceeds of the loans will be used for financing the cost of development and construction of the three-train Cameron LNG project. The Loan Facility Agreements and related finance documents contain customary
representations and affirmative and negative covenants for project finance facilities of this kind with the lenders of the type participating in the Cameron LNG JV financing.
Interest. The weighted-average all-in cost of the loans outstanding under all the Loan Facility Agreements (and based on certain assumptions as to timing of drawdown) is 1.59 percent per annum over LIBOR prior to financial completion of the project and 1.78 percent per annum over LIBOR following financial completion of the project. The Loan Facility Agreements require Cameron LNG JV to hedge 50 percent of outstanding borrowings to fix the interest rate, beginning in 2016. The hedges are to remain in place until the debt principal has been amortized by 50 percent. In November 2014, Cameron LNG JV entered into floating-to-fixed interest rate swaps for approximately $3.7 billion notional amount, resulting in an effective fixed rate of 3.19 percent for the LIBOR component of the interest rate on the loans. In June 2015, Cameron LNG JV entered into additional floating-to-fixed interest rate swaps effective starting in 2020, for approximately $1.5 billion notional amount, resulting in an effective fixed rate of 3.32 percent for the LIBOR component of the interest rate on the loans.
Guarantees. In August 2014, Sempra Energy entered into agreements for the benefit of all of Cameron LNG JV’s creditors under the Loan Facility Agreements and related finance documents. Pursuant to these agreements, Sempra Energy has severally guaranteed 50.2 percent of Cameron LNG JV’s obligations under the Loan Facility Agreements and related finance documents, or a maximum amount of $3.9 billion. Guarantees for the remaining 49.8 percent of Cameron LNG JV’s senior secured financing have been provided by the other project partners. The Sempra Energy guarantee of 50.2 percent of Cameron LNG JV’s financing became effective upon effectiveness of the joint venture. Sempra Energy’s agreements and guarantees will terminate upon financial completion of the three-train Cameron LNG project, which is subject to satisfaction of certain conditions, including all three trains achieving commercial operations and meeting certain operational performance tests. We expect the project to achieve financial completion and the guarantees to be terminated approximately nine months after all three trains achieve commercial operation. Sempra Energy recorded a liability of $82 million in October 2014, with an associated carrying value of $26 million at December 31, 2017, for the fair value of its obligations associated with the Loan Facility Agreements and related finance documents, which constitute guarantees. This liability is being reduced on a straight-line basis over the duration of the guarantees by recognizing equity earnings from Cameron LNG JV, included in Equity Earnings, Before Income Tax.
In August 2014, Sempra Energy and the other project partners entered into a transfer restrictions agreement with Société Générale, as intercreditor agent for the lenders under the Loan Facility Agreements. Pursuant to the transfer restriction agreement, Sempra Energy agreed to certain restrictions on its ability to dispose of Sempra Energy’s indirect fully diluted economic and beneficial ownership interests in Cameron LNG JV. These restrictions vary over time. Prior to financial completion of the three-train Cameron LNG project, Sempra Energy must retain 37.65 percent of such interest in Cameron LNG JV. Starting six months after financial completion of the three-train Cameron LNG project, Sempra Energy must retain at least 10 percent of the indirect fully diluted economic and beneficial ownership interest in Cameron LNG JV. In addition, at all times, a Sempra Energy controlled (but not necessarily wholly owned) subsidiary must directly own 50.2 percent of the membership interests of the Cameron LNG JV.
Events of Default. Cameron LNG JV’s Loan Facility Agreements and related finance documents contain events of default customary for such financings, including events of default for: failure to pay principal and interest on the due date; insolvency of Cameron LNG JV; abandonment of the project; expropriation; unenforceability or termination of the finance documents; and a failure to achieve financial completion of the project by a financial completion deadline date of September 30, 2021 (with up to an additional 365 days extension beyond such date permitted in cases of force majeure). A delay in construction that results in a failure to achieve financial completion of the project by this financial completion deadline date would therefore result in an event of default under Cameron LNG JV’s financing and a potential demand on Sempra Energy’s guarantees.
Security. To support Cameron LNG JV’s obligations under the Loan Facility Agreements and related finance documents, Cameron LNG JV has granted security over all of its assets, subject to customary exceptions, and all equity interests in Cameron LNG JV have been pledged to HSBC Bank USA, National Association, as security trustee for the benefit of all of Cameron LNG JV’s creditors. As a result, an enforcement action by the lenders taken in accordance with the finance documents could result in the exercise of such security interests by the lenders and the loss of ownership interests in Cameron LNG JV by Sempra Energy and the other project partners.
The security trustee under Cameron LNG JV’s financing can demand that a payment be made by Sempra Energy under its guarantees of Sempra Energy’s 50.2-percent share of senior debt obligations due and payable either on the date such amounts were due from Cameron LNG JV (taking into account cure periods) in the event of a failure by Cameron LNG JV to pay such senior debt obligations when they become due or within 10 business days in the event of an acceleration of senior debt obligations under the terms of the finance documents. If an event of default occurs under the Sempra Energy completion agreement, the security trustee can demand that Sempra Energy purchase its 50.2-percent share of all then outstanding senior debt obligations within five business days (other than in the case of a bankruptcy default, which is automatic).
RBS SEMPRA COMMODITIES
RBS Sempra Commodities is a United Kingdom limited liability partnership formed by Sempra Energy and RBS in 2008 to own and operate the commodities-marketing businesses previously operated through wholly owned subsidiaries of Sempra Energy. We and RBS sold substantially all of the partnership’s businesses and assets in four separate transactions completed in 2010 and 2011. We account for our investment in RBS Sempra Commodities under the equity method, and report miscellaneous costs since the sale of the business in Parent and Other.
In April 2011, we and RBS entered into a letter agreement (Letter Agreement) which amended certain provisions of the agreements that formed RBS Sempra Commodities. The Letter Agreement addresses the wind-down of the partnership and the distribution of the partnership’s remaining assets. The investment balance of $67 million at December 31, 2017 reflects remaining distributions expected to be received from the partnership in accordance with the Letter Agreement. The timing and amount of distributions, if any, may be impacted by the matters we discuss related to RBS Sempra Commodities in Note 15 in “Legal Proceedings – Other Litigation.” In addition, amounts may be retained by the partnership for an extended period of time to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership.
In connection with the Letter Agreement described above, we also released RBS from its indemnification obligations with respect to items for which JP Morgan, one of the buyers of the partnership’s businesses, has agreed to indemnify us.
SUMMARIZED FINANCIAL INFORMATION
We present summarized financial information below, aggregated for all of our equity method investments for the periods in which we were invested in the entity. The amounts below represent the aggregate financial position and results of operations of 100 percent of each of Sempra Energy’s equity method investments.
|
| | | | | | | | | | | |
SUMMARIZED FINANCIAL INFORMATION |
(Dollars in millions) |
| Years ended December 31, |
| 2017(1) | | 2016(2) | | 2015 |
Gross revenues | $ | 846 |
| | $ | 1,079 |
| | $ | 1,533 |
|
Operating expense | (590 | ) | | (726 | ) | | (845 | ) |
Income from operations | 256 |
| | 353 |
| | 688 |
|
Interest expense | (217 | ) | | (127 | ) | | (312 | ) |
Net income/Earnings(3) | 116 |
| | 252 |
| | 440 |
|
|
| | | | | | | |
| At December 31, |
| 2017(1) | | 2016(2) |
Current assets | $ | 974 |
| | $ | 704 |
|
Noncurrent assets | 14,087 |
| | 9,970 |
|
Current liabilities | 797 |
| | 629 |
|
Noncurrent liabilities | 9,809 |
| | 6,627 |
|
| |
(1) | On November 15, 2017, IEnova completed the asset acquisition of PEMEX’s 50-percent interest in DEN, increasing its ownership percentage to 100 percent. At December 31, 2017, DEN is no longer an equity method investment. |
| |
(2) | On September 26, 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, increasing its ownership percentage to 100 percent, and on May 9, 2016, Sempra LNG & Midstream sold its 25-percent interest in Rockies Express. At December 31, 2016, IEnova Pipelines and Rockies Express are no longer equity method investments. |
| |
(3) | Except for our investments in South America and Mexico, there was no income tax recorded by the entities, as they are primarily domestic partnerships. |
GUARANTEES
Project financing at our solar and wind joint ventures generally requires the joint venture partners, for each partner’s interest, to return cash to the projects in the event that the projects do not meet certain cash flow criteria or in the event that the projects’ debt service, O&M, and firm transmission and PTC reserve accounts are not maintained at specific thresholds. In some cases, the joint venture partners have provided guarantees to the lenders in lieu of the projects funding the reserve account requirements. We recorded liabilities for the fair value of certain of our obligations associated with these guarantees and the liabilities are being amortized over their expected lives. The outstanding loans at our solar and wind joint ventures are not guaranteed by the partners, but are secured by project assets.
IEnova has an indirect 40-percent ownership interest and TransCanada has an indirect 60-percent ownership interest in IMG. IEnova and TransCanada have each provided guarantees to third parties associated with construction of IMG’s Sur de Texas-Tuxpan natural gas marine pipeline. The aggregate amount of the obligations guaranteed by IEnova shall not exceed $288 million and will terminate upon completion of all guaranteed obligations. IEnova expects the construction giving rise to these guarantees to be completed by the end of 2018.
At December 31, 2017, we provided guarantees aggregating a maximum of $183 million with an associated aggregated carrying value of $6 million for guarantees related to project financing. In addition, at December 31, 2017, we provided guarantees to joint ventures aggregating a maximum of $370 million with an associated aggregated carrying value of $3 million, primarily related to PPAs and EPC contracts.
NOTE 5. DEBT AND CREDIT FACILITIES
LINES OF CREDIT
AtDecember 31, 2017, Sempra Energy Consolidated had an aggregate of $4.3 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 principal terms of which we describe below. Available unused credit on these lines at December 31, 2017 was approximately $3.0 billion. Our foreign operations have additional general purpose credit facilities aggregating $1.8 billion at December 31, 2017. Available unused credit on these lines totaled $1.4 billion at December 31, 2017.
|
| | | | | | | | | | | | | |
PRIMARY U.S. COMMITTED LINES OF CREDIT |
(Dollars in millions) |
| | | At December 31, 2017 |
| | | Total facility | | Commercial paper outstanding(1) | | Available unused credit |
Sempra Energy(2) | | $ | 1,000 |
| | $ | — |
| | $ | 1,000 |
|
Sempra Global(3) | | 2,335 |
| | (931 | ) | | 1,404 |
|
California Utilities(4): | | | | | | |
| SDG&E | | 750 |
| | (253 | ) | | 497 |
|
| SoCalGas | | 750 |
| | (116 | ) | | 634 |
|
| Less: subject to a combined limit of $1 billion for both utilities | | (500 | ) | | — |
| | (500 | ) |
| | | 1,000 |
| | (369 | ) | | 631 |
|
Total | | $ | 4,335 |
| | $ | (1,300 | ) | | $ | 3,035 |
|
| | | | |
AB(1) | Assembly BillBecause the commercial paper programs are supported by these lines, we reflect the amount of commercial paper outstanding as a reduction to the available unused credit. |
| | FTA | Free Trade Agreement |
Annual Report(2) | 2015 Annual ReportThe facility also provides for issuance of up to Shareholders$400 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. No letters of credit were outstanding at December 31, 2017. |
| | GHG | Greenhouse gas |
ASU(3) | Accounting Standards UpdateSempra Energy guarantees Sempra Global’s obligations under the credit facility. |
| |
(4) | The Governor's Order | Proclamationfacility also provides for the issuance of letters of credit on behalf of each utility subject to a Statecombined letter of Emergency,credit commitment of $250 million for both utilities. The amount of borrowings otherwise available under the facility is reduced by the Governoramount of outstanding letters of credit. No letters of credit were outstanding at December 31, 2017. |
Related to the committed lines of credit in the table above:
| |
▪ | Each is a 5-year syndicated revolving credit agreement expiring in October 2020. |
| |
▪ | Citibank N.A. serves as administrative agent for the Sempra Energy and Sempra Global facilities and JPMorgan Chase Bank, N.A. serves as administrative agent for the California Utilities combined facility. |
| |
▪ | Each facility has a syndicate of 21 lenders. No single lender has greater than a 7-percent share in any facility. |
| |
▪ | Sempra Energy, SDG&E and SoCalGas must maintain a ratio of indebtedness to total capitalization (as defined in each agreement) of no more than 65 percent at the end of each quarter. Each entity is in compliance with this and all other financial covenants under its respective credit facility at December 31, 2017. |
| |
▪ | Borrowings bear interest at benchmark rates plus a margin that varies with Sempra Energy’s credit ratings in the case of the StateSempra Energy and Sempra Global lines of credit, and with the borrowing utility’s credit rating in the case of the California dated January 6, 2016Utilities line of credit. |
| |
Bay Gas▪ | Bay Gas Storage Company, Ltd. | | IEnova | Infraestructura Energética Nova, S.A.B. de C.V. |
Bcf | Billion cubic feet (of natural gas) | | IOUs | Investor-owned utilities |
BMV | La Bolsa Mexicana de Valores, S.A.B. de C.V. (the Mexican Stock Exchange) | | IRS | Internal Revenue Service |
The California Utilities | San Diego Gas & Electric CompanyUtilities’ obligations under their agreement are individual obligations, and Southern California Gas Company | | ISFSI | Independent spent fuel storage installations |
Cameron LNG JV | Cameron LNG Holdings, LLC | | ISO | Independent System Operator |
CARB | California Air Resources Board | | kV | Kilovolt |
CCC | California Coastal Commission | | kW | Kilowatt |
CDEC | Centros de Despacho Económico de Carga (Centers for Economic Load Dispatch) (Chile) | | LA Storage | LA Storage, LLC |
CDEC-SIC | Sistema Interconectado Central (Central Interconnected System) (Chile) | | LNG | Liquefied natural gas |
CDEC-SING | Sistema Interconectado del Norte Grande (Northern Interconnected System) (Chile) | | Luz del Sur | Luz del Sur S.A.A. and its subsidiaries |
CEC | California Energy Commission | | Mississippi Hub | Mississippi Hub, LLC |
CFE | Comisión Federal de Electricidad | | Mobile Gas | Mobile Gas Service Corporation |
Chilquinta Energía | Chilquinta Energía S.A. and its subsidiaries | | Mtpa | Million tonnes per annum |
CNBV | Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission) | | MW | Megawatt |
CNE | Comisión Nacional de Energídefault by one utility would not constitute a (National Energy Commission) (Chile) | | MWh | Megawatt hours |
COES | Comité de Operación Económica del Sistema Interconectado Nacional (Committeedefault by the other utility or preclude borrowings by, or the issuance of Economic Operationletters of credit on behalf of, the National Interconnected System) (Peru) | | NEM | Net energy metering |
CPUC | California Public Utilities Commission | | NRC | Nuclear Regulatory Commission |
CRE | Comisión Reguladora de Energía (Energy Regulatory Commission) (Mexico) | | NYK | Nippon Yusen Kabushiki Kaisha |
DOE | U.S. Department of Energy | | OSINERGMIN | Organismo Supervisor de la Inversión en Energía y Minería (Energy and Mining Investment Supervisory Body) (Peru) |
DOGGR | California Department of Conservation's Division of Oil, Gas, and Geothermal Resources | | PEMEX | Petróleos Mexicanos (Mexican state-owned oil company) |
DOT | U.S. Department of Transportation | | PG&E | Pacific Gas and Electric Company |
Edison | Southern California Edison Company | | PHMSA | Pipeline and Hazardous Materials Safety Administration |
EPA | Environmental Protection Agency | | PSEP | Pipeline Safety Enhancement Plan |
EPC | Engineering, procurement and construction | | QF | Qualifying Facility |
ERR | Eligible Renewable Energy Resource | | RBS Sempra Commodities | RBS Sempra Commodities LLP |
FERC | Federal Energy Regulatory Commission | | REX | Rockies Express pipelineother utility. |
On January 17, 2018, pursuant to the terms of the Sempra Energy and Sempra Global credit facilities, the amounts available under the lines of credit were increased by $250 million, from $1.0 billion to $1.25 billion, for Sempra Energy and by $850 million, from $2.335 billion to $3.185 billion, for Sempra Global. This additional borrowing capacity is available to us for working capital, capital expenditures and other general corporate purposes, and is intended to provide us with additional liquidity and to support commercial paper that we may utilize from time to time to fund our strategic and growth initiatives.
|
| | | | | | | | | | | | | | |
CREDIT FACILITIES IN SOUTH AMERICA AND MEXICO |
(U.S. dollar equivalent in millions) |
| | | | At December 31, 2017 |
| | Denominated in | | Total facility | | Amount outstanding | | Available unused credit |
Sempra South American Utilities(1): | | | | | | | |
| Peru(2) | Peruvian sol | | $ | 465 |
| | $ | (169 | ) | (3) | $ | 296 |
|
| Chile | Chilean peso | | 115 |
| | — |
| | 115 |
|
Sempra Mexico: | | | | | | | |
| IEnova(4) | U.S. dollar | | 1,170 |
| | (137 | ) | | 1,033 |
|
Total | | | $ | 1,750 |
| | $ | (306 | ) | | $ | 1,444 |
|
(1) The credit facilities were entered into to finance working capital and for general corporate purposes and expire between 2018 and 2021.
(2) The Peruvian facilities require a debt to equity ratio of no more than 170 percent, with which we were in compliance at December 31, 2017.
(3) Includes bank guarantees of $18 million.
(4) Five-year revolver expiring in August 2020 with a syndicate of eight lenders.
Outside of these domestic and foreign committed credit facilities, we have bilateral unsecured standby letter of credit capacity with select lenders that is uncommitted and supported by reimbursement agreements. At December 31, 2017, we had approximately $629 million in standby letters of credit outstanding under these agreements.
WEIGHTED-AVERAGE INTEREST RATES
The weighted-average interest rates on the total short-term debt at Sempra Energy Consolidated were 1.92 percent and 1.51 percent at December 31, 2017 and 2016, respectively. The weighted-average interest rate on total short-term debt at SDG&E was 1.65 percent at December 31, 2017. The weighted-average interest rates on total short-term debt at SoCalGas were 1.64 percent and 0.75 percent at December 31, 2017 and 2016, respectively.
BRIDGE FACILITY RELATED TO THE PENDING ACQUISITION OF ENERGY FUTURE HOLDINGS CORP.
At December 31, 2017, Sempra Energy had a commitment letter from a syndicate of banks, subject to customary conditions, for a $4.0 billion, 364-day senior unsecured bridge facility to backstop a portion of our obligations to pay the Merger Consideration for the acquisition of EFH, which we discuss in Note 3. The $4.0 billion commitment is reduced by the amount of funds received through Sempra Energy’s sales of equity securities and debt securities, subject in each case to certain exceptions, and increases in our borrowing capacity under our existing revolving credit facilities. At December 31, 2017, we had no amounts outstanding under this bridge facility. Following the completion of the common stock offering and the mandatory convertible preferred stock offering, which closed on January 9, 2018, the facility was terminated. We discuss the offerings in Note 18.
LONG-TERM DEBT
The following tables show the detail and maturities of long-term debt outstanding:
|
| | | | | | | |
LONG-TERM DEBT |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
SDG&E | | | |
First mortgage bonds (collateralized by plant assets): | | | |
Bonds at variable rates (1.151% at December 31, 2016) March 9, 2017 | $ | — |
| | $ | 140 |
|
1.65% July 1, 2018(1) | 161 |
| | 161 |
|
3% August 15, 2021 | 350 |
| | 350 |
|
1.914% payable 2015 through February 2022 | 161 |
| | 197 |
|
3.6% September 1, 2023 | 450 |
| | 450 |
|
2.5% May 15, 2026 | 500 |
| | 500 |
|
6% June 1, 2026 | 250 |
| | 250 |
|
5.875% January and February 2034(1) | 176 |
| | 176 |
|
5.35% May 15, 2035 | 250 |
| | 250 |
|
6.125% September 15, 2037 | 250 |
| | 250 |
|
4% May 1, 2039(1) | 75 |
| | 75 |
|
6% June 1, 2039 | 300 |
| | 300 |
|
5.35% May 15, 2040 | 250 |
| | 250 |
|
4.5% August 15, 2040 | 500 |
| | 500 |
|
3.95% November 15, 2041 | 250 |
| | 250 |
|
4.3% April 1, 2042 | 250 |
| | 250 |
|
3.75% June 1, 2047 | 400 |
| | — |
|
| 4,573 |
| | 4,349 |
|
Other long-term debt: | |
| | |
|
OMEC LLC variable-rate loan (5.2925% after floating-to-fixed rate swaps effective 2007), | |
| | |
|
payable 2013 through April 2019 (collateralized by OMEC plant assets) | 295 |
| | 305 |
|
Capital lease obligations: | |
| | |
|
Purchased-power contracts | 731 |
| | 239 |
|
Other | 1 |
| | 1 |
|
| 1,027 |
| | 545 |
|
| 5,600 |
| | 4,894 |
|
Current portion of long-term debt | (220 | ) | | (191 | ) |
Unamortized discount on long-term debt | (11 | ) | | (11 | ) |
Unamortized debt issuance costs | (34 | ) | | (34 | ) |
Total SDG&E | 5,335 |
| | 4,658 |
|
| | | |
SoCalGas | |
| | |
|
First mortgage bonds (collateralized by plant assets): | |
| | |
|
5.45% April 15, 2018 | 250 |
| | 250 |
|
1.55% June 15, 2018 | 250 |
| | 250 |
|
3.15% September 15, 2024 | 500 |
| | 500 |
|
3.2% June 15, 2025 | 350 |
| | 350 |
|
2.6% June 15, 2026 | 500 |
| | 500 |
|
5.75% November 15, 2035 | 250 |
| | 250 |
|
5.125% November 15, 2040 | 300 |
| | 300 |
|
3.75% September 15, 2042 | 350 |
| | 350 |
|
4.45% March 15, 2044 | 250 |
| | 250 |
|
| 3,000 |
| | 3,000 |
|
Other long-term debt (uncollateralized): | |
| | |
|
1.875% Notes payable 2016 through May 2026(1) | 4 |
| | 4 |
|
5.67% Notes January 18, 2028 | 5 |
| | 5 |
|
Capital lease obligations | 1 |
| | — |
|
| 10 |
| | 9 |
|
| 3,010 |
| | 3,009 |
|
Current portion of long-term debt | (501 | ) | | — |
|
Unamortized discount on long-term debt | (7 | ) | | (7 | ) |
Unamortized debt issuance costs | (17 | ) | | (20 | ) |
Total SoCalGas | 2,485 |
| | 2,982 |
|
|
| | | | | | | |
LONG-TERM DEBT (CONTINUED) |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
Sempra Energy | | | |
Other long-term debt (uncollateralized): | | | |
2.3% Notes April 1, 2017 | $ | — |
| | $ | 600 |
|
6.15% Notes June 15, 2018 | 500 |
| | 500 |
|
9.8% Notes February 15, 2019 | 500 |
| | 500 |
|
1.625% Notes October 7, 2019 | 500 |
| | 500 |
|
2.4% Notes March 15, 2020 | 500 |
| | 500 |
|
2.85% Notes November 15, 2020 | 400 |
| | 400 |
|
Notes at variable rates (2.038% at December 31, 2017) March 15, 2021 | 850 |
| | — |
|
2.875% Notes October 1, 2022 | 500 |
| | 500 |
|
4.05% Notes December 1, 2023 | 500 |
| | 500 |
|
3.55% Notes June 15, 2024 | 500 |
| | 500 |
|
3.75% Notes November 15, 2025 | 350 |
| | 350 |
|
3.25% Notes June 15, 2027 | 750 |
| | — |
|
6% Notes October 15, 2039 | 750 |
| | 750 |
|
Fair value adjustments for interest rate swaps, net | (1 | ) | | (3 | ) |
Build-to-suit lease(2) | 138 |
| | 137 |
|
Sempra South American Utilities | |
| | |
|
Other long-term debt (uncollateralized): | |
| | |
|
Chilquinta Energía – 4.25% Series B Bonds October 30, 2030 | 205 |
| | 185 |
|
Luz del Sur | |
| | |
|
Bank loans 5.18% to 6.7% payable 2016 through December 2018 | 53 |
| | 75 |
|
Corporate bonds at 4.75% to 8.75% payable 2014 through September 2029 | 415 |
| | 346 |
|
Other bonds at 3.77% to 4.61% payable 2020 through May 2022 | 6 |
| | 7 |
|
Capital lease obligations | 6 |
| | 6 |
|
Sempra Mexico | |
| | |
|
Other long-term debt (uncollateralized unless otherwise noted): | |
| | |
|
Notes February 8, 2018 at variable rates (2.66% after floating-to-fixed rate cross-currency | |
| | |
|
swaps effective 2013) | 66 |
| | 63 |
|
6.3% Notes February 2, 2023 (4.12% after cross-currency swap) | 198 |
| | 189 |
|
Notes at variable rates (4.63% after floating-to-fixed rate swaps effective 2014), |
|
| |
|
|
payable 2016 through December 2026, collateralized by plant assets | 314 |
| | 352 |
|
3.75% Notes January 14, 2028 | 300 |
| | — |
|
Bank loans including $251 at a weighted-average fixed rate of 6.67%, $178 at variable rates | | | |
(weighted-average rate of 6.29% after floating-to-fixed rate swaps effective 2014) and $39 at variable | | | |
rates (4.62% at December 31, 2017), payable 2016 through March 2032, collateralized by plant assets | 468 |
| | 481 |
|
4.875% Notes January 14, 2048 | 540 |
| | — |
|
Sempra Renewables | |
| | |
|
Other long-term debt (collateralized by project assets): | |
| | |
|
Loan at variable rates (3.325% at December 31, 2017) payable 2012 through December 2028 | |
| | |
|
except for $59 at 3.668% after floating-to-fixed rate swaps effective June 2012(1) | 77 |
| | 84 |
|
Sempra LNG & Midstream | |
| | |
|
Other long-term debt (uncollateralized unless otherwise noted): | |
| | |
|
Notes at 2.87% to 3.51% October 1, 2026(1) | 20 |
| | 20 |
|
8.45% Notes payable 2012 through December 2017, collateralized by parent guarantee | — |
| | 6 |
|
| 9,405 |
| | 7,548 |
|
Current portion of long-term debt | (706 | ) | | (722 | ) |
Unamortized discount on long-term debt | (13 | ) | | (10 | ) |
Unamortized premium on long-term debt | 4 |
| | 4 |
|
Unamortized debt issuance costs | (65 | ) | | (31 | ) |
Total other Sempra Energy | 8,625 |
| | 6,789 |
|
Total Sempra Energy Consolidated | $ | 16,445 |
| | $ | 14,429 |
|
GLOSSARY (CONTINUED) | |
(1) | Callable long-term debt not subject to make-whole provisions. |
| |
(2) | We discuss this lease in Note 15. |
|
| | | | | | | | | | | | | | | |
MATURITIES OF LONG-TERM DEBT(1) |
(Dollars in millions) |
| SDG&E | | SoCalGas | | Other Sempra Energy | | Total Sempra Energy Consolidated |
2018 | $ | 207 |
| | $ | 500 |
| | $ | 705 |
| | $ | 1,412 |
|
2019 | 321 |
| | — |
| | 1,098 |
| | 1,419 |
|
2020 | 36 |
| | — |
| | 997 |
| | 1,033 |
|
2021 | 385 |
| | — |
| | 961 |
| | 1,346 |
|
2022 | 18 |
| | — |
| | 629 |
| | 647 |
|
Thereafter | 3,901 |
| | 2,509 |
| | 4,872 |
| | 11,282 |
|
Total | $ | 4,868 |
| | $ | 3,009 |
| | $ | 9,262 |
| | $ | 17,139 |
|
| |
(1) | Excludes capital lease obligations, build-to-suit lease, market value adjustments for interest rate swaps, discounts, premiums and debt issuance costs. |
Various long-term obligations totaling $8.4 billion at Sempra Energy Consolidated at December 31, 2017 are unsecured. This includes unsecured long-term obligations totaling $9 million at SoCalGas. There were no unsecured long-term obligations at SDG&E.
CALLABLE LONG-TERM DEBT
At the option of Sempra Energy, SDG&E and SoCalGas, certain debt at December 31, 2017 is callable subject to premiums:
|
| | | | | | | | | | | | | | | |
CALLABLE LONG-TERM DEBT |
(Dollars in millions) |
| SDG&E | | SoCalGas | | Other Sempra Energy | | Total Sempra Energy Consolidated |
Not subject to make-whole provisions | $ | 412 |
| | $ | 4 |
| | $ | 97 |
| | $ | 513 |
|
Subject to make-whole provisions | 4,161 |
| | 3,005 |
| | 7,058 |
| | 14,224 |
|
In addition, the OMEC LLC project financing loan discussed in Note 1, with $295 million of outstanding borrowings at December 31, 2017, may be prepaid at OMEC LLC’s option.
FIRST MORTGAGE BONDS
The California Utilities issue first mortgage bonds secured by a lien on utility plant. The California Utilities may issue additional first mortgage bonds if in compliance with the provisions of their bond agreements (indentures). These indentures require, among other things, the satisfaction of pro forma earnings-coverage tests on first mortgage bond interest and the availability of sufficient mortgaged property to support the additional bonds, after giving effect to prior bond redemptions. The most restrictive of these tests (the property test) would permit the issuance, subject to CPUC authorization, of additional first mortgage bonds of $4.7 billion at SDG&E and $1.1 billion at SoCalGas at December 31, 2017.
In June 2017, SDG&E publicly offered and sold $400 million of 3.75-percent, first mortgage bonds maturing in June 2047. SDG&E used the proceeds from the offering to repay outstanding commercial paper.
OTHER LONG-TERM DEBT
Sempra Energy
In January 2018, Sempra Energy publicly offered and sold an aggregate principal amount of $5.0 billion of fixed and floating rate notes, which we discuss in Note 18.
In October 2017, Sempra Energy publicly offered and sold $850 million of floating rate notes, maturing in March 2021. The floating rate notes bear interest at a rate equal to the three-month LIBOR plus 45 bps. The interest rate is reset quarterly. Sempra
Energy used a substantial portion of the net proceeds from the offering to repay outstanding commercial paper, with remaining proceeds used for general corporate purposes.
In June 2017, Sempra Energy publicly offered and sold $750 million of 3.25-percent, fixed rate notes maturing in June 2027. Sempra Energy used the proceeds from the offering to repay outstanding commercial paper.
SDG&E
In 2015, SDG&E entered into a CPUC-approved 25-year PPA with a peaker plant facility. Construction of the peaker plant facility was completed and delivery of contracted power commenced in June 2017, at which time we recorded a $500 million capital lease obligation on SDG&E’s and Sempra Energy’s Consolidated Balance Sheets.
Sempra South American Utilities
Luz del Sur has outstanding corporate bonds and bank loans that are denominated in the local currency. In February 2017, Luz del Sur publicly offered and sold $50 million of corporate bonds at 6.375 percent, maturing in February 2023. In December 2017, Luz del Sur publicly offered and sold $50 million of corporate bonds at 5.9375 percent, maturing in December 2027.
Sempra Mexico
In December 2017, Sempra Mexico offered and sold in a private placement $300 million of 3.75-percent, fixed rate notes maturing in January 2028 and $540 million of 4.875-percent, fixed rate notes maturing in January 2048. Sempra Mexico used a substantial portion of the net proceeds from the offering to repay outstanding short-term debt, with remaining proceeds used for general corporate purposes.
INTEREST RATE SWAPS
We discuss our fair value and cash flow hedging interest rate swaps in Note 9.
NOTE 6. INCOME TAXES
Reconciliation of net U.S. statutory federal income tax rates to the ETRs is as follows:
|
| | | | | | | | |
RECONCILIATION OF FEDERAL INCOME TAX RATES TO EFFECTIVE INCOME TAX RATES |
|
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
U.S. federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Effects of the TCJA | 55 |
| | — |
| | — |
|
Utility depreciation | 6 |
| | 4 |
| | 5 |
|
Foreign exchange and inflation effects(1) | 3 |
| | (2 | ) | | (2 | ) |
State income taxes, net of federal income tax benefit | 1 |
| | 1 |
| | 1 |
|
Utility repairs expenditures | (6 | ) | | (4 | ) | | (5 | ) |
Tax credits | (4 | ) | | (3 | ) | | (4 | ) |
Self-developed software expenditures | (4 | ) | | (3 | ) | | (3 | ) |
Non-U.S. earnings taxed at lower statutory income tax rates(2) | (3 | ) | | (3 | ) | | (2 | ) |
Allowance for equity funds used during construction | (3 | ) | | (2 | ) | | (2 | ) |
Resolution of prior years’ income tax items | (2 | ) | | — |
| | (3 | ) |
Share-based compensation | — |
| | (2 | ) | | — |
|
Other, net | 3 |
| | — |
| | — |
|
Effective income tax rate | 81 | % | | 21 | % | | 20 | % |
SDG&E: | | | | | |
U.S. federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Depreciation | 7 |
| | 5 |
| | 4 |
|
Effects of the TCJA | 5 |
| | — |
| | — |
|
State income taxes, net of federal income tax benefit | 3 |
| | 5 |
| | 5 |
|
|
| | | | | | | | |
Repairs expenditures | (8 | ) | | (4 | ) | | (4 | ) |
Self-developed software expenditures | (6 | ) | | (3 | ) | | (3 | ) |
Allowance for equity funds used during construction | (4 | ) | | (2 | ) | | (2 | ) |
Resolution of prior years’ income tax items | (4 | ) | | (1 | ) | | (2 | ) |
Share-based compensation | — |
| | (1 | ) | | — |
|
Other, net | (1 | ) | | (1 | ) | | (1 | ) |
Effective income tax rate | 27 | % | | 33 | % | | 32 | % |
SoCalGas: | | | | | |
U.S. federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Depreciation | 9 |
| | 9 |
| | 8 |
|
State income taxes, net of federal income tax benefit | 3 |
| | 2 |
| | 4 |
|
Repairs expenditures | (8 | ) | | (9 | ) | | (10 | ) |
Self-developed software expenditures | (5 | ) | | (6 | ) | | (6 | ) |
Allowance for equity funds used during construction | (3 | ) | | (2 | ) | | (2 | ) |
Resolution of prior years’ income tax items | (2 | ) | | 2 |
| | (3 | ) |
Share-based compensation | — |
| | (1 | ) | | — |
|
Other, net | — |
| | (1 | ) | | (1 | ) |
Effective income tax rate | 29 | % | | 29 | % | | 25 | % |
| |
(1) | Primarily due to fluctuation of the Mexican peso against the U.S. dollar. We record income tax expense (benefit) from the transactional effects of foreign currency and inflation because of significant appreciation (depreciation) of the Mexican peso. We also recognize gains (losses) in Other Income, Net, on the Consolidated Statements of Operations from foreign currency derivatives that are partially hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova. |
| |
(2) | Related to operations in Mexico, Chile and Peru. |
On December 22, 2017, the TCJA was signed into law. This legislation significantly changes the IRC. Under U.S. GAAP, certain effects of the TCJA are required to be recognized upon enactment, and, as a result, Sempra Energy, SDG&E, and SoCalGas recorded the related effects in 2017.
The TCJA reduces the U.S. statutory corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018, which will be applied to future U.S. earnings. U.S. GAAP requires that deferred income tax assets and liabilities, including NOLs, be remeasured at the income tax rate expected to apply when those temporary differences reverse and that the effects of any change to such income tax rate be recognized in the period when the change was enacted. This remeasurement resulted in significant reductions in deferred income tax balances at Sempra Energy Consolidated, SDG&E and SoCalGas.
The remeasurement of deferred income tax balances at SDG&E and SoCalGas resulted in excess deferred income taxes that previously have been collected from ratepayers at the higher rate. These excess deferred income taxes have been recorded as regulatory liabilities as of December 31, 2017 and will be refunded to ratepayers in accordance with the IRC’s normalization provisions and as determined by the CPUC and FERC.
Our 2017 financial statements were materially impacted by the effects of the TCJA, primarily related to two provisions:
| |
▪ | Lower U.S. statutory corporate income tax rate: The change in the U.S. statutory corporate federal income tax rate from 35 percent to 21 percent resulted in income tax expense of $182 million for the year ended December 31, 2017 for Sempra Energy Consolidated because of the remeasurement of deferred income tax balances. SDG&E’s and SoCalGas’ impacts were primarily offset with adjustments to regulatory liabilities, however, they also recorded $28 million and $2 million of income tax expense, respectively, for the year ended December 31, 2017 associated with the TCJA. |
| |
▪ | Deemed repatriation: The TCJA imposes a one-time tax for deemed repatriation of foreign undistributed earnings as determined under U.S. federal tax law. Under this provision, a U.S. shareholder must include in taxable income its pro-rata share of foreign undistributed earnings, which are taxed at 15.5 percent on cash or cash equivalents and 8 percent on cumulative other earnings. Sempra Energy Consolidated recorded deemed repatriation tax expense of $328 million. Based on our preliminary analysis, we currently anticipate using our existing NOLs to offset the deemed repatriation tax liability. In addition, we plan to repatriate these foreign undistributed earnings (estimated to be approximately $4 billion) that have now been taxed at the U.S. federal level. As a result, for the year ended December 31, 2017, we accrued $360 million of U.S. state and non-U.S. withholding tax expense on this expected future repatriation. This liability could change as a result of various factors, such as interpretation and clarification of the TCJA provisions, changes in foreign tax laws, foreign currency movements, the source of cash to be repatriated or adjustments to our provisional estimates, as we discuss below. |
We have not recorded deferred income tax with respect to remaining basis differences of approximately $1 billion between financial statement and income tax investment amounts in our non-U.S subsidiaries as of December 31, 2017 because we consider them to be indefinitely reinvested. It is not practicable to determine the hypothetical amount of tax that might be payable if the
underlying basis differences were realized. If these basis differences were realized, we would need to adjust our income tax provision in the period we determine that they are no longer indefinitely reinvested.
|
| | | | | | | | | | | |
EFFECTS OF THE TAX CUTS AND JOBS ACT OF 2017 |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
Consolidated Balance Sheets: | | | | | |
Decrease in net deferred income tax liabilities due | | | | | |
to remeasurement
| $ | (2,220 | ) | | $ | (1,400 | ) | | $ | (972 | ) |
Increase in net regulatory liabilities from remeasurement of | | | | | |
deferred income tax assets and liabilities | $ | 2,402 |
| | $ | 1,428 |
| | $ | 974 |
|
|
|
| |
|
| |
|
|
Consolidated Statements of Operations: | |
| | |
| | |
|
Income tax expense related to remeasurement of deferred | | | | | |
income tax assets and liabilities | $ | 182 |
| | $ | 28 |
| | $ | 2 |
|
Income tax expense related to deemed repatriation | 328 |
| | — |
| | — |
|
U.S. state and non-U.S. withholding tax expense related to | | | | | |
expected future repatriation of foreign earnings | 360 |
| | — |
| | — |
|
Total increase in income tax expense | $ | 870 |
| | $ | 28 |
| | $ | 2 |
|
We recorded the effects of the TCJA in 2017 using our best estimates and the information available to us through the date the financial statements were issued. However, our analysis is ongoing and as such, the income tax effects that we have recorded are provisional.
As permitted by and in accordance with the guidance issued by the SEC, we may adjust our provisional estimates in future reporting periods throughout 2018 as we complete our analysis and as more information becomes available, and these adjustments may affect earnings. Events and information that may result in adjustments to our provisional estimates include interpretations or rulings by the U.S. Department of the Treasury or states, the filing of our 2017 income tax return and the finalization of our calculation of foreign undistributed earnings.
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 ETR. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the ETR. The following items are subject to flow-through treatment:
| |
▪ | repairs expenditures related to a certain portion of utility plant fixed 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 has similar flow-through treatment.
The 2016 GRC FD issued by the CPUC in June 2016 required SDG&E and SoCalGas to each establish a two-way income tax expense memorandum account to track certain revenue variances resulting from certain differences between the income tax expense forecasted in the GRC and the income tax expense incurred from 2016 through 2018. The tracking accounts will remain open until the CPUC decides to close the accounts, which we expect will be reviewed in the 2019 GRC proceedings. We expect that certain amounts recorded in the tracking accounts may give rise to regulatory assets or liabilities. We discuss the tracking accounts further in Note 14.
The geographic components of Income Before Income Taxes and Equity Earnings of Certain Unconsolidated Subsidiaries at Sempra Energy Consolidated are as follows:
|
| | | | | | | | | | | |
GEOGRAPHIC COMPONENTS |
(Dollars in millions) |
| Pretax book income |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | 878 |
| | $ | 773 |
| | $ | 1,189 |
|
Non-U.S. | 707 |
| | 1,057 |
| | 515 |
|
Total | $ | 1,585 |
| | $ | 1,830 |
| | $ | 1,704 |
|
U.S. pretax book income decreased in 2016 compared to 2015 at the California Utilities primarily due to the reallocation of 2012-2015 income tax benefits generated from income tax repairs deductions to ratepayers pursuant to the 2016 GRC FD, as we discuss in Note 14; at Sempra LNG & Midstream for the loss on permanent release of pipeline capacity, as we discuss in Note 15; and the impairment charge related to the investment in Rockies Express, as we discuss in Note 3. U.S. pretax income remained lower in 2017 due to the write-off of SDG&E’s wildfire regulatory asset, as we discuss in Note 15. Non-U.S. pretax book income was lower in 2017 and 2015 compared to 2016 primarily due to the noncash gain in 2016 associated with the remeasurement of our equity interest in IEnova Pipelines, as we discuss in Note 3.
The components of income tax expense are as follows:
|
| | | | | | | | | | | |
INCOME TAX EXPENSE (BENEFIT) | | | | | |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Current: | | | | | |
U.S. federal | $ | — |
| | $ | — |
| | $ | 3 |
|
U.S. state | — |
| | 1 |
| | (24 | ) |
Non-U.S. | 116 |
| | 171 |
| | 123 |
|
Total | 116 |
| | 172 |
| | 102 |
|
Deferred: | |
| | |
| | |
|
U.S. federal | 536 |
| | 78 |
| | 242 |
|
U.S. state | 297 |
| | 9 |
| | 34 |
|
Non-U.S. | 327 |
| | 135 |
| | (32 | ) |
Total | 1,160 |
| | 222 |
| | 244 |
|
Deferred investment tax credits | — |
| | (5 | ) | | (5 | ) |
Total income tax expense | $ | 1,276 |
| | $ | 389 |
| | $ | 341 |
|
SDG&E: | |
| | |
| | |
|
Current: | |
| | |
| | |
|
U.S. federal | $ | 100 |
| | $ | — |
| | $ | 12 |
|
U.S. state | 65 |
| | 22 |
| | 77 |
|
Total | 165 |
| | 22 |
| | 89 |
|
Deferred: | |
| | |
| | |
|
U.S. federal | 29 |
| | 223 |
| | 233 |
|
U.S. state | (41 | ) | | 38 |
| | (35 | ) |
Total | (12 | ) |
| 261 |
| | 198 |
|
Deferred investment tax credits | 2 |
| | (3 | ) | | (3 | ) |
Total income tax expense | $ | 155 |
| | $ | 280 |
| | $ | 284 |
|
SoCalGas: | |
| | |
| | |
|
Current: | |
| | |
| | |
|
U.S. federal | $ | — |
| | $ | — |
| | $ | (1 | ) |
U.S. state | 23 |
| | 40 |
| | 12 |
|
Total | 23 |
| | 40 |
| | 11 |
|
Deferred: | |
| | |
| | |
|
U.S. federal | 144 |
| | 123 |
| | 122 |
|
U.S. state | (5 | ) | | (18 | ) | | 7 |
|
Total | 139 |
| | 105 |
| | 129 |
|
Deferred investment tax credits | (2 | ) | | (2 | ) | | (2 | ) |
Total income tax expense | $ | 160 |
| | $ | 143 |
| | $ | 138 |
|
We show the components of deferred income taxes, which reflect the effects of the TCJA, at December 31 for Sempra Energy Consolidated, SDG&E and SoCalGas in the tables below:
|
| | | | | | | |
DEFERRED INCOME TAXES – SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
Deferred income tax liabilities: | | | |
Differences in financial and tax bases of fixed assets, investments and other assets(1) | $ | 4,233 |
| | $ | 6,111 |
|
U.S. state and non-U.S. withholding tax on repatriation of foreign earnings | 360 |
| | — |
|
Regulatory balancing accounts | 376 |
| | 783 |
|
Property taxes | 37 |
| | 63 |
|
Other deferred income tax liabilities | 117 |
| | 143 |
|
Total deferred income tax liabilities | 5,123 |
| | 7,100 |
|
Deferred income tax assets: | |
| | |
|
Tax credits | 1,066 |
| | 431 |
|
Net operating losses | 968 |
| | 2,304 |
|
Compensation-related items | 199 |
| | 252 |
|
Postretirement benefits | 251 |
| | 434 |
|
Other deferred income tax assets | 115 |
| | 87 |
|
Accrued expenses not yet deductible | 60 |
| | 112 |
|
Deferred income tax assets before valuation allowances | 2,659 |
| | 3,620 |
|
Less: valuation allowances | 133 |
| | 31 |
|
Total deferred income tax assets | 2,526 |
| | 3,589 |
|
Net deferred income tax liability(2) | $ | 2,597 |
| | $ | 3,511 |
|
| |
(1) | In addition to the financial over tax basis differences in fixed assets, the amount also includes financial over tax basis differences in various interests in partnerships and certain subsidiaries. |
| |
(2) | At December 31, 2017 and 2016, includes $170 million and $234 million, respectively, recorded as a noncurrent asset and $2,767 million and $3,745 million, respectively, recorded as a noncurrent liability on the Consolidated Balance Sheets. |
|
| | | | | | | | | | | | | | | |
DEFERRED INCOME TAXES – SDG&E AND SOCALGAS |
(Dollars in millions) |
| SDG&E | | SoCalGas |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Deferred income tax liabilities: | | | | | | | |
Differences in financial and tax bases of | | | | | | | |
utility plant and other assets | $ | 1,472 |
| | $ | 2,549 |
| | $ | 987 |
| | $ | 1,699 |
|
Regulatory balancing accounts | 113 |
| | 379 |
| | 271 |
| | 411 |
|
Property taxes | 26 |
| | 42 |
| | 12 |
| | 21 |
|
Other | 10 |
| | 10 |
| | 1 |
| | 4 |
|
Total deferred income tax liabilities | 1,621 |
| | 2,980 |
| | 1,271 |
| | 2,135 |
|
Deferred income tax assets: | |
| | |
| | |
| | |
|
Net operating losses | — |
| | — |
| | 58 |
| | 83 |
|
Tax credits | 7 |
| | 27 |
| | 15 |
| | 17 |
|
Postretirement benefits | 43 |
| | 98 |
| | 152 |
| | 244 |
|
Compensation-related items | 5 |
| | 8 |
| | 25 |
| | 32 |
|
State income taxes | 14 |
| | — |
| | 7 |
| | 19 |
|
Accrued expenses not yet deductible | 3 |
| | 7 |
| | 12 |
| | 20 |
|
Other | 19 |
| | 11 |
| | 7 |
| | 11 |
|
Total deferred income tax assets | 91 |
| | 151 |
| | 276 |
| | 426 |
|
Net deferred income tax liability | $ | 1,530 |
| | $ | 2,829 |
| | $ | 995 |
| | $ | 1,709 |
|
The following table summarizes our unused NOLs and tax credit carryforwards at December 31, 2017.
|
| | | | | |
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS |
(Dollars in millions) |
| | Unused amount at December 31, 2017 | Year expiration begins |
Sempra Energy Consolidated: | | | |
U.S. federal: | | | |
NOLs(1) | | $ | 3,145 |
| 2031 |
General business tax credits(1) | | 389 |
| 2032 |
Foreign tax credits(2) | | 631 |
| 2024 |
U.S. state(2): | | | |
NOLs | | 2,295 |
| 2019 |
General business tax credits | | 51 |
| 2018 |
Non-U.S.(2) | |
| |
NOLs | | 607 |
| 2018 |
SoCalGas: | | | |
U.S. federal(1): | | | |
NOLs | | $ | 334 |
| 2032 |
General business tax credits | | 12 |
| 2031 |
| |
(1) | We have recorded deferred income tax benefits on these NOLs and tax credits, in total, because we currently believe they will be realized on a more-likely-than-not-basis. |
| |
(2) | We have not recorded deferred income tax benefits on a portion of these NOLs and tax credits because we currently believe they will not be realized on a more-likely-than-not-basis, as discussed below. |
At December 31, 2017, Sempra Energy recorded a valuation allowance against a portion of its total deferred income tax assets, as shown above in the “Deferred Income Taxes – Sempra Energy Consolidated” table. A valuation allowance is recorded when, based on more-likely-than-not criteria, negative evidence outweighs positive evidence with regard to our ability to realize a deferred income tax asset in the future. Of the valuation allowances recorded to date, the negative evidence outweighs the positive evidence primarily due to cumulative pretax losses in various U.S. state and non-U.S. jurisdictions resulting in a deferred income tax asset related to NOLs, as shown in the “Net Operating Losses and Tax Credit Carryforwards” table above, that we currently do not believe will be realized on a more-likely-than-not basis. Of Sempra Energy’s total valuation allowance of $133 million at December 31, 2017, $20 million is related to non-U.S. NOLs and tax credits, $30 million to U.S. state NOLs and tax credits, and $83 million to U.S. foreign tax credits. Of Sempra Energy’s total valuation allowance of $31 million at December 31, 2016, $1 million was related to non-U.S. NOLs and $30 million to U.S. state NOLs and tax credits.
Following is a reconciliation of the changes in unrecognized income tax benefits and the potential effect on our ETR for the years ended December 31:
|
| | | | | | | | | | | |
RECONCILIATION OF UNRECOGNIZED INCOME TAX BENEFITS |
(Dollars in millions) |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Balance at January 1 | $ | 90 |
| | $ | 87 |
| | $ | 117 |
|
Increase in prior period tax positions | 22 |
| | 2 |
| | 10 |
|
Decrease in prior period tax positions | (15 | ) | | (2 | ) | | — |
|
Increase in current period tax positions | 4 |
| | 6 |
| | 8 |
|
Settlements with taxing authorities | (12 | ) | | (3 | ) | | (48 | ) |
Balance at December 31 | $ | 89 |
| | $ | 90 |
| | $ | 87 |
|
Of December 31 balance, amounts related to tax positions that | |
| | |
| | |
|
if recognized in future years would | |
| | |
| | |
|
decrease the effective tax rate(1) | $ | (77 | ) | | $ | (87 | ) | | $ | (83 | ) |
increase the effective tax rate(1) | 20 |
| | 36 |
| | 32 |
|
SDG&E: | |
| | |
| | |
|
Balance at January 1 | $ | 22 |
| | $ | 20 |
| | $ | 14 |
|
Increase in prior period tax positions | 9 |
| | — |
| | 5 |
|
Decrease in prior period tax positions | (11 | ) | | — |
| | — |
|
Increase in current period tax positions | — |
| | 2 |
| | 2 |
|
Settlements with taxing authorities | (10 | ) | | — |
| | (1 | ) |
Balance at December 31 | $ | 10 |
| | $ | 22 |
| | $ | 20 |
|
Of December 31 balance, amounts related to tax positions that | |
| | |
| | |
|
if recognized in future years would | |
| | |
| | |
|
decrease the effective tax rate(1) | $ | (7 | ) | | $ | (19 | ) | | $ | (16 | ) |
increase the effective tax rate(1) | 1 |
| | 13 |
| | 11 |
|
SoCalGas: | |
| | |
| | |
|
Balance at January 1 | $ | 29 |
| | $ | 27 |
| | $ | 19 |
|
Increase in prior period tax positions | 3 |
| | — |
| | 2 |
|
Decrease in prior period tax positions | — |
| | (2 | ) | | — |
|
Increase in current period tax positions | 4 |
| | 4 |
| | 6 |
|
Settlements with taxing authorities | (1 | ) | | — |
| | — |
|
Balance at December 31 | $ | 35 |
| | $ | 29 |
| | $ | 27 |
|
Of December 31 balance, amounts related to tax positions that | |
| | |
| | |
|
if recognized in future years would | |
| | |
| | |
|
decrease the effective tax rate(1) | $ | (26 | ) | | $ | (29 | ) | | $ | (27 | ) |
increase the effective tax rate(1) | 20 |
| | 24 |
| | 21 |
|
| |
(1) | Includes temporary book and tax differences that are treated as flow-through for ratemaking purposes, as discussed above. |
It is reasonably possible that within the next 12 months, unrecognized income tax benefits could decrease due to the following:
|
| | | | | | | | | | | |
POSSIBLE DECREASES IN UNRECOGNIZED INCOME TAX BENEFITS WITHIN 12 MONTHS |
(Dollars in millions) |
| At December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Expiration of statutes of limitations on tax assessments | $ | — |
| | $ | (2 | ) | | $ | (2 | ) |
Potential resolution of audit issues with various | |
| | |
| | |
|
U.S. federal, state and local and non-U.S. taxing authorities | (8 | ) | | (36 | ) | | (32 | ) |
| $ | (8 | ) | | $ | (38 | ) | | $ | (34 | ) |
SDG&E: | |
| | |
| | |
|
Expiration of statutes of limitations on tax assessments | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
Potential resolution of audit issues with various | |
| | |
| | |
|
U.S. federal, state and local taxing authorities | (6 | ) | | (10 | ) | | (8 | ) |
| $ | (6 | ) | | $ | (11 | ) | | $ | (9 | ) |
SoCalGas: | |
| | |
| | |
|
Potential resolution of audit issues with various | |
| | |
| | |
|
U.S. federal, state and local taxing authorities | $ | (2 | ) | | $ | (25 | ) | | $ | (22 | ) |
Amounts accrued for interest and penalties associated with unrecognized income tax benefits are included in Income Tax Expense on the Consolidated Statements of Operations. Sempra Energy Consolidated accrued a negligible amount and $1 million for interest expense and penalties at December 31, 2017 and 2016, respectively, on the Consolidated Balance Sheets, and recorded negligible amounts of interest income and penalties in each of 2017 and 2016 and $2 million in 2015 on the Consolidated Statements of Operations. SDG&E and SoCalGas accrued negligible amounts of interest expense and penalties at December 31, 2017 and 2016 on the Consolidated Balance Sheets, and recorded negligible amounts of interest expense and penalties in 2017, 2016 and 2015 on the Consolidated Statements of Operations.
INCOME TAX AUDITS
Sempra Energy is subject to U.S. federal income tax as well as income tax of multiple state and non-U.S. jurisdictions. We remain subject to examination for U.S. federal tax years after 2013. We are subject to examination by major state tax jurisdictions for tax years after 2008. Certain major non-U.S. income tax returns for tax years 2008 through the present are open to examination. We are also open to examination for non-U.S. income tax returns related to our prior interest in our commodities business, which we divested in 2010, for years 1996 through 2010.
In addition, we have filed state refund claims for tax years back to 2006. The pre-2009 tax years for our major state tax jurisdictions are closed to new issues; therefore, no additional tax may be assessed by the taxing authorities for these tax years.
SDG&E and SoCalGas are subject to U.S. federal income tax as well as income tax of state jurisdictions. They remain subject to examination for U.S. federal tax years after 2013 and by state tax jurisdictions for tax years after 2008.
NOTE 7. EMPLOYEE BENEFIT PLANS
We are required by applicable U.S. GAAP to:
RNV | Registro Nacional de Valores (Mexican National Securities Registry) |
▪ | recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the statement of financial position; |
| |
▪ | measure a plan’s assets and its obligations that determine its funded status as of the end of the fiscal year (with limited exceptions); and |
| |
▪ | recognize changes in the funded status of pension and PBOP plans in the year in which the changes occur. Generally, those changes are reported in OCI and as a separate component of shareholders’ equity. |
The detailed information presented below covers the employee benefit plans of Sempra Energy and its consolidated subsidiaries.
Sempra Energy has funded and unfunded noncontributory traditional defined benefit and cash balance plans, including separate plans for SDG&E and SoCalGas, which collectively cover all eligible employees, including members of the Sempra Energy board of directors who were participants in a predecessor plan on or before June 1, 1998. Pension benefits under the traditional defined benefit plans are based on service and final average earnings, while the cash balance plans provide benefits using a career average earnings methodology.
IEnova has an unfunded noncontributory defined benefit plan covering all employees. Chilquinta Energía has an unfunded noncontributory defined benefit plan covering all employees hired before October 1, 1981 and an unfunded noncontributory termination indemnity plan covering represented employees. The plans generally provide defined benefits to retirees based on date of hire, years of service and final average earnings.
Sempra Energy also has PBOP plans, including separate plans for SDG&E and SoCalGas, which collectively cover all domestic and certain foreign employees. The life insurance plans are both contributory and noncontributory, and the health care plans are contributory. Participants’ contributions are adjusted annually. Other postretirement benefits include medical benefits for retirees’ spouses.
Chilquinta Energía also has two noncontributory postretirement benefit plans which cover represented employees – a health care plan and an energy subsidy plan that provides for reduced energy rates. The health care plan includes benefits for retirees’ spouses and dependents.
Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. We review these assumptions on an annual basis and update them as appropriate. We consider current market conditions, including interest rates, in making these assumptions. We use a December 31 measurement date for all of our plans.
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 $455 million and $430 million at December 31, 2017 and 2016, respectively.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Special Termination Benefits Affecting 2017 and 2016
In 2017, certain represented and in 2016, certain nonrepresented employees age 62 or older with 5 years of service or age 55 to 61 with 10 years of service that retired under the Voluntary Retirement Enhancement Program offered in either of those years received an additional postretirement health benefit in the form of a $100,000 Health Reimbursement Account. We treated the benefit obligation attributable to the Health Reimbursement Account as a special termination benefit. This resulted in increases to the recorded liability for PBOP and net periodic benefit cost of $18 million for each of Sempra Energy Consolidated and SoCalGas in 2017, and $26 million for Sempra Energy Consolidated, $14 million for SDG&E and $11 million for SoCalGas in 2016.
The Voluntary Retirement Enhancement Program resulted in a higher than expected number of retirements in 2017 and 2016. As a result, the total lump sum benefits paid from the Sempra Energy nonqualified and SoCalGas qualified pension plans in 2017, and the SDG&E qualified pension plan in 2016, exceeded the settlement threshold, which triggered settlement accounting. This resulted in a reduction of the recorded pension liability and pension plan assets of $194 million at Sempra Energy Consolidated and $175 million at SoCalGas in 2017, and $75 million at each of Sempra Energy Consolidated and SDG&E in 2016. This also resulted in settlement charges in net periodic benefit cost of $38 million at Sempra Energy Consolidated and $30 million at SoCalGas in 2017, and $16 million at each of Sempra Energy Consolidated and SDG&E in 2016. The settlement charges at SoCalGas in 2017, and at SDG&E in 2016, were recorded as regulatory assets on the Consolidated Balance Sheets. Measurement dates of December 31, 2017 and 2016 were used for the respective settlement accounting triggered in each year, as the year-to-date lump sum benefit payments first exceeded the settlement threshold in December of both of those years.
Divestiture Affecting 2016
On September 12, 2016, Sempra LNG & Midstream completed the sale of EnergySouth, the parent company of Mobile Gas and Willmut Gas, as we discuss in Note 3. The benefit obligations and plan assets of the benefit plans that covered employees of Mobile Gas and Willmut Gas were transferred to the buyer on the date of sale. This resulted in decreases to the recorded pension liability and other postretirement benefit plan liability of $61 million and $6 million, respectively, and decreases to pension plan assets and other postretirement benefit plan assets of $44 million and $4 million, respectively, for Sempra Energy Consolidated.
Benefit Obligations and Assets
The following three tables provide a reconciliation of the changes in the plans’ projected benefit obligations and the fair value of assets during 2017 and 2016, and a statement of the funded status at December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS |
SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
CHANGE IN PROJECTED BENEFIT OBLIGATION | | | | | | | |
Net obligation at January 1 | $ | 3,679 |
| | $ | 3,649 |
| | $ | 922 |
| | $ | 963 |
|
Service cost | 117 |
| | 107 |
| | 21 |
| | 20 |
|
Interest cost | 151 |
| | 160 |
| | 39 |
| | 42 |
|
Contributions from plan participants | — |
| | — |
| | 20 |
| | 20 |
|
Actuarial loss (gain) | 286 |
| | 116 |
| | 6 |
| | (81 | ) |
Benefit payments | (182 | ) | | (217 | ) | | (63 | ) | | (61 | ) |
Divestiture of EnergySouth | — |
| | (61 | ) | | — |
| | (6 | ) |
Plan amendments | 1 |
| | — |
| | — |
| | — |
|
Special termination benefits | — |
| | — |
| | 18 |
| | 26 |
|
Curtailments | (1 | ) | | — |
| | — |
| | — |
|
Settlements | (194 | ) | | (75 | ) | | — |
| | (1 | ) |
Net obligation at December 31 | 3,857 |
| | 3,679 |
| | 963 |
| | 922 |
|
| | | | | | | |
CHANGE IN PLAN ASSETS | |
| | |
| | |
| | |
|
Fair value of plan assets at January 1 | 2,459 |
| | 2,484 |
| | 1,057 |
| | 1,003 |
|
Actual return on plan assets | 421 |
| | 207 |
| | 185 |
| | 94 |
|
Employer contributions | 155 |
| | 104 |
| | 10 |
| | 6 |
|
Contributions from plan participants | — |
| | — |
| | 20 |
| | 20 |
|
Benefit payments | (182 | ) | | (217 | ) | | (63 | ) | | (61 | ) |
Divestiture of EnergySouth | — |
| | (44 | ) | | — |
| | (4 | ) |
Settlements | (194 | ) | | (75 | ) | | — |
| | (1 | ) |
Fair value of plan assets at December 31 | 2,659 |
| | 2,459 |
| | 1,209 |
| | 1,057 |
|
Funded status at December 31 | $ | (1,198 | ) | | $ | (1,220 | ) | | $ | 246 |
| | $ | 135 |
|
Net recorded (liability) asset at December 31 | $ | (1,198 | ) | | $ | (1,220 | ) | | $ | 246 |
| | $ | 135 |
|
|
| | | | | | | | | | | | | | | |
PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS |
SAN DIEGO GAS & ELECTRIC COMPANY |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
CHANGE IN PROJECTED BENEFIT OBLIGATION | | | | | | | |
Net obligation at January 1 | $ | 935 |
| | $ | 965 |
| | $ | 190 |
| | $ | 165 |
|
Service cost | 29 |
| | 29 |
| | 5 |
| | 5 |
|
Interest cost | 38 |
| | 41 |
| | 8 |
| | 7 |
|
Contributions from plan participants | — |
| | — |
| | 7 |
| | 7 |
|
Actuarial loss (gain) | 50 |
| | 7 |
| | (9 | ) | | 6 |
|
Benefit payments | (83 | ) | | (25 | ) | | (16 | ) | | (14 | ) |
Special termination benefits | — |
| | — |
| | — |
| | 14 |
|
Settlements | — |
| | (75 | ) | | — |
| | — |
|
Transfer of liability from (to) other plans | 2 |
| | (7 | ) | | — |
| | — |
|
Net obligation at December 31 | 971 |
| | 935 |
| | 185 |
| | 190 |
|
| | | | | | | |
CHANGE IN PLAN ASSETS | |
| | |
| | |
| | |
|
Fair value of plan assets at January 1 | 714 |
| | 752 |
| | 169 |
| | 161 |
|
Actual return on plan assets | 120 |
| | 59 |
| | 30 |
| | 13 |
|
Employer contributions | 22 |
| | 3 |
| | 5 |
| | 2 |
|
Contributions from plan participants | — |
| | — |
| | 7 |
| | 7 |
|
Benefit payments | (83 | ) | | (25 | ) | | (16 | ) | | (14 | ) |
Settlements | — |
| | (75 | ) | | — |
| | — |
|
Transfer of assets from other plans | 3 |
| | — |
| | — |
| | — |
|
Fair value of plan assets at December 31 | 776 |
| | 714 |
| | 195 |
| | 169 |
|
Funded status at December 31 | $ | (195 | ) | | $ | (221 | ) | | $ | 10 |
| | $ | (21 | ) |
Net recorded (liability) asset at December 31 | $ | (195 | ) | | $ | (221 | ) | | $ | 10 |
| | $ | (21 | ) |
|
| | | | | | | | | | | | | | | |
PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS |
SOUTHERN CALIFORNIA GAS COMPANY |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
CHANGE IN PROJECTED BENEFIT OBLIGATION | | | | | | | |
Net obligation at January 1 | $ | 2,343 |
| | $ | 2,255 |
| | $ | 691 |
| | $ | 752 |
|
Service cost | 76 |
| | 67 |
| | 14 |
| | 14 |
|
Interest cost | 98 |
| | 101 |
| | 29 |
| | 32 |
|
Contributions from plan participants | — |
| | — |
| | 13 |
| | 13 |
|
Actuarial loss (gain) | 216 |
| | 77 |
| | 16 |
| | (86 | ) |
Benefit payments | (73 | ) | | (158 | ) | | (44 | ) | | (45 | ) |
Special termination benefits | — |
| | — |
| | 18 |
| | 11 |
|
Settlements | (175 | ) | | — |
| | — |
| | — |
|
Transfer of liability from other plans | 1 |
| | 1 |
| | — |
| | — |
|
Net obligation at December 31 | 2,486 |
| | 2,343 |
| | 737 |
| | 691 |
|
| | | | | | | |
CHANGE IN PLAN ASSETS | |
| | |
| | |
| | |
|
Fair value of plan assets at January 1 | 1,579 |
| | 1,537 |
| | 870 |
| | 822 |
|
Actual return on plan assets | 269 |
| | 128 |
| | 151 |
| | 79 |
|
Employer contributions | 93 |
| | 72 |
| | 3 |
| | 1 |
|
Contributions from plan participants | — |
| | — |
| | 13 |
| | 13 |
|
Benefit payments | (73 | ) | | (158 | ) | | (44 | ) | | (45 | ) |
Settlements | (175 | ) | | — |
| | — |
| | — |
|
Transfer of assets from other plans | 1 |
| | — |
| | — |
| | — |
|
Fair value of plan assets at December 31 | 1,694 |
| | 1,579 |
| | 993 |
| | 870 |
|
Funded status at December 31 | $ | (792 | ) | | $ | (764 | ) | | $ | 256 |
| | $ | 179 |
|
Net recorded (liability) asset at December 31 | $ | (792 | ) | | $ | (764 | ) | | $ | 256 |
| | $ | 179 |
|
Actuarial losses (gains) fluctuate based on changes in assumptions that we describe below in “Assumptions for Pension and Other Postretirement Benefit Plans” and updates to census data. In 2017, 2016 and 2015, the Society of Actuaries released updated mortality improvement projection scales, reflecting changes to projected observed longevity improvements in its mortality tables. We have incorporated these assumptions, adjusted for the Sempra Energy companies’ actual mortality experience, in our calculations for each of those years. Actuarial losses in pension plans at Sempra Energy Consolidated in 2017 were driven primarily by actuarial losses at SDG&E and SoCalGas due to a decrease in discount rates and, additionally at SoCalGas, actuarial losses due to updated census data. Actuarial losses in PBOP plans at Sempra Energy Consolidated in 2017 were driven primarily by actuarial losses at SDG&E and SoCalGas due to a decrease in discount rates, offset by actuarial gains at SDG&E and partially offset by actuarial gains at SoCalGas due to a reduction in the 2018 expected health care costs.
Net Assets and Liabilities
The assets and liabilities of the pension and PBOP plans are affected by changing market conditions as well as when actual plan experience is different than assumed. Such events result in investment gains and losses, which we defer and recognize in pension and other postretirement benefit costs over a period of years. Our funded pension and PBOP plans use the asset smoothing method, except for those at SDG&E. This method develops an asset value that recognizes realized and unrealized investment gains and losses over a three-year period. This adjusted asset value, known as the market-related value of assets, is used in conjunction with an expected long-term rate of return to determine the expected return-on-assets component of net periodic cost. SDG&E does not use the asset smoothing method, but rather recognizes realized and unrealized investment gains and losses during the current year.
The 10-percent corridor accounting method is used at Sempra Energy Consolidated, SDG&E and SoCalGas. Under the corridor accounting method, if as of the beginning of a year unrecognized net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets, the excess is amortized over the average remaining service period of active participants. The asset smoothing and 10-percent corridor accounting methods help mitigate volatility of net periodic costs from year to year.
We recognize the overfunded or underfunded status of defined benefit pension and other postretirement plans as assets or liabilities, respectively; unrecognized changes in these assets and/or liabilities are normally recorded in Accumulated Other Comprehensive Income (Loss) on the balance sheet. The California Utilities record regulatory assets and liabilities that offset the funded pension and other postretirement plans’ assets or liabilities, as these costs are expected to be recovered in future utility rates based on agreements with regulatory agencies.
The California Utilities record annual pension and other postretirement net periodic benefit costs equal to the contributions to their plans as authorized by the CPUC. The annual contributions to the pension plans are limited to a minimum required funding amount as determined by the IRS. The annual contributions to PBOP plans are equal to the lesser of the maximum tax deductible amount or the net periodic cost calculated in accordance with U.S. GAAP for pension and PBOP plans. Until the date of sale, Mobile Gas recorded annual pension and other postretirement net periodic benefit costs based on an estimate of the net periodic cost at the beginning of the year calculated in accordance with U.S. GAAP for pension and PBOP plans, as authorized by the Alabama Public Service Commission. Any differences between booked net periodic benefit cost and amounts contributed to the pension and other postretirement plans for the California Utilities are disclosed as regulatory adjustments in accordance with U.S. GAAP for rate-regulated entities.
The net (liability) asset is included in the following categories on the Consolidated Balance Sheets at December 31:
|
| | | | | | | | | | | | | | | |
PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS, NET OF PLAN ASSETS AT DECEMBER 31 |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
Sempra Energy Consolidated: | | | | | | | |
Noncurrent assets | $ | — |
| | $ | — |
| | $ | 266 |
| | $ | 179 |
|
Current liabilities | (69 | ) | | (56 | ) | | (1 | ) | | — |
|
Noncurrent liabilities | (1,129 | ) | | (1,164 | ) | | (19 | ) | | (44 | ) |
Net recorded (liability) asset | $ | (1,198 | ) | | $ | (1,220 | ) | | $ | 246 |
| | $ | 135 |
|
SDG&E: | |
| | |
| | |
| | |
|
Noncurrent assets | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | — |
|
Current liabilities | (13 | ) | | (10 | ) | | — |
| | — |
|
Noncurrent liabilities | (182 | ) | | (211 | ) | | — |
| | (21 | ) |
Net recorded (liability) asset | $ | (195 | ) | | $ | (221 | ) | | $ | 10 |
| | $ | (21 | ) |
SoCalGas: | |
| | |
| | |
| | |
|
Noncurrent assets | $ | — |
| | $ | — |
| | $ | 256 |
| | $ | 179 |
|
Current liabilities | (3 | ) | | (2 | ) | | — |
| | — |
|
Noncurrent liabilities | (789 | ) | | (762 | ) | | — |
| | — |
|
Net recorded (liability) asset | $ | (792 | ) | | $ | (764 | ) | | $ | 256 |
| | $ | 179 |
|
Amounts recorded in AOCI at December 31, 2017 and 2016, net of income tax effects and amounts recorded as regulatory assets, are as follows:
|
| | | | | | | | | | | | | | | |
AMOUNTS IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
Sempra Energy Consolidated: | | | | | | | |
Net actuarial (loss) gain | $ | (84 | ) | | $ | (95 | ) | | $ | 4 |
| | $ | 3 |
|
Prior service cost | (4 | ) | | (4 | ) | | — |
| | — |
|
Total | $ | (88 | ) | | $ | (99 | ) | | $ | 4 |
| | $ | 3 |
|
SDG&E: | |
| | |
| | |
| | |
|
Net actuarial loss | $ | (8 | ) | | $ | (8 | ) | | |
| | |
|
SoCalGas: | |
| | |
| | |
| | |
|
Net actuarial loss | $ | (6 | ) | | $ | (6 | ) | | |
| | |
|
Prior service cost | (2 | ) | | (3 | ) | | |
| | |
|
Total | $ | (8 | ) | | $ | (9 | ) | | |
| | |
|
The accumulated benefit obligation for defined benefit pension plans at December 31, 2017 and 2016 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
ACCUMULATED BENEFIT OBLIGATION |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Accumulated benefit obligation | $ | 3,551 |
| | $ | 3,465 |
| | $ | 930 |
| | $ | 904 |
| | $ | 2,241 |
| | $ | 2,167 |
|
Sempra Energy, SDG&E and SoCalGas each have a funded pension plan. We also have unfunded pension plans at Sempra Energy, SDG&E, SoCalGas, IEnova and Chilquinta Energía. The following table shows the obligations of funded pension plans with benefit obligations in excess of plan assets at December 31:
|
| | | | | | | |
OBLIGATIONS OF FUNDED PENSION PLANS |
(Dollars in millions) |
| 2017 | | 2016 |
Sempra Energy Consolidated: | | | |
Projected benefit obligation | $ | 3,623 |
| | $ | 3,431 |
|
Accumulated benefit obligation | 3,334 |
| | 3,227 |
|
Fair value of plan assets | 2,659 |
| | 2,459 |
|
SDG&E: | | | |
|
Projected benefit obligation | $ | 939 |
| | $ | 902 |
|
Accumulated benefit obligation | 900 |
| | 874 |
|
Fair value of plan assets | 776 |
| | 714 |
|
SoCalGas: | |
| | |
|
Projected benefit obligation | $ | 2,462 |
| | $ | 2,320 |
|
Accumulated benefit obligation | 2,220 |
| | 2,148 |
|
Fair value of plan assets | 1,694 |
| | 1,579 |
|
Net Periodic Benefit Cost
The following three tables provide the components of net periodic benefit cost and pretax amounts recognized in OCI for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI |
SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
NET PERIODIC BENEFIT COST | | | | | | | | | | | |
Service cost | $ | 117 |
| | $ | 107 |
| | $ | 114 |
| | $ | 21 |
| | $ | 20 |
| | $ | 26 |
|
Interest cost | 151 |
| | 160 |
| | 154 |
| | 39 |
| | 42 |
| | 44 |
|
Expected return on assets | (161 | ) | | (166 | ) | | (173 | ) | | (66 | ) | | (69 | ) | | (68 | ) |
Amortization of: | |
| | |
| | |
| | | | |
| | |
|
Prior service cost (credit) | 11 |
| | 11 |
| | 11 |
| | 1 |
| | — |
| | (4 | ) |
Actuarial loss (gain) | 36 |
| | 30 |
| | 38 |
| | (4 | ) | | (1 | ) | | — |
|
Settlement and curtailment charges | 38 |
| | 16 |
| | 4 |
| | — |
| | — |
| | — |
|
Special termination benefits | — |
| | — |
| | — |
| | 18 |
| | 26 |
| | — |
|
Regulatory adjustment | (42 | ) | | (57 | ) | | (110 | ) | | — |
| | (11 | ) | | 12 |
|
Total net periodic benefit cost | 150 |
| | 101 |
| | 38 |
| | 9 |
| | 7 |
| | 10 |
|
| | | | | | | | | | | |
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS | |
| | |
| | |
| | |
| | |
| | |
|
RECOGNIZED IN OCI | |
| | |
| | |
| | |
| | |
| | |
|
Net loss (gain) | — |
| | 26 |
| | 17 |
| | (2 | ) | | (2 | ) | | (4 | ) |
Prior service cost | 1 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
|
Amortization of actuarial loss | (18 | ) | | (10 | ) | | (14 | ) | | — |
| | — |
| | — |
|
Amortization of prior service cost | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Total recognized in OCI | (18 | ) | | 15 |
| | 7 |
| | (2 | ) | | (2 | ) | | (4 | ) |
Total recognized in net periodic benefit cost and OCI | $ | 132 |
| | $ | 116 |
| | $ | 45 |
| | $ | 7 |
| | $ | 5 |
| | $ | 6 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI |
SAN DIEGO GAS & ELECTRIC COMPANY |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
NET PERIODIC BENEFIT COST | | | | | | | | | | | |
Service cost | $ | 29 |
| | $ | 29 |
| | $ | 29 |
| | $ | 5 |
| | $ | 5 |
| | $ | 7 |
|
Interest cost | 38 |
| | 41 |
| | 39 |
| | 8 |
| | 7 |
| | 8 |
|
Expected return on assets | (47 | ) | | (49 | ) | | (54 | ) | | (11 | ) | | (12 | ) | | (11 | ) |
Amortization of: | |
| | |
| | |
| | |
| | |
| | |
|
Prior service cost | 1 |
| | 1 |
| | 8 |
| | 3 |
| | 3 |
| | 3 |
|
Actuarial loss (gain) | 9 |
| | 10 |
| | 2 |
| | — |
| | (1 | ) | | — |
|
Settlement charge | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
|
Special termination benefits | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
|
Regulatory adjustment | (8 | ) | | (45 | ) | | (20 | ) | | — |
| | (14 | ) | | — |
|
Total net periodic benefit cost | 22 |
| | 3 |
| | 4 |
| | 5 |
| | 2 |
| | 7 |
|
| | | | | | | | | | | |
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS | |
| | |
| | |
| | |
| | |
| | |
|
RECOGNIZED IN OCI | |
| | |
| | |
| | |
| | |
| | |
|
Net loss (gain) | 2 |
| | 1 |
| | (6 | ) | | — |
| | — |
| | — |
|
Amortization of actuarial loss | (1 | ) | | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
|
Total recognized in OCI | 1 |
| | — |
| | (7 | ) | | — |
| | — |
| | — |
|
Total recognized in net periodic benefit cost and OCI | $ | 23 |
| | $ | 3 |
|
| $ | (3 | ) | | $ | 5 |
| | $ | 2 |
| | $ | 7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI |
SOUTHERN CALIFORNIA GAS COMPANY |
(Dollars in millions) |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
NET PERIODIC BENEFIT COST | | | | | | | | | | | |
Service cost | $ | 76 |
| | $ | 67 |
| | $ | 74 |
| | $ | 14 |
| | $ | 14 |
| | $ | 17 |
|
Interest cost | 98 |
| | 101 |
| | 98 |
| | 29 |
| | 32 |
| | 34 |
|
Expected return on assets | (103 | ) | | (103 | ) | | (106 | ) | | (53 | ) | | (56 | ) | | (56 | ) |
Amortization of: | |
| | |
| | |
| | |
| | |
| | |
|
Prior service cost (credit) | 9 |
| | 9 |
| | 9 |
| | (3 | ) | | (4 | ) | | (7 | ) |
Actuarial loss (gain) | 19 |
| | 11 |
| | 21 |
| | (3 | ) | | — |
| | — |
|
Settlement charge | 30 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Special termination benefits | — |
| | — |
| | — |
| | 18 |
| | 11 |
| | — |
|
Regulatory adjustment | (34 | ) | | (12 | ) | | (90 | ) | | — |
| | 3 |
| | 12 |
|
Total net periodic benefit cost | 95 |
| | 73 |
| | 6 |
| | 2 |
| | — |
| | — |
|
| | | | | | | | | | | |
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS | |
| | |
| | |
| | |
| | |
| | |
|
RECOGNIZED IN OCI | |
| | |
| | |
| | |
| | |
| | |
|
Net loss | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
|
Prior service cost | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | — |
|
Amortization of prior service cost | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Total recognized in OCI | (1 | ) | | 6 |
| | 2 |
| | — |
| | — |
| | — |
|
Total recognized in net periodic benefit cost and OCI | $ | 94 |
| | $ | 79 |
| | $ | 8 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
The estimated net loss for the pension and PBOP plans that will be amortized from AOCI into net periodic benefit cost in 2018 is $10 million for Sempra Energy Consolidated and $1 million for each of SDG&E and SoCalGas. The estimated prior service cost that will be similarly amortized in 2018 is $1 million for each of Sempra Energy Consolidated and SoCalGas and a negligible amount for SDG&E.
Assumptions for Pension and Other Postretirement Benefit Plans
Benefit Obligation and Net Periodic Benefit Cost
Except for the IEnova and Chilquinta Energía plans, we develop the discount rate assumptions based on the results of a third party modeling tool that matches each plan’s expected cash flows to interest rates and expected maturity values of individually selected bonds in a hypothetical portfolio. The model controls the level of accumulated surplus that may result from the selection of bonds based solely on their premium yields by limiting the number of years to look back for selection to 3 years for pre-30-year and 6 years for post-30-year benefit payments. Additionally, the model ensures that an adequate number of bonds are selected in the portfolio by limiting the amount of the plan’s benefit payments that can be met by a single bond to 7.5 percent.
We selected individual bonds from a universe of Bloomberg AA-rated bonds that:
| |
▪ | have an outstanding issue of at least $50 million; |
| |
▪ | are non-callable (or callable with make-whole provisions); |
| |
▪ | exclude collateralized bonds; and |
| |
▪ | exclude the top and bottom 10 percent of yields to avoid relying on bonds which might be mispriced or misgraded. |
This selection methodology also mitigates the impact of market volatility on the portfolio by excluding bonds with the following characteristics:
| |
▪ | The issuer is on review for downgrade by a major rating agency if the downgrade would eliminate the issuer from the portfolio. |
| |
▪ | Recent events have caused significant price volatility to which rating agencies have not reacted. |
| |
▪ | Lack of liquidity is causing price quotes to vary significantly from broker to broker. |
We believe that this bond selection approach provides the best estimate of discount rates to estimate settlement values for our plans’ benefit obligations as required by applicable U.S. GAAP.
We develop the discount rate assumptions for the plans at IEnova by constructing a synthetic government zero coupon bond yield curve from the available market data, based on duration matching, and we add a risk spread to allow for the yields of high-quality corporate bonds. We develop the discount rate assumptions for the plans at Chilquinta Energía based on 10-year Chilean government bond yields and the expected local long-term rate of inflation. These methods for developing the discount rate are required when there is no deep market for high quality corporate bonds.
Long-term return on assets is based on the weighted-average of the plans’ investment allocation as of the measurement date and the expected returns for those asset types.
We amortize prior service cost using straight line amortization over average future service (or average expected lifetime for plans where participants are substantially inactive employees), which is an alternative method allowed under U.S. GAAP.
The significant assumptions affecting benefit obligation and net periodic benefit cost are as follows:
|
| | | | | | | | | | | |
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATION |
AT DECEMBER 31 | | | |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2017 | | 2016 |
Sempra Energy Consolidated: | | | | | | | |
Discount rate | 3.65 | % | | 4.08 | % | | 3.70 | % | | 4.19 | % |
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
SDG&E: | | | | | | | |
Discount rate | 3.64 | % | | 4.08 | % | | 3.65 | % | | 4.15 | % |
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
SoCalGas: | | | | | | | |
Discount rate | 3.65 | % | | 4.10 | % | | 3.70 | % | | 4.20 | % |
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
|
| | | | | | | | | | | | | | | | | |
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST |
YEARS ENDED DECEMBER 31 | | | |
| Pension benefits | | Other postretirement benefits |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | | | | | | | |
Discount rate | 4.08 | % | | 4.46 | % | | 4.09 | % | | 4.19 | % | | 4.49 | % | | 4.15 | % |
Expected return on plan assets | 7.00 |
| | 7.00 |
| | 7.00 |
| | 6.47 |
| | 6.98 |
| | 6.98 |
|
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
SDG&E: | | | | | | | | | | | |
Discount rate | 4.08 | % | | 4.35 | % | | 4.00 | % | | 4.15 | % | | 4.50 | % | | 4.15 | % |
Expected return on plan assets | 7.00 |
| | 7.00 |
| | 7.00 |
| | 6.91 |
| | 6.90 |
| | 6.91 |
|
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
SoCalGas: | | | | | | | | | | | |
Discount rate | 4.10 | % | | 4.50 | % | | 4.15 | % | | 4.20 | % | | 4.50 | % | | 4.15 | % |
Expected return on plan assets | 7.00 |
| | 7.00 |
| | 7.00 |
| | 6.37 |
| | 7.00 |
| | 7.00 |
|
Rate of compensation increase | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
| | 2.00-10.00 |
|
Health Care Cost Trend Rates
Assumed health care cost trend rates have a significant effect on the amounts that we report for the health care plan costs. Following are the health care cost trend rates applicable to our postretirement benefit plans:
|
| | | | | | | | | | | | | | | | | |
ASSUMED HEALTH CARE COST TREND RATES |
AT DECEMBER 31 |
| Other postretirement benefit plans(1) |
| Pre-65 retirees | | Retirees aged 65 years and older |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Health care cost trend rate assumed for next year | 7.00 | % | | 8.00 | % | | 8.10 | % | | 5.00 | % | | 5.50 | % | | 5.50 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend) | 5.00 | % | | 5.00 | % | | 5.00 | % | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Year the rate reaches the ultimate trend | 2022 |
| | 2022 |
| | 2022 |
| | 2022 |
| | 2022 |
| | 2022 |
|
| |
(1) | Excludes Mobile Gas plan. For Mobile Gas, which we deconsolidated on September 12, 2016, the health care cost trend rate assumed for next year for all retirees was 8.10 percent in 2015; the ultimate trend was 5.00 percent in 2015; and the year the rate reaches the ultimate trend was 2022 in 2015. For Chilquinta Energía, the health care cost trend rate assumed for next year, and the ultimate trend, was 3.00 percent in each of 2017, 2016 and 2015. |
A one-percent change in assumed health care cost trend rates would have had the following effects in 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
EFFECT OF ONE-PERCENT CHANGE IN ASSUMED HEALTH CARE COST TREND RATES |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
| 1% | | 1% | | 1% | | 1% | | 1% | | 1% |
| increase | | decrease | | increase | | decrease | | increase | | decrease |
Effect on total of service and interest | | | | | | | | | | | |
cost components of net periodic | | | | | | | | | | | |
postretirement health care benefit cost | $ | 5 |
| | $ | (4 | ) | | $ | 1 |
| | $ | — |
| | $ | 4 |
| | $ | (3 | ) |
Effect on the health care component of the | | | | | | | | | | | |
accumulated other postretirement | | | | | | | | | | | |
benefit obligations | 53 |
| | (44 | ) | | 3 |
| | (2 | ) | | 48 |
| | (40 | ) |
Plan Assets
Investment Allocation Strategy for Sempra Energy’s Pension Master Trust
Sempra Energy’s pension master trust holds the investments for our pension plans and a portion of the investments for our PBOP plans. We maintain additional trusts as we discuss below for certain of the California Utilities’ PBOP plans. Other than through indexing strategies, the trusts do not invest in securities of Sempra Energy.
The current asset allocation objective for the pension master trust is to protect the funded status of the plans while generating sufficient returns to cover future benefit payments and accruals. We assess the portfolio performance by comparing actual returns with relevant benchmarks. Currently, the pension plans’ target asset allocations are
| |
▪ | 38 percent domestic equity |
| |
▪ | 26 percent international equity |
| |
▪ | 8 percent ultra-long duration government securities |
| |
▪ | 5 percent return-seeking credit |
The asset allocation of the plans is reviewed by our Plan Funding Committee and our Pension and Benefits Investment Committee (the Committees) on a regular basis. When evaluating strategic asset allocations, the Committees consider many variables, including:
| |
▪ | variability and level of contributions |
| |
▪ | a range of expected outcomes over varying confidence levels |
We maintain asset allocations at strategic levels with reasonable bands of variance.
In accordance with the Sempra Energy pension investment guidelines, derivative financial instruments may be used by the pension master trust’s equity and fixed income portfolio investment managers to equitize cash, hedge certain exposures, and as substitutes for certain types of fixed income securities.
Rate of Return Assumption
The expected return on assets in our pension and PBOP plans is based on the weighted-average of the plans’ investment allocations to specific asset classes as of the measurement date. We arrive at a 7-percent expected return on assets by considering both the historical and forecasted long-term rates of return on those asset classes. We expect a return of between 7 percent and 9 percent on return-seeking assets and between 3 percent and 5 percent for risk-mitigating assets. Certain trusts that hold assets for the SDG&E other postretirement benefit plan are subject to taxation, which impacts the expected after-tax return on assets in the plan.
Concentration of Risk
Plan assets are diversified across global equity and bond markets, and concentration of risk in any one economic, industry, maturity or geographic sector is limited.
Investment Strategy for SDG&E’s and SoCalGas’ Other Postretirement Benefit Plans
SDG&E’s and SoCalGas’ PBOP plans are funded by cash contributions from SDG&E and SoCalGas and their current retirees. The assets of these plans are placed into the pension master trust and other Voluntary Employee Beneficiary Association trusts. Certain assets of SoCalGas’ PBOP plans, which are held in the pension master trust, are invested based on an allocation that seeks to mitigate risks for the assets of these plans, with 38 percent invested in return-seeking and 62 percent invested in risk-mitigating assets. The assets in the Voluntary Employee Beneficiary Association trusts are invested at an allocation similar to the pension master trust, with 74 percent invested in return-seeking and 26 percent invested in risk-mitigating assets. These allocations are periodically reviewed to ensure that plan assets are best positioned to meet plan obligations.
Fair Value of Pension and Other Postretirement Benefit Plan Assets
We classify the investments in Sempra Energy’s pension master trust and the trusts for the California Utilities’ PBOP plans based on the fair value hierarchy, except for certain investments measured at net asset value (NAV).
The following are descriptions of the valuation methods and assumptions we use to estimate the fair values of investments held by pension and other postretirement benefit plan trusts.
Equity Securities – Equity securities are valued using quoted prices listed on nationally recognized securities exchanges.
Fixed Income Securities – Certain fixed income securities are valued at the closing price reported in the active market in which the security is traded. Other fixed income securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the security is valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Certain high yield fixed-income securities are valued by applying a price adjustment to the bid side to calculate a mean and ask value. Adjustments can vary based on maturity, credit standing, and reported trade frequencies. The bid to ask spread is determined by the investment manager based on the review of the available market information.
Registered Investment Companies – Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices. Where the value is a quoted price in an active market, the investment is classified within Level 1 of the fair value hierarchy. Investments in certain fixed income securities are valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks for the remaining fixed income securities.
Common/Collective Trusts – Investments in common/collective trust funds are valued based on the NAV of units owned, which is based on the current fair value of the funds’ underlying assets.
Private Equity Funds – These funds consist of investments in private equities that are held by limited partnerships following various strategies, including private equity and corporate finance. These partnerships generally have limited lives of 10 years,
after which liquidating distributions will be received. The value is determined based on the NAV of the proportionate share of an ownership interest in partners’ capital. Holdings in these types of private equity funds are negligible, as the funds are well past their expected investment term and have distributed the bulk of proceeds from investment sales.
Derivative Financial Instruments – Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies, and unrealized gain (loss) is recorded daily. Fixed income futures and options are marked to market daily. Equity index future contracts are valued at the last sales price quoted on the exchange on which they primarily trade.
While management believes the valuation methods described above are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
We provide more discussion of fair value measurements in Notes 1 and 10. The following tables set forth by level within the fair value hierarchy a summary of the investments in our pension and other postretirement benefit plan trusts measured at fair value on a recurring basis.
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 and there were no changes in the valuation techniques used.
SDG&E and SoCalGas each hold a proportionate share of investment assets in the pension master trust at Sempra Energy Consolidated. The fair values of our pension plan assets by asset category are as follows:
|
| | | | | | | | | | | |
FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF PENSION PLANS |
(Dollars in millions) |
| Fair value at December 31, 2017 |
| Level 1 | | Level 2 | | Total |
Sempra Energy Consolidated: | | | | | |
Equity securities: | | | | | |
Domestic | $ | 946 |
| | $ | — |
| | $ | 946 |
|
International | 538 |
| | — |
| | 538 |
|
Registered investment companies | 102 |
| | — |
| | 102 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 242 |
| | 27 |
| | 269 |
|
International government bonds | — |
| | 12 |
| | 12 |
|
Domestic corporate bonds | — |
| | 338 |
| | 338 |
|
International corporate bonds | — |
| | 64 |
| | 64 |
|
Registered investment companies | — |
| | 6 |
| | 6 |
|
Other | — |
| | 1 |
| | 1 |
|
Total investment assets in the fair value hierarchy | $ | 1,828 |
| | $ | 448 |
| | 2,276 |
|
Investments measured at NAV: | | | | | |
Common/collective trusts | | | | | 384 |
|
Private equity funds | | | | | 4 |
|
Total investment assets(1) |
|
| |
|
| | $ | 2,664 |
|
SDG&E’s proportionate share of investment assets | | | | | $ | 777 |
|
SoCalGas’ proportionate share of investment assets | | | | | $ | 1,697 |
|
| | | | | |
| Fair value at December 31, 2016 |
| Level 1 | | Level 2 | | Total |
Sempra Energy Consolidated: | | | | | |
Equity securities: | |
| | |
| | |
|
Domestic | $ | 884 |
| | $ | — |
| | $ | 884 |
|
International | 522 |
| | — |
| | 522 |
|
Registered investment companies | 127 |
| | — |
| | 127 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 214 |
| | 32 |
| | 246 |
|
International government bonds | — |
| | 9 |
| | 9 |
|
Domestic corporate bonds | — |
| | 346 |
| | 346 |
|
International corporate bonds | — |
| | 94 |
| | 94 |
|
Registered investment companies | — |
| | 14 |
| | 14 |
|
Total investment assets in the fair value hierarchy | $ | 1,747 |
| | $ | 495 |
| | 2,242 |
|
Investments measured at NAV: | | | | | |
Common/collective trusts | | | | | 223 |
|
Private equity funds | | | | | 4 |
|
Total investment assets(2) | | | | | $ | 2,469 |
|
SDG&E’s proportionate share of investment assets | | | | | $ | 717 |
|
SoCalGas’ proportionate share of investment assets | | | | | $ | 1,585 |
|
| |
(1) | Excludes cash and cash equivalents of $13 million and accounts payable of $18 million. |
| |
(2) | Excludes cash and cash equivalents of $14 million and accounts payable of $24 million. |
The fair values by asset category of the PBOP plan assets held in the pension master trust and in the additional trusts for SoCalGas’ PBOP plans and SDG&E’s PBOP plan trusts are as follows:
|
| | | | | | | | | | | |
FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS |
(Dollars in millions) |
| Fair value at December 31, 2017 |
| Level 1 | | Level 2 | | Total |
SDG&E: | | | | | |
Equity securities: | | | | | |
Domestic | $ | 46 |
| | $ | — |
| | $ | 46 |
|
International | 26 |
| | — |
| | 26 |
|
Registered investment companies | 52 |
| | — |
| | 52 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 12 |
| | 1 |
| | 13 |
|
International government bonds | — |
| | 1 |
| | 1 |
|
Domestic corporate bonds | — |
| | 17 |
| | 17 |
|
International corporate bonds | — |
| | 3 |
| | 3 |
|
Registered investment companies | — |
| | 17 |
| | 17 |
|
Total investment assets in the fair value hierarchy | 136 |
| | 39 |
| | 175 |
|
Investments measured at NAV – Common/collective trusts | | | | | 20 |
|
Total investment assets(1) | | | | | 195 |
|
| | | | | |
SoCalGas: | |
| | |
| | |
|
Equity securities: | |
| | |
| | |
|
Domestic | 78 |
| | — |
| | 78 |
|
International | 44 |
| | — |
| | 44 |
|
Registered investment companies | 41 |
| | — |
| | 41 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 125 |
| | 13 |
| | 138 |
|
International government bonds | — |
| | 7 |
| | 7 |
|
Domestic corporate bonds | — |
| | 164 |
| | 164 |
|
International corporate bonds | — |
| | 28 |
| | 28 |
|
Registered investment companies | — |
| | 85 |
| | 85 |
|
Total investment assets in the fair value hierarchy | 288 |
| | 297 |
| | 585 |
|
Investments measured at NAV – Common/collective trusts | | | | | 406 |
|
Total investment assets(2) | | | | | 991 |
|
| | | | | |
Other Sempra Energy: | |
| | |
| | |
|
Equity securities: | |
| | |
| | |
|
Domestic | 7 |
| | — |
| | 7 |
|
International | 5 |
| | — |
| | 5 |
|
Registered investment companies | 1 |
| | — |
| | 1 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 1 |
| | 1 |
| | 2 |
|
Domestic corporate bonds | — |
| | 2 |
| | 2 |
|
International corporate bonds | — |
| | 1 |
| | 1 |
|
Total investment assets in the fair value hierarchy | 14 |
| | 4 |
| | 18 |
|
Investments measured at NAV – Common/collective trusts | | | | | 2 |
|
Private equity funds | | | | | 1 |
|
Total other Sempra Energy investment assets | | | | | 21 |
|
| | | | | |
Total Sempra Energy Consolidated investment assets in the fair value hierarchy | $ | 438 |
| | $ | 340 |
| | |
Total Sempra Energy Consolidated investment assets(3) |
|
| |
|
| | $ | 1,207 |
|
| |
(1) | Excludes cash and cash equivalents of $1 million and accounts payable of $1 million held in SDG&E PBOP plan trusts. |
| |
(2) | Excludes cash and cash equivalents of $4 million and accounts payable of $2 million held in SoCalGas PBOP plan trusts. |
| |
(3) | Excludes cash and cash equivalents of $5 million and accounts payable of $3 million at Sempra Energy Consolidated. |
|
| | | | | | | | | | | |
FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS |
(Dollars in millions) |
| Fair value at December 31, 2016 |
| Level 1 | | Level 2 | | Total |
SDG&E: | | | | | |
Equity securities: | | | | | |
Domestic | $ | 41 |
| | $ | — |
| | $ | 41 |
|
International | 24 |
| | — |
| | 24 |
|
Registered investment companies | 46 |
| | — |
| | 46 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 10 |
| | 1 |
| | 11 |
|
Domestic corporate bonds | — |
| | 16 |
| | 16 |
|
International corporate bonds | — |
| | 3 |
| | 3 |
|
Registered investment companies | — |
| | 17 |
| | 17 |
|
Total investment assets in the fair value hierarchy | 121 |
| | 37 |
| | 158 |
|
Investments measured at NAV – Common/collective trusts | | | | | 11 |
|
Total investment assets(1) | | | | | 169 |
|
| | | | | |
SoCalGas: | |
| | |
| | |
|
Equity securities: | |
| | |
| | |
|
Domestic | 130 |
| | — |
| | 130 |
|
International | 77 |
| | — |
| | 77 |
|
Registered investment companies | 46 |
| | — |
| | 46 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 52 |
| | 8 |
| | 60 |
|
International government bonds | — |
| | 2 |
| | 2 |
|
Domestic corporate bonds | — |
| | 94 |
| | 94 |
|
International corporate bonds | — |
| | 28 |
| | 28 |
|
Registered investment companies | — |
| | 47 |
| | 47 |
|
Total investment assets in the fair value hierarchy | 305 |
| | 179 |
| | 484 |
|
Investments measured at NAV – Common/collective trusts | | | | | 386 |
|
Total investment assets(2) | | | | | 870 |
|
| | | | | |
Other Sempra Energy: | |
| | |
| | |
|
Equity securities: | |
| | |
| | |
|
Domestic | 6 |
| | — |
| | 6 |
|
International | 3 |
| | — |
| | 3 |
|
Fixed income securities: | |
| | |
| | |
|
Domestic government bonds | 1 |
| | — |
| | 1 |
|
International government bonds | — |
| | 1 |
| | 1 |
|
Domestic corporate bonds | — |
| | 2 |
| | 2 |
|
International corporate bonds | — |
| | 1 |
| | 1 |
|
Registered investment companies | — |
| | 1 |
| | 1 |
|
Total investment assets in the fair value hierarchy | 10 |
| | 5 |
| | 15 |
|
Investments measured at NAV – Common/collective trusts | | | | | 3 |
|
Total other Sempra Energy investment assets | | | | | 18 |
|
| | | | | |
Total Sempra Energy Consolidated investment assets in the fair value hierarchy | $ | 436 |
| | $ | 221 |
| | |
Total Sempra Energy Consolidated investment assets(3) |
|
| |
|
| | $ | 1,057 |
|
| |
(1) | Excludes cash and cash equivalents of $1 million and accounts payable of $1 million held in SDG&E PBOP plan trusts. |
| |
(2) | Excludes cash and cash equivalents of $4 million and accounts payable of $4 million held in SoCalGas PBOP plan trusts. |
| |
(3) | Excludes cash and cash equivalents of $5 million and accounts payable of $5 million at Sempra Energy Consolidated. |
Future Payments
We expect to contribute the following amounts to our pension and PBOP plans in 2018:
|
| | | | | | | | | | | |
EXPECTED CONTRIBUTIONS | | | | | |
(Dollars in millions) | | | | | |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
Pension plans | $ | 226 |
| | $ | 48 |
| | $ | 113 |
|
Other postretirement benefit plans | 9 |
| | 3 |
| | 2 |
|
The following table shows the total benefits we expect to pay for the next 10 years to current employees and retirees from the plans or from company assets.
|
| | | | | | | | | | | | | | | | | | | | | | | |
EXPECTED BENEFIT PAYMENTS |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E | | SoCalGas |
| Pension benefits | | Other postretirement benefits | | Pension benefits | | Other postretirement benefits | | Pension benefits | | Other postretirement benefits |
2018 | $ | 351 |
| | $ | 52 |
| | $ | 90 |
| | $ | 10 |
| | $ | 192 |
| | $ | 38 |
|
2019 | 304 |
| | 52 |
| | 76 |
| | 10 |
| | 188 |
| | 39 |
|
2020 | 294 |
| | 54 |
| | 74 |
| | 10 |
| | 179 |
| | 40 |
|
2021 | 285 |
| | 53 |
| | 71 |
| | 11 |
| | 173 |
| | 40 |
|
2022 | 273 |
| | 53 |
| | 68 |
| | 11 |
| | 172 |
| | 40 |
|
2023-2027 | 1,217 |
| | 262 |
| | 314 |
| | 52 |
| | 782 |
| | 197 |
|
PROFIT SHARING PLANS
Under Chilean law, Chilquinta Energíais required to pay all employees either (1) 30 percent of Chilquinta Energía’s taxable income after deducting a 10-percent return on equity, allocated in proportion to the annual salary of each employee or (2) 25 percent of each employee’s annual salary, with a maximum mandatory profit sharing of 4.75 months of Chile’s legal minimum salary. Chilquinta Energíahas elected the second option but calculates the profit sharing amounts with actual employee salaries instead of the legal minimum salary, resulting in a higher cost. The amounts are paid out each pay period. Chilquinta Energía recorded annual profit sharing expense of $7 million for 2017, $5 million for 2016 and $3 million for 2015 related to this plan.
Under Peruvian law, Luz del Sur is required to pay their employees 5 percent of Luz del Sur’s taxable income, paid once a year and allocated as follows: 50 percent based on each employee’s annual hours worked and 50 percent based on each employee’s annual salary. Luz del Sur recorded annual profit sharing expense of $12 million in 2017 and $10 million in both 2016 and 2015 related to this plan.
SAVINGS PLANS
Sempra Energy offers trusteed savings plans to all domestic employees, all employees in Mexico and certain employees in Chile. Employee participation, employee contributions and employer matching contributions are subject to the provisions of the respective plans, and for employee contributions, limits imposed by the respective governmental authorities.
Employer contributions to the savings plans were as follows:
|
| | | | | | | | | | | |
EMPLOYER CONTRIBUTIONS TO SAVINGS PLANS |
(Dollars in millions) |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 41 |
| | $ | 42 |
| | $ | 43 |
|
SDG&E | 14 |
| | 15 |
| | 17 |
|
SoCalGas | 22 |
| | 22 |
| | 21 |
|
The market value of Sempra Energy common stock held by the savings plans was $1.1 billion at both December 31, 2017 and 2016.
|
| | | | |
| | SEC | Securities and Exchange Commission |
Rockies Express | Rockies Express Pipeline LLC | | SEIN |
NOTE 8. SHARE-BASED COMPENSATION
SEMPRA ENERGY EQUITY COMPENSATION PLANS
Sempra Energy has share-based compensation plans intended to align employee and shareholder objectives related to the long-term growth of Sempra Energy. The plans permit a wide variety of share-based awards, including:
| Sistema Eléctrico Interconectado Nacional (Peruvian national interconnected system) |
RPS▪ | Renewables Portfolio Standardnon-qualified stock options |
| |
▪ | stock appreciation rights |
Eligible employees, including those from the California Utilities, participate in Sempra Energy’s share-based compensation plans as a component of their compensation package.
In the three years ended December 31, 2017, Sempra Energy had the following types of equity awards outstanding:
| |
▪ | Non-Qualified Stock Options: Options to purchase common stock have an exercise price equal to the market price of the common stock at the date of grant, are service-based, become exercisable over a four-year period, and expire 10 years from the date of grant. Vesting and/or the ability to exercise may be accelerated upon a change in control, in accordance with severance pay agreements, in accordance with the terms of the grant, or upon eligibility for retirement. Options are subject to forfeiture or earlier expiration when an employee terminates employment. |
| |
▪ | Performance-Based Restricted Stock Units: These RSU awards generally vest in Sempra Energy common stock at the end of three-year (for awards granted during or after 2015) or four-year performance periods based on Sempra Energy’s total return to shareholders relative to that of specified market indices or based on the compound annual growth rate of Sempra Energy’s EPS. The comparative market indices for the awards that vest based on total return to shareholders are the S&P 500 Utilities Index and the S&P 500 Index. We primarily use long-term analyst consensus growth estimates for S&P 500 Utilities Index peer companies to develop our targets for awards that vest based on EPS growth. |
| |
◦ | For awards granted in 2013 or earlier, if Sempra Energy’s total return to shareholders exceeds target levels, up to an additional 50 percent of the number of granted RSUs may be issued. |
| |
◦ | For awards granted during or after 2014, up to an additional 100 percent of the granted RSUs may be issued if total return to shareholders or EPS growth exceeds target levels. |
| |
◦ | For awards granted in 2015 and 2016, and certain awards granted in 2017, that vest based on Sempra Energy’s total return to shareholders, a modifier adds 20 percent to the award’s payout (as initially calculated based on total return to shareholders relative to that of specified market indices) for total shareholder return performance in the top quartile relative to historical benchmark data for Sempra Energy and reduces the award’s payout by 20 percent for performance in the bottom quartile. However, in no event will more than an additional 100 percent of the granted RSUs be issued. If performance falls within the second or third quartiles, the modifier is not triggered, and the payout is based solely on total return to shareholders relative to that of specified market indices. |
If Sempra Energy’s total return to shareholders or EPS growth is below the target levels but above threshold performance levels, shares are subject to partial vesting on a pro rata basis.
| |
▪ | Other Performance-Based Restricted Stock Units: RSUs were granted in 2014 and 2015 in connection with the creation of Cameron LNG JV. |
| |
◦ | The 2014 awards vest to the extent that the Compensation Committee of Sempra Energy’s board of directors determines that the objectives of the joint venture are continuing to be achieved. These awards vest on the anniversary of the grant date over a period of either two or three years. |
| |
◦ | The 2015 awards vest to the extent that the Compensation Committee of Sempra Energy’s board of directors determines that Sempra Energy has achieved positive cumulative net income for fiscal years 2015 through 2017 and Cameron LNG JV has commenced commercial operations of the first train. |
| |
▪ | Service-Based Restricted Stock Units: RSUs may also be service-based; these generally vest at the end of three-year (for awards granted during or after 2015) or four-year service periods. |
| |
▪ | Restricted Stock Awards: RSAs are solely service-based and generally vest at the end of four years of service. Accelerated vesting of RSAs may occur upon eligibility for retirement. Holders of RSAs have full voting rights. |
For RSA and RSU awards, vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable long-term incentive plan, in accordance with severance pay agreements, or at the discretion of the Compensation Committee of Sempra Energy’s board of directors. Dividend equivalents on shares subject to RSAs and RSUs are reinvested to purchase additional common shares that become subject to the same vesting conditions as the RSAs and RSUs to which the dividends relate.
In April 2013, the IEnova board of directors approved the IEnova 2013 Long-Term Incentive Plan. The purpose of this plan is to align the interests of employees and directors of IEnova with its shareholders. All awards issued from this plan and any related dividend equivalents will settle in cash at vesting based on the price of IEnova common stock. In 2017, 2016 and 2015, IEnova granted 1,043,709 RSUs, 378,367 RSUs and 278,538 RSUs, respectively, from this plan, 1,374,114 of which remain outstanding at December 31, 2017. During 2017, 2016 and 2015, IEnova paid cash of $2 million, $1 million and $4 million, respectively, to settle vested awards.
SHARE-BASED AWARDS AND COMPENSATION EXPENSE
At December 31, 2017, 5,589,925common shares were authorized and available for future grants of share-based awards. Our practice is to satisfy share-based awards by issuing new shares rather than by open-market purchases.
We measure and recognize compensation expense for all share-based payment awards made to our employees and directors based on estimated fair values on the date of grant. We recognize compensation costs net of an estimated forfeiture rate (based on historical experience) and recognize the compensation costs for non-qualified stock options, RSAs and RSUs on a straight-line basis over the requisite service period of the award, which is generally three or four years. However, in the year that an employee becomes eligible for retirement, the remaining expense related to the employee’s awards is recognized immediately. Substantially all awards outstanding are classified as equity instruments; therefore, we recognize additional paid in capital as we recognize the compensation expense associated with the awards. Beginning in 2016, we recognize in earnings the tax benefits (or deficiencies) resulting from tax deductions that are in excess of (or less than) tax benefits related to compensation cost recognized for share-based payments. In 2015, $52 million in excess tax benefits was recorded within Sempra Energy’s Shareholders’ Equity.
Sempra Energy subsidiaries record an expense for the plans to the extent that subsidiary employees participate in the plans and/or the subsidiaries are allocated a portion of the Sempra Energy plans’ corporate staff costs. Total share-based compensation expense for all of Sempra Energy’s share-based awards was comprised as follows:
|
| | | | | | | | | | | |
SHARE-BASED COMPENSATION EXPENSE |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | |
Share-based compensation expense, before income taxes | $ | 78 |
| | $ | 46 |
| | $ | 48 |
|
Income tax benefit | (31 | ) | | (18 | ) | | (19 | ) |
| $ | 47 |
| | $ | 28 |
| | $ | 29 |
|
| | | | | |
Capitalized share-based compensation cost | $ | 9 |
| | $ | 7 |
| | $ | 6 |
|
Excess income tax benefit | $ | — |
| | $ | (34 | ) | | $ | — |
|
SDG&E: | | | | | |
Share-based compensation expense, before income taxes | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Income tax benefit | (5 | ) | | (3 | ) | | (3 | ) |
| $ | 8 |
| | $ | 4 |
| | $ | 5 |
|
| | | | | |
Capitalized share-based compensation cost | $ | 5 |
| | $ | 4 |
| | $ | 4 |
|
Excess income tax benefit | $ | — |
| | $ | (7 | ) | | $ | — |
|
SoCalGas: | |
| | |
| | |
|
Share-based compensation expense, before income taxes | $ | 17 |
| | $ | 8 |
| | $ | 10 |
|
Income tax benefit | (7 | ) | | (3 | ) | | (4 | ) |
| $ | 10 |
| | $ | 5 |
| | $ | 6 |
|
| | | | | |
Capitalized share-based compensation cost | $ | 4 |
| | $ | 3 |
| | $ | 2 |
|
Excess income tax benefit | $ | — |
| | $ | (4 | ) | | $ | — |
|
SEMPRA ENERGY NON-QUALIFIED STOCK OPTIONS
We use a Black-Scholes option-pricing model to estimate the fair value of each non-qualified stock option grant. The use of a valuation model requires us to make certain assumptions about selected model inputs. Expected volatility is calculated based on the historical volatility of Sempra Energy’s common stock price. We base the average expected life for options on the contractual term of the option and expected employee exercise and post-termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.
The following table shows a summary of non-qualified stock options at December 31, 2017 and activity for the year then ended:
|
| | | | | | | | | | | | |
NON-QUALIFIED STOCK OPTIONS |
| | | | | | | |
| Common shares under option | | Weighted- average exercise price | | Weighted- average remaining contractual term (in years) | | Aggregate intrinsic value (in millions) |
Outstanding at January 1, 2017 | 360,255 |
| | $ | 52.46 |
| | | | |
Exercised | (164,454 | ) | | $ | 55.04 |
| | | | |
Outstanding at December 31, 2017 | 195,801 |
| | $ | 50.30 |
| | 1.5 | | $ | 11 |
|
| | | | | | | |
Vested at December 31, 2017 | 195,801 |
| | $ | 50.30 |
| | 1.5 | | $ | 11 |
|
Exercisable at December 31, 2017 | 195,801 |
| | $ | 50.30 |
| | 1.5 | | $ | 11 |
|
The aggregate intrinsic value at December 31, 2017 is the total of the difference between Sempra Energy’s closing common stock price and the exercise price for all in-the-money options. The aggregate intrinsic value for non-qualified stock options exercised in the last three years was
No stock options were granted in 2017, 2016 or 2015. All outstanding stock options were fully vested and all compensation cost related to stock options had been recognized as of December 31, 2014.
We received cash of $9 million from stock option exercises during 2017.
SEMPRA ENERGY RESTRICTED STOCK AWARDS AND UNITS
We use a Monte-Carlo simulation model to estimate the fair value of our RSAs and our RSUs that vest based on Sempra Energy’s total return to shareholders. Our determination of fair value is affected by the historical volatility of the common stock price for Sempra Energy and its peer group companies. The valuation also is affected by the risk-free rates of return, and a number of other variables. Below are key assumptions for awards granted in 2017, 2016 and 2015 for Sempra Energy:
|
| | | | | | | | |
KEY ASSUMPTIONS FOR AWARDS GRANTED |
|
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Risk-free rate of return | 1.5 | % | | 1.3 | % | | 1.1 | % |
Stock price volatility | 17 |
| | 16 |
| | 14 |
|
Restricted Stock Awards
No RSAs were granted in 2017, 2016 or 2015. All outstanding RSAs were fully vested and all compensation cost related to RSAs had been recognized as of December 31, 2016. The total fair value of RSA shares vested during the year was a negligible amount in 2016 and $1 million in 2015.
Restricted Stock Units
We provide below a summary of Sempra Energy’s RSUs as of December 31, 2017 and the activity during the year.
|
| | | | | | | | | | | | | |
RESTRICTED STOCK UNITS | | | | |
| | | | | |
| Performance-based restricted stock units | | Service-based restricted stock units |
| Units | | Weighted- average grant-date fair value | | Units | | Weighted- average grant-date fair value |
Nonvested at January 1, 2017 | 1,954,322 |
| | $ | 88.58 |
| | 305,736 |
| | $ | 94.68 |
|
Granted | 424,760 |
| | $ | 110.54 |
| | 93,619 |
| | $ | 101.88 |
|
Vested | (637,577 | ) | | $ | 57.42 |
| | (108,880 | ) | | $ | 79.61 |
|
Forfeited | (39,888 | ) | | $ | 103.17 |
| | (4,580 | ) | | $ | 97.84 |
|
Nonvested at December 31, 2017(1) | 1,701,617 |
| | $ | 105.84 |
| | 285,895 |
| | $ | 98.81 |
|
Expected to vest at December 31, 2017 | 1,670,885 |
| | $ | 105.38 |
| | 282,106 |
| | $ | 98.65 |
|
| |
(1) | Each RSU represents the right to receive one share of our common stock if applicable performance conditions are satisfied. For all performance-based RSUs, except for those issued in connection with the creation of Cameron LNG JV, up to an additional 50 percent (100 percent for awards granted during or after 2014) of the shares represented by the RSUs may be issued if Sempra Energy exceeds target performance conditions. |
The total fair value of RSU shares vested during the year was $45 million in 2017 and $46 million in each of 2016 and 2015.
The $17 million of total compensation cost related to nonvested RSUs not yet recognized as of December 31, 2017 is expected to be recognized over a weighted-average period of 1.9 years. The weighted-average per-share fair values for performance-based RSUs granted were $100.37 and $123.30 in 2016 and 2015, respectively. The weighted-average per-share fair values for service-based RSUs granted were $93.59 and $111.43 in 2016 and 2015, respectively.
|
| | | | |
| | SoCalGas | Southern California Gas Company |
SAESA | Sociedad Austral de Electricidad Sociedad Anónima | | SONGS |
NOTE 9. 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, benchmark interest rate risk and foreign exchange rate exposures. 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 included in the tables below.
In certain cases, we apply the normal purchase or sale exception to derivative instruments 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.
In all other cases, we record derivatives at fair value on the 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 Consolidated Statements of Cash Flows.
HEDGE ACCOUNTING
We may designate a derivative as a cash flow hedging instrument if it effectively converts anticipated cash flows associated with 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 the future cash flows of a given 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, as follows:
| San Onofre Nuclear Generating Station |
SB▪ | Senate BillThe California Utilities use natural gas and electricity derivatives, for the benefit of customers, with the objective of managing price risk and basis risks, and stabilizing 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 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 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, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations. |
| |
▪ | Sempra Mexico, Sempra LNG & Midstream and Sempra Renewables may use natural gas and electricity derivatives, as appropriate, to optimize the earnings of their assets which support the following businesses: LNG, natural gas transportation and storage, and power generation. 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 Consolidated Statements of Operations. Certain of these derivatives may also be designated as cash flow hedges. Sempra Mexico may also use 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 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 and GHG allowances. |
We summarize net energy derivative volumes at December 31, 2017 and 2016 as follows:
|
| | | | | | | |
NET ENERGY DERIVATIVE VOLUMES |
(Quantities in millions) |
| | | December 31, |
Commodity | Unit of measure | | 2017 | | 2016 |
California Utilities: | | | | | |
SDG&E: | | | | | |
Natural gas | MMBtu | | 39 |
| | 48 |
|
Electricity | MWh | | 3 |
| | 4 |
|
Congestion revenue rights | MWh | | 59 |
| | 48 |
|
SoCalGas – natural gas | MMBtu | | — |
| | 1 |
|
| | | | | |
Energy-Related Businesses: | | | |
| | |
|
Sempra LNG & Midstream – natural gas | MMBtu | | 3 |
| | 31 |
|
Sempra Mexico – natural gas | MMBtu | | 4 |
| | — |
|
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. The California Utilities, as well as Sempra Energy and its other subsidiaries and joint ventures, periodically enter into interest rate derivative agreements intended to moderate our exposure to interest rates and to lower our overall costs of borrowing. We may 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. Separately, Otay Mesa VIE has entered into interest rate swap agreements, designated as cash flow hedges, to moderate its exposure to interest rate changes.
At December 31, 2017 and 2016, the net notional amounts of our interest rate derivatives, excluding joint ventures, were:
|
| | | | | | | | | | | |
INTEREST RATE DERIVATIVES |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016 |
| Notional debt | | Maturities | | Notional debt | | Maturities |
Sempra Energy Consolidated: | | | | | | | |
Cash flow hedges(1) | $ | 861 |
| | 2018-2032 | | $ | 924 |
| | 2017-2032 |
SDG&E: | | | | | |
| | |
Cash flow hedge(1) | 295 |
| | 2018-2019 | | 305 |
| | 2017-2019 |
| |
(1) | Includes Otay Mesa VIE. All of SDG&E’s interest rate derivatives relate to Otay Mesa VIE. |
FOREIGN CURRENCY DERIVATIVES
We utilize cross-currency swaps to hedge exposure related to Mexican peso-denominated debt at our Mexican subsidiaries and joint ventures. These cash flow hedges exchange our Mexican peso-denominated principal and interest payments into the U.S. dollar and swap Mexican variable interest rates for U.S. fixed interest rates. From time to time, Sempra Mexico and its joint ventures may use other foreign currency derivatives to hedge exposures related to cash flows associated with revenues from contracts denominated in Mexican pesos that are indexed to the U.S. dollar.
We are also exposed to exchange rate movements at our Mexican subsidiaries and joint ventures, which have U.S. dollar-denominated cash balances, receivables, payables and debt (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 denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities and certain nonmonetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes. We utilize foreign currency derivatives as a means to manage the risk of exposure to significant fluctuations in our income tax expense and equity earnings from these impacts; however, we generally do not hedge our deferred income tax assets and liabilities or inflation.
In addition, Sempra South American Utilities and its joint ventures use foreign currency derivatives to manage foreign currency rate risk. We discuss these derivatives at Chilquinta Energía’s Eletrans joint venture investment in Note 4.
At December 31, 2017 and 2016, the net notional amounts of our foreign currency derivatives, excluding joint ventures, were:
|
| | | | | | | | | | | |
FOREIGN CURRENCY DERIVATIVES |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016 |
| Notional amount | | Maturities | | Notional amount | | Maturities |
Sempra Energy Consolidated: | | | | | | | |
Cross-currency swaps | $ | 408 |
| | 2018-2023 | | $ | 408 |
| | 2017-2023 |
Other foreign currency derivatives(1) | 345 |
| | 2018-2019 | | 86 |
| | 2017-2018 |
| |
(1) | In the first quarter of 2018, we entered into foreign currency derivatives with notional amounts totaling $650 million that expire between December 2018 and January 2019. |
FINANCIAL STATEMENT PRESENTATION
The Consolidated Balance Sheets reflect 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 Consolidated Balance Sheets at December 31, 2017 and 2016, including the amount of cash collateral receivables that were not offset, as the cash collateral was in excess of liability positions.
|
| | | | | | | | | | | | | | | |
DERIVATIVE INSTRUMENTS ON THE CONSOLIDATED BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2017 |
| Current assets: Fixed-price contracts and other derivatives(1) | | Other assets: Sundry | | Current liabilities: Fixed-price contracts and other derivatives(2) | | Deferred credits and other liabilities: Fixed-price contracts and other derivatives |
Sempra Energy Consolidated: | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate and foreign exchange instruments(3) | $ | 5 |
| | $ | 2 |
| | $ | (51 | ) | | $ | (165 | ) |
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Foreign exchange instruments | — |
| | — |
| | (1 | ) | | — |
|
Commodity contracts not subject to rate recovery | 81 |
| | 8 |
| | (72 | ) | | (6 | ) |
Associated offsetting commodity contracts | (67 | ) | | (5 | ) | | 67 |
| | 5 |
|
Commodity contracts subject to rate recovery | 28 |
| | 101 |
| | (65 | ) | | (120 | ) |
Associated offsetting commodity contracts | — |
| | (1 | ) | | — |
| | 1 |
|
Associated offsetting cash collateral | — |
| | — |
| | 19 |
| | 4 |
|
Net amounts presented on the balance sheet | 47 |
| | 105 |
| | (103 | ) | | (281 | ) |
Additional cash collateral for commodity contracts not subject to rate recovery | 2 |
| | — |
| | — |
| | — |
|
Additional cash collateral for commodity contracts subject to rate recovery | 17 |
| | — |
| | — |
| | — |
|
Total(4) | $ | 66 |
| | $ | 105 |
| | $ | (103 | ) | | $ | (281 | ) |
SDG&E: | |
| | |
| | |
| | |
|
Derivatives designated as hedging instruments: | |
| | |
| | |
| | |
|
Interest rate instruments(3) | $ | — |
| | $ | — |
| | $ | (10 | ) | | $ | (3 | ) |
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Commodity contracts subject to rate recovery | 26 |
| | 101 |
| | (63 | ) | | (120 | ) |
Associated offsetting commodity contracts | — |
| | (1 | ) | | — |
| | 1 |
|
Associated offsetting cash collateral | — |
| | — |
| | 19 |
| | 4 |
|
Net amounts presented on the balance sheet | 26 |
| | 100 |
| | (54 | ) | | (118 | ) |
Additional cash collateral for commodity contracts subject to rate recovery | 16 |
| | — |
| | — |
| | — |
|
Total(4) | $ | 42 |
| | $ | 100 |
|
| $ | (54 | ) | | $ | (118 | ) |
SoCalGas: | |
| | |
| | |
| | |
|
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Commodity contracts subject to rate recovery | $ | 2 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
|
Net amounts presented on the balance sheet | 2 |
| | — |
| | (2 | ) | | — |
|
Additional cash collateral for commodity contracts subject to rate recovery | 1 |
| | — |
| | — |
| | — |
|
Total | $ | 3 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
|
| |
(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 CONSOLIDATED BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2016 |
| Current assets: Fixed-price contracts and other derivatives(1) | | Other assets: Sundry | | Current liabilities: Fixed-price contracts and other derivatives(2) | | Deferred credits and other liabilities: Fixed-price contracts and other derivatives |
Sempra Energy Consolidated: | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate and foreign exchange instruments(3) | $ | 7 |
| | $ | 2 |
| | $ | (24 | ) | | $ | (228 | ) |
Commodity contracts not subject to rate recovery | — |
| | — |
| | (14 | ) | | — |
|
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Commodity contracts not subject to rate recovery | 248 |
| | 36 |
| | (254 | ) | | (28 | ) |
Associated offsetting commodity contracts | (242 | ) | | (27 | ) | | 242 |
| | 27 |
|
Associated offsetting cash collateral | — |
| | (1 | ) | | 16 |
| | 1 |
|
Commodity contracts subject to rate recovery | 37 |
| | 73 |
| | (57 | ) | | (150 | ) |
Associated offsetting commodity contracts | (9 | ) | | (1 | ) | | 9 |
| | 1 |
|
Associated offsetting cash collateral | — |
| | — |
| | 5 |
| | 13 |
|
Net amounts presented on the balance sheet | 41 |
| | 82 |
| | (77 | ) | | (364 | ) |
Additional cash collateral for commodity contracts not subject to rate recovery | 10 |
| | — |
| | — |
| | — |
|
Additional cash collateral for commodity contracts subject to rate recovery | 32 |
| | — |
| | — |
| | — |
|
Total(4) | $ | 83 |
| | $ | 82 |
| | $ | (77 | ) | | $ | (364 | ) |
SDG&E: | |
| | |
| | |
| | |
|
Derivatives designated as hedging instruments: | |
| | |
| | |
| | |
|
Interest rate instruments(3) | $ | — |
| | $ | — |
| | $ | (13 | ) | | $ | (12 | ) |
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Commodity contracts subject to rate recovery | 33 |
| | 73 |
| | (51 | ) | | (150 | ) |
Associated offsetting commodity contracts | (6 | ) | | (1 | ) | | 6 |
| | 1 |
|
Associated offsetting cash collateral | — |
| | — |
| | 3 |
| | 13 |
|
Net amounts presented on the balance sheet | 27 |
| | 72 |
| | (55 | ) | | (148 | ) |
Additional cash collateral for commodity contracts not subject to rate recovery | 1 |
| | — |
| | — |
| | — |
|
Additional cash collateral for commodity contracts subject to rate recovery | 30 |
| | — |
| | — |
| | — |
|
Total(4) | $ | 58 |
| | $ | 72 |
| | $ | (55 | ) | | $ | (148 | ) |
SoCalGas: | |
| | |
| | |
| | |
|
Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
|
Commodity contracts subject to rate recovery | $ | 4 |
| | $ | — |
| | $ | (6 | ) | | $ | — |
|
Associated offsetting commodity contracts | (3 | ) | | — |
| | 3 |
| | — |
|
Associated offsetting cash collateral | — |
| | — |
| | 2 |
| | — |
|
Net amounts presented on the balance sheet | 1 |
| | — |
| | (1 | ) | | — |
|
Additional cash collateral for commodity contracts not subject to rate recovery | 1 |
| | — |
| | — |
| | — |
|
Additional cash collateral for commodity contracts subject to rate recovery | 2 |
| | — |
| | — |
| | — |
|
Total | $ | 4 |
| | $ | — |
| | $ | (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 table below includes the effects of derivative instruments designated as fair value hedges on the Consolidated Statements of Operations for the years ended December 31, 2016 and 2015. There were no fair value hedges outstanding during the year ended December 31, 2017.
|
| | | | | | | | |
FAIR VALUE HEDGE IMPACTS |
(Dollars in millions) |
| | Pretax gain (loss) on derivatives recognized in earnings |
| | Years ended December 31, |
| Location | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | |
Interest rate instruments | Interest Expense | $ | 3 |
| | $ | 6 |
|
Interest rate instruments | Other Income, Net | (2 | ) | | (5 | ) |
Total(1) | | $ | 1 |
| | $ | 1 |
|
| |
(1) | There was no hedge ineffectiveness in 2016 or 2015. 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 recorded in Other Income, Net. |
The effects of derivative instruments designated as cash flow hedges on the Consolidated Statements of Operations and in OCI and AOCI for the years ended December 31 were:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOW HEDGE IMPACTS |
(Dollars in millions) |
| Pretax gain (loss) recognized in OCI | | | | Pretax gain (loss) reclassified from AOCI into earnings |
| Years ended December 31, | | | | Years ended December 31, |
| 2017 | | 2016 | | 2015 | | Location | | 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | | | | | | | | | |
Interest rate and foreign exchange instruments(1) | $ | 19 |
| | $ | (8 | ) | | $ | (18 | ) | | Interest Expense | | $ | 4 |
| | $ | (17 | ) | | $ | (18 | ) |
Interest rate instruments | (25 | ) | | (9 | ) | | (80 | ) | | Equity Earnings, Before Income Tax | | (8 | ) | | (10 | ) | | (12 | ) |
Interest rate and foreign exchange instruments | — |
| | — |
| | — |
| | Remeasurement of Equity Method Investment | | — |
| | (7 | ) | | — |
|
Interest rate and foreign exchange instruments | (9 | ) | | 5 |
| | (20 | ) | | Equity Earnings, Net of Income Tax | | (12 | ) | | (5 | ) | | (13 | ) |
Foreign exchange instruments | 4 |
| | 4 |
| | — |
| | Revenues: Energy- Related Businesses | | 2 |
| | — |
| | — |
|
Commodity contracts not subject to rate recovery | 3 |
| | (13 | ) | | 12 |
| | Revenues: Energy- Related Businesses | | (9 | ) | | 6 |
| | 14 |
|
Total(2) | $ | (8 | ) | | $ | (21 | ) | | $ | (106 | ) | | | | $ | (23 | ) | | $ | (33 | ) | | $ | (29 | ) |
SDG&E: | |
| | |
| | |
| | | | |
| | |
| | |
|
Interest rate instruments(1)(3) | $ | (2 | ) | | $ | (2 | ) | | $ | (6 | ) | | Interest Expense | | $ | (13 | ) | | $ | (12 | ) | | $ | (12 | ) |
SoCalGas: | |
| | |
| | |
| | | | |
| | |
| | |
|
Interest rate instruments | $ | — |
| | $ | — |
| | $ | — |
| | Interest Expense | | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
| |
(1) | Amounts include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE. |
| |
(2) | There was $5 million, $4 million and $2 million of losses from ineffectiveness related to these cash flow hedges in 2017, 2016 and 2015, respectively. |
| |
(3) | There was negligible hedge ineffectiveness related to these cash flow hedges in 2017, 2016 and 2015. |
For Sempra Energy Consolidated, we expect that net losses of $33 million, which are net of income tax benefit, that are currently recorded in AOCI (including $9 million of losses in noncontrolling interest 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. SoCalGas expects that $1 million of losses, net of income tax benefit, that are 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. Actual amounts ultimately reclassified into earnings depend on the interest rates in effect when derivative contracts mature.
For all forecasted transactions, the maximum remaining term over which we are hedging exposure to the variability of cash flows at December 31, 2017 is approximately 14 years and 1 year for Sempra Energy Consolidated and SDG&E, respectively. The maximum remaining term for which we are hedging exposure to the variability of cash flows at our equity method investees is 18 years.
The effects of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations for the years ended December 31 were:
|
| | | | | | | | | | | | |
UNDESIGNATED DERIVATIVE IMPACTS |
(Dollars in millions) |
| | Pretax gain (loss) on derivatives recognized in earnings |
| | Years ended December 31, |
| Location | 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated: | | | | | | |
Interest rate and foreign exchange instruments | Other Income, Net | $ | 49 |
| | $ | (32 | ) | | $ | (4 | ) |
Foreign exchange instruments | Equity Earnings, Net of Income Tax | 1 |
| | 3 |
| | (4 | ) |
Commodity contracts not subject to rate recovery | Revenues: Energy-Related Businesses | 16 |
| | (18 | ) | | 42 |
|
Commodity contracts not subject to rate recovery | Operation and Maintenance | — |
| | 1 |
| | (1 | ) |
Commodity contracts subject to rate recovery | Cost of Electric Fuel and Purchased Power | 54 |
| | (53 | ) | | (126 | ) |
Commodity contracts subject to rate recovery | Cost of Natural Gas | (2 | ) | | (4 | ) | | 1 |
|
Total | | $ | 118 |
| | $ | (103 | ) | | $ | (92 | ) |
SDG&E: | | |
| | |
| | |
|
Commodity contracts subject to rate recovery | Cost of Electric Fuel and Purchased Power | $ | 54 |
| | $ | (53 | ) | | $ | (126 | ) |
SoCalGas: | | |
| | |
| | |
|
Commodity contracts not subject to rate recovery | Operation and Maintenance | $ | — |
| | $ | 1 |
| | $ | (1 | ) |
Commodity contracts subject to rate recovery | Cost of Natural Gas | (2 | ) | | (4 | ) | | 1 |
|
Total | | $ | (2 | ) | | $ | (3 | ) | | $ | — |
|
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 December 31, 2017 and 2016 is $6 million and $10 million, respectively. At December 31, 2017, if the credit ratings of Sempra Energy were reduced below investment grade, $6 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 at December 31, 2017 and 2016 is $1 million and negligible, respectively. At December 31, 2017, if the credit ratings of SDG&E were reduced below investment grade, $1 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.
|
| | | | |
| | The board | Sempra Energy's board of directors |
SCAQMD | South Coast Air Quality Management District | | TURN | The Utility Reform Network |
SDG&E | San Diego Gas & Electric Company | | UCAN | Utility Consumers’ Action Network |
SDWA | Safe Drinking Water Act | | Willmut Gas | Willmut Gas Company |
NOTE 10. FAIR VALUE MEASUREMENTS
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 December 31, 2017 and 2016. 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.
The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 9 in “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 December 31, 2017 and 2016 in the tables below include the following:
| |
▪ | Nuclear decommissioning trusts reflect the assets of SDG&E’s NDT, 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. 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 securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2). |
| |
▪ | For commodity contracts, interest rate derivatives and foreign exchange instruments, 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 in “Level 3 Information.” |
| |
▪ | Rabbi Trust 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). These investments in marketable securities were negligible at both December 31, 2017 and 2016. |
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.
|
| | | | | | | | | | | | | | | | | |
RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| | Fair value at December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
Assets: | | | | | | | | | |
Nuclear decommissioning trusts: | | | | | | | | | |
Equity securities | | $ | 491 |
| | $ | 5 |
| | $ | — |
| | $ | 496 |
| |
Debt securities: | | |
| | |
| | |
| | |
| |
Debt securities issued by the U.S. Treasury and other | | |
| | |
| | |
| | |
| |
U.S. government corporations and agencies | | 45 |
| | 9 |
| | — |
| | 54 |
| |
Municipal bonds | | — |
| | 250 |
| | — |
| | 250 |
| |
Other securities | | — |
| | 217 |
| | — |
| | 217 |
| |
Total debt securities | | 45 |
| | 476 |
| | — |
| | 521 |
| |
Total nuclear decommissioning trusts(1) | | 536 |
| | 481 |
| | — |
| | 1,017 |
| |
Interest rate and foreign exchange instruments | | — |
| | 7 |
| | — |
| | 7 |
| |
Commodity contracts not subject to rate recovery | | 5 |
| | 12 |
| | — |
| | 17 |
| |
Effect of netting and allocation of collateral(2) | | 2 |
| | — |
| | — |
| | 2 |
| |
Commodity contracts subject to rate recovery | | — |
| | 2 |
| | 126 |
| | 128 |
| |
Effect of netting and allocation of collateral(2) | | 12 |
| | — |
| | 5 |
| | 17 |
| |
Total | | $ | 555 |
| | $ | 502 |
| | $ | 131 |
| | $ | 1,188 |
| |
| | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| |
Interest rate and foreign exchange instruments | | $ | — |
| | $ | 217 |
| | $ | — |
| | $ | 217 |
| |
Commodity contracts not subject to rate recovery | | — |
| | 6 |
| | — |
| | 6 |
| |
Commodity contracts subject to rate recovery | | 23 |
| | 7 |
| | 154 |
| | 184 |
| |
Effect of netting and allocation of collateral(2) | | (23 | ) | | — |
| | — |
| | (23 | ) | |
Total | | $ | — |
| | $ | 230 |
| | $ | 154 |
| | $ | 384 |
| |
| | | | | | | | | |
| | Fair value at December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
Assets: | | |
| | |
| | |
| | |
| |
Nuclear decommissioning trusts: | | |
| | |
| | |
| | |
| |
Equity securities | | $ | 508 |
| | $ | — |
| | $ | — |
| | $ | 508 |
| |
Debt securities: | | |
| | |
| | |
| | |
| |
Debt securities issued by the U.S. Treasury and other | | |
| | |
| | |
| | |
| |
U.S. government corporations and agencies | | 36 |
| | 16 |
| | — |
| | 52 |
| |
Municipal bonds | | — |
| | 206 |
| | — |
| | 206 |
| |
Other securities | | — |
| | 141 |
| | — |
| | 141 |
| |
Total debt securities | | 36 |
| | 363 |
| | — |
| | 399 |
| |
Total nuclear decommissioning trusts(1) | | 544 |
| | 363 |
| | — |
| | 907 |
| |
Interest rate and foreign exchange instruments | | — |
| | 9 |
| | — |
| | 9 |
| |
Commodity contracts not subject to rate recovery | | — |
| | 15 |
| | — |
| | 15 |
| |
Effect of netting and allocation of collateral(2) | | 2 |
| | 7 |
| | — |
| | 9 |
| |
Commodity contracts subject to rate recovery | | 1 |
| | 3 |
| | 96 |
| | 100 |
| |
Effect of netting and allocation of collateral(2) | | 27 |
| | — |
| | 5 |
| | 32 |
| |
Total | | $ | 574 |
| | $ | 397 |
| | $ | 101 |
|
| $ | 1,072 |
| |
| | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| |
Interest rate and foreign exchange instruments | | $ | — |
| | $ | 252 |
| | $ | — |
| | $ | 252 |
| |
Commodity contracts not subject to rate recovery | | 16 |
| | 11 |
| | — |
| | 27 |
| |
Effect of netting and allocation of collateral(2) | | (17 | ) | | — |
| | — |
| | (17 | ) | |
Commodity contracts subject to rate recovery | | 19 |
| | 8 |
| | 170 |
| | 197 |
| |
Effect of netting and allocation of collateral(2) | | (18 | ) | | — |
| | — |
| | (18 | ) | |
Total | | $ | — |
| | $ | 271 |
| | $ | 170 |
| | $ | 441 |
| |
| |
(1) | Excludes cash balances and cash equivalents. |
| |
(2) | 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. |
|
| | | | | | | | | | | | | | | | | |
RECURRING FAIR VALUE MEASURES – SDG&E |
(Dollars in millions) |
| | Fair value at December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | | Total |
Assets: | | | | | | | | | |
Nuclear decommissioning trusts: | | | | | | | | | |
Equity securities | | $ | 491 |
| | $ | 5 |
| | $ | — |
| | | $ | 496 |
|
Debt securities: | | |
| | |
| | |
| | | |
|
Debt securities issued by the U.S. Treasury and other | | |
| | |
| | |
| | | |
|
U.S. government corporations and agencies | | 45 |
| | 9 |
| | — |
| | | 54 |
|
Municipal bonds | | — |
| | 250 |
| | — |
| | | 250 |
|
Other securities | | — |
| | 217 |
| | — |
| | | 217 |
|
Total debt securities | | 45 |
| | 476 |
| | — |
| | | 521 |
|
Total nuclear decommissioning trusts(1) | | 536 |
| | 481 |
| | — |
| | | 1,017 |
|
Commodity contracts subject to rate recovery | | — |
| | — |
| | 126 |
| | | 126 |
|
Effect of netting and allocation of collateral(2) | | 11 |
| | — |
| | 5 |
| | | 16 |
|
Total | | $ | 547 |
| | $ | 481 |
| | $ | 131 |
| | | $ | 1,159 |
|
| | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | | |
|
Interest rate instruments | | $ | — |
| | $ | 13 |
| | $ | — |
| | | $ | 13 |
|
Commodity contracts subject to rate recovery | | 23 |
| | 5 |
| | 154 |
| | | 182 |
|
Effect of netting and allocation of collateral(2) | | (23 | ) | | — |
| | — |
| | | (23 | ) |
Total | | $ | — |
| | $ | 18 |
| | $ | 154 |
| | | $ | 172 |
|
| | | | | | | | | |
| | Fair value at December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | | Total |
Assets: | | |
| | |
| | |
| | | |
|
Nuclear decommissioning trusts: | | |
| | |
| | |
| | | |
|
Equity securities | | $ | 508 |
| | $ | — |
| | $ | — |
| | | $ | 508 |
|
Debt securities: | | |
| | |
| | |
| | | |
|
Debt securities issued by the U.S. Treasury and other | | |
| | |
| | |
| | | |
|
U.S. government corporations and agencies | | 36 |
| | 16 |
| | — |
| | | 52 |
|
Municipal bonds | | — |
| | 206 |
| | — |
| | | 206 |
|
Other securities | | — |
| | 141 |
| | — |
| | | 141 |
|
Total debt securities | | 36 |
| | 363 |
| | — |
| | | 399 |
|
Total nuclear decommissioning trusts(1) | | 544 |
| | 363 |
| | — |
| | | 907 |
|
Commodity contracts not subject to rate recovery | | — |
| | — |
| | — |
| | | — |
|
Effect of netting and allocation of collateral(2) | | 1 |
| | — |
| | — |
| | | 1 |
|
Commodity contracts subject to rate recovery | | 1 |
| | 2 |
| | 96 |
| | | 99 |
|
Effect of netting and allocation of collateral(2) | | 25 |
| | — |
| | 5 |
| | | 30 |
|
Total | | $ | 571 |
| | $ | 365 |
|
| $ | 101 |
| | | $ | 1,037 |
|
| | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | | |
|
Interest rate instruments | | $ | — |
| | $ | 25 |
| | $ | — |
| | | $ | 25 |
|
Commodity contracts subject to rate recovery | | 17 |
| | 7 |
| | 170 |
| | | 194 |
|
Effect of netting and allocation of collateral(2) | | (16 | ) | | — |
| | — |
| | | (16 | ) |
Total | | $ | 1 |
| | $ | 32 |
| | $ | 170 |
| | | $ | 203 |
|
| |
(1) | Excludes cash balances and cash equivalents. |
| |
(2) | 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. |
|
| | | | | | | | | | | | | | | | | | |
RECURRING FAIR VALUE MEASURES – SOCALGAS |
(Dollars in millions) |
| | Fair value at December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | | Total |
Assets: | | | | | | | | | |
Commodity contracts subject to rate recovery | | $ | — |
| | $ | 2 |
| | $ | — |
| | | $ | 2 |
|
Effect of netting and allocation of collateral(1) | | 1 |
| | — |
| | — |
| | | 1 |
|
Total | | $ | 1 |
| | $ | 2 |
| | $ | — |
| | | $ | 3 |
|
Liabilities: | | |
| | |
| | |
| | | |
|
Commodity contracts subject to rate recovery | | $ | — |
| | $ | 2 |
| | $ | — |
| | | $ | 2 |
|
Total | | $ | — |
|
| $ | 2 |
|
| $ | — |
|
| | $ | 2 |
|
| | | | | | | | | |
| | Fair value at December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | | Total |
Assets: | | |
| | |
| | |
| | | |
|
Commodity contracts not subject to rate recovery | | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
|
Effect of netting and allocation of collateral(1) | | 1 |
| | — |
| | — |
| | | 1 |
|
Commodity contracts subject to rate recovery | | — |
| | 1 |
| | — |
| | | 1 |
|
Effect of netting and allocation of collateral(1) | | 2 |
| | — |
| | — |
| | | 2 |
|
Total | | $ | 3 |
|
| $ | 1 |
|
| $ | — |
|
| | $ | 4 |
|
Liabilities: | | |
| | |
| | |
| | | |
|
Commodity contracts subject to rate recovery | | $ | 2 |
| | $ | 1 |
| | $ | — |
| | | $ | 3 |
|
Effect of netting and allocation of collateral(1) | | (2 | ) | | — |
| | — |
| | — |
| (2 | ) |
Total | | $ | — |
| | $ | 1 |
| | $ | — |
| | | $ | 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 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(1) |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | (74 | ) | | $ | 19 |
| | $ | 107 |
|
Realized and unrealized gains (losses) | 34 |
| | (120 | ) | | (134 | ) |
Allocated transmission instruments | 6 |
| | 8 |
| | 12 |
|
Settlements | 6 |
| | 19 |
| | 34 |
|
Balance at December 31 | $ | (28 | ) | | $ | (74 | ) | | $ | 19 |
|
Change in unrealized gains (losses) relating to | |
| | |
| | |
|
instruments still held at December 31 | $ | 30 |
| | $ | (101 | ) | | $ | (27 | ) |
(1) Excludes the effect of contractual ability to settle contracts under master netting agreements.
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-price 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 CAISO, an objective source. Annual auction prices are published once a year, typically in the middle of November, and are the basis for valuing CRRs settling in the following year. For the CRRs settling from January 1 to December 31, the auction price inputs, at a given location, are in the following ranges:
|
| | | | | | | | |
CONGESTION REVENUE RIGHTS AUCTION PRICE INPUTS | |
| |
Settlement year | | Price per MWh |
2018 | $ | (7.25 | ) | to | $ | 11.99 |
| |
2017 | | (11.88 | ) | to | | 6.93 |
| |
2016 | | (23.81 | ) | to | | 10.23 |
| |
The impact associated with discounting is negligible. Because these auction prices are a less observable input, these instruments are classified as Level 3. 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 9.
Long-term, fixed-price 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. These inputs range from $22.55 per MWh to $51.01 per MWh at December 31, 2017, and $17.40 per MWh to $56.67 per MWh at December 31, 2016. A significant increase or decrease in market electricity forward prices would result in a significantly higher or lower fair value, respectively. We summarize long-term, fixed-price electricity position volumes in Note 9.
Realized gains and losses associated with CRRs and long-term electricity positions, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the 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, accounts and notes receivable, short-term amounts due to/from unconsolidated affiliates, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts because of the short-term nature of these instruments. 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 that are not recorded at fair value on the Consolidated Balance Sheets at December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
(Dollars in millions) |
| December 31, 2017 |
| Carrying | | Fair value |
| amount | | Level 1 | | Level 2 | | Level 3 | | Total |
Sempra Energy Consolidated: | | | | | | | | | |
Long-term amounts due from unconsolidated affiliates(1) | $ | 604 |
| | $ | — |
| | $ | 528 |
| | $ | 96 |
| | $ | 624 |
|
Long-term amounts due to unconsolidated affiliates | 35 |
| | — |
| | 32 |
| | — |
| | 32 |
|
Total long-term debt(2)(3) | 17,138 |
| | 817 |
| | 17,134 |
| | 458 |
| | 18,409 |
|
SDG&E: | |
| | |
| | |
| | |
| | |
|
Total long-term debt(3)(4) | $ | 4,868 |
| | $ | — |
| | $ | 5,073 |
| | $ | 295 |
| | $ | 5,368 |
|
SoCalGas: | |
| | |
| | |
| | |
| | |
|
Total long-term debt(5) | $ | 3,009 |
| | $ | — |
| | $ | 3,192 |
| | $ | — |
| | $ | 3,192 |
|
| | | | | | | | | |
| December 31, 2016 |
| Carrying | | Fair value |
| amount | | Level 1 | | Level 2 | | Level 3 | | Total |
Sempra Energy Consolidated: | |
| | |
| | |
| | |
| | |
|
Long-term amounts due from unconsolidated affiliates(1) | $ | 184 |
| | $ | — |
| | $ | 91 |
| | $ | 84 |
| | $ | 175 |
|
Total long-term debt(2)(3) | 15,068 |
| | — |
| | 15,455 |
| | 492 |
| | 15,947 |
|
SDG&E: | |
| | |
| | |
| | |
| | |
|
Total long-term debt(3)(4) | $ | 4,654 |
| | $ | — |
| | $ | 4,727 |
| | $ | 305 |
| | $ | 5,032 |
|
SoCalGas: | |
| | |
| | |
| | |
| | |
|
Total long-term debt(5) | $ | 3,009 |
| | $ | — |
| | $ | 3,131 |
| | $ | — |
| | $ | 3,131 |
|
| |
(1) | Excluding accumulated interest outstanding of $29 million and $17 million at December 31, 2017 and 2016, respectively, and excluding foreign currency translation of $35 million on a Mexican peso-denominated loan at December 31, 2017. |
| |
(2) | Before reductions for unamortized discount (net of premium) and debt issuance costs of $143 million and $109 million at December 31, 2017 |
and 2016, respectively, and excluding build-to-suit and capital lease obligations of $877 million and $383 million at December 31, 2017 and 2016, respectively. We discuss our long-term debt in Note 5.
| |
(3) | Level 3 instruments include $295 million and $305 million at December 31, 2017 and 2016, respectively, related to Otay Mesa VIE. |
| |
(4) | Before reductions for unamortized discount and debt issuance costs of $45 million at December 31, 2017 and 2016, respectively, and excluding capital lease obligations of $732 million and $240 million at December 31, 2017 and 2016, respectively. |
| |
(5) | Before reductions for unamortized discount and debt issuance costs of $24 million and $27 million at December 31, 2017 and 2016, respectively, and excluding capital lease obligations of $1 million at December 31, 2017. |
We determine the fair value of certain long-term amounts due from/to unconsolidated affiliates and long-term debt based on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value certain other long-term amounts due from unconsolidated affiliates using a perpetuity approach based on the obligation’s fixed interest rate, the absence of a stated maturity date and a discount rate reflecting local borrowing costs (Level 3). 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 NDT funds related to SONGS in Note 13.
NON-RECURRING FAIR VALUE MEASURES
Sempra Mexico
IEnova Pipelines. In September 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, increasing its ownership interest to 100 percent. As a result of IEnova obtaining control over IEnova Pipelines, in the year ended December 31, 2016, Sempra Mexico recognized a pretax gain of $617 million ($432 million after-tax) for the excess of the acquisition-date fair value of its previously held equity interest in IEnova Pipelines ($1.144 billion) over the carrying value of that interest ($520 million) and losses reclassified from AOCI ($7 million), included as Remeasurement of Equity Method Investment on Sempra Energy’s Consolidated Statement of Operations. The valuation technique used to measure the acquisition-date fair value of our equity interest in IEnova Pipelines immediately prior to the business acquisition was based on the fair value of the entire business combination ($2.288 billion) less the fair value of the consideration paid ($1.144 billion, the equity sale price). We discuss the IEnova Pipelines acquisition in Note 3.
TdM. In February 2016, management approved a plan to market and sell Sempra Mexico’s TdM natural gas-fired power plant, and classified it as held for sale on the Sempra Energy Consolidated Balance Sheet, as we discuss in Note 3. In September 2016, we received market information that indicated that the fair value of TdM may be less than its carrying value. As a result, after performing an analysis of the information, Sempra Mexico reduced the carrying value of TdM by recognizing a noncash impairment charge of $131 million ($111 million after-tax) in the third quarter of 2016. In 2017, Sempra Mexico received a purchase price offer resulting from negotiations with an active market participant. This new market information indicated that the fair value of TdM was lower than its carrying value at June 30, 2017. As a result, in the second quarter of 2017, Sempra Mexico further reduced the carrying value of TdM by recognizing a noncash impairment charge of $71 million. Impairments recorded for TdM are included in Impairment Losses on Sempra Energy’s Consolidated Statements of Operations. Market values resulting from a third-party bidding process and a purchase price offer are considered to be Level 2 inputs in the fair value hierarchy, as they represent observable pricing inputs.
Sempra LNG & Midstream
Rockies Express. As we discuss in Note 3, in March 2016, Sempra LNG & Midstream agreed to sell its 25-percent interest in Rockies Express for cash consideration of $440 million, subject to adjustment at closing. In March 2016, we recorded a noncash impairment of our investment in Rockies Express of $44 million ($27 million after-tax). The charge is included in Equity Earnings, Before Income Tax, on the Sempra Energy Consolidated Statement of Operations for the year ended December 31, 2016. We considered the sale price for our equity interest in Rockies Express to be a market participants’ view of the total value of Rockies Express and measured the fair value of our investment based on the equity sale price.
The following table summarizes significant inputs impacting our non-recurring fair value measures:
|
| | | | | | | | | | | | | | |
NON-RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) |
| Estimated fair value | | Valuation technique | | Fair value hierarchy | | % of fair value measurement | | Inputs used to develop measurement | | Range of inputs |
Investment in IEnova Pipelines | $ | 1,144 |
| (1) | | Market approach | | Level 2 | | 100% | | Equity sale price | | 100% |
TdM | $ | 145 |
| (2) | | Market approach | | Level 2 | | 100% | | Purchase price offers | | 100% |
TdM | $ | 62 |
| (3) | | Market approach | | Level 2 | | 100% | | Purchase price offer | | 100% |
Investment in Rockies Express | $ | 440 |
| (4) | | Market approach | | Level 2 | | 100% | | Equity sale price | | 100% |
| |
(1) | At measurement date of September 26, 2016, immediately prior to acquiring a 100-percent ownership interest in IEnova Pipelines. |
| |
(2) | At measurement date of September 29, 2016. |
| |
(3) | At measurement date of June 30, 2017. At December 31, 2017, TdM has a carrying value of $78 million, reflecting subsequent business activity, and is classified as held for sale. |
| |
(4) | At measurement date of March 29, 2016. On May 9, 2016, Sempra LNG & Midstream sold its equity interest in Rockies Express. |
NOTE 11. PREFERRED STOCK
Sempra Energy and SDG&E are authorized to issue up to 50 million and 45 million shares of preferred stock, respectively. At December 31, 2017 and 2016, Sempra Energy and SDG&E have no preferred stock outstanding. The rights, preferences, privileges and restrictions for any new series of preferred stock would be established by each company’s board of directors at the time of issuance.
In January 2018, Sempra Energy issued 17,250,000 shares of mandatory convertible preferred stock and received proceeds of approximately $1.69 billion (net of underwriting discounts, but before related expenses), which we discuss in Note 18.
SoCalGas is authorized to issue up to an aggregate of 11 million shares of preferred stock, series preferred stock and preference stock. At December 31, 2017 and 2016, SoCalGas has the following preferred stock outstanding:
|
| | | | | | | |
PREFERRED STOCK OUTSTANDING |
(Dollars in millions, except per share amounts) | | | |
| December 31, |
| 2017 | | 2016 |
$25 par value, authorized 1,000,000 shares: | | | |
6% Series, 79,011 shares outstanding | $ | 3 |
| | $ | 3 |
|
6% Series A, 783,032 shares outstanding | 19 |
| | 19 |
|
SoCalGas - Total preferred stock | 22 |
| | 22 |
|
Less: 50,970 shares of the 6% Series outstanding owned by Pacific Enterprises | (2 | ) | | (2 | ) |
Sempra Energy - Total preferred stock of subsidiary | $ | 20 |
| | $ | 20 |
|
None of SoCalGas’ outstanding preferred stock is callable, and no shares are subject to mandatory redemption.
All outstanding shares have one vote per share, cumulative preferences as to dividends and liquidation preferences of $25 per share plus any unpaid dividends.
In addition to the outstanding preferred stock above, SoCalGas’ articles of incorporation authorize 5 million shares of series preferred stock and 5 million shares of preference stock, both without par value and with cumulative preferences as to dividends and liquidation value. The preference stock would rank junior to all series of preferred stock and series preferred stock. Other rights and privileges of any new series of such stock would be established by the SoCalGas board of directors at the time of issuance.
NOTE 12. SEMPRA ENERGY – SHAREHOLDERS’ EQUITY AND EARNINGS PER SHARE
The following table provides EPS computations for the years ended December 31, 2017, 2016 and 2015. Basic EPS is calculated by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the year. 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 AND DIVIDENDS DECLARED |
(Dollars in millions, except per share amounts; shares in thousands) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Numerator: | | | | | |
Earnings/Income attributable to common shares | $ | 256 |
| | $ | 1,370 |
| | $ | 1,349 |
|
| | | | | |
Denominator: | |
| | |
| | |
|
Weighted-average common shares outstanding for basic EPS(1) | 251,545 |
| | 250,217 |
| | 248,249 |
|
Dilutive effect of stock options, RSAs and RSUs(2) | 755 |
| | 938 |
| | 2,674 |
|
Weighted-average common shares outstanding for diluted EPS | 252,300 |
| | 251,155 |
| | 250,923 |
|
| | | | | |
EPS: | |
| | |
| | |
|
Basic | $ | 1.02 |
| | $ | 5.48 |
| | $ | 5.43 |
|
Diluted | $ | 1.01 |
| | $ | 5.46 |
| | $ | 5.37 |
|
| | | | | |
Dividends declared per share of common stock(3) | $ | 3.29 |
| | $ | 3.02 |
| | $ | 2.80 |
|
| |
(1) | Includes average fully vested RSUs held in our Deferred Compensation Plan of 609 in 2017, 568 in 2016 and 491 in 2015. These fully vested RSUs 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. |
| |
(2) | Due to market fluctuations of both Sempra Energy stock and the comparative indices used to determine the vesting percentage of our total shareholder return performance-based RSUs, which we discuss in Note 8, dilutive RSUs may vary widely from period-to-period. |
| |
(3) | Our board of directors has the discretion to determine the payment and amount of future dividends. |
The potentially dilutive impact from stock options, RSAs and RSUs is calculated under the treasury stock method. Under this method, proceeds based on the exercise price and unearned compensation are assumed to be used to repurchase shares on the open market at the average market price for the period, reducing the number of potential new shares to be issued and sometimes causing an antidilutive effect. The computation of diluted EPS excludes 237,741, zero and 722 potentially dilutive shares for the years ended December 31, 2017, 2016 and 2015, respectively, because to include them would be antidilutive for the period. However, these shares could potentially dilute basic EPS in the future.
We are authorized to issue 750 million shares of no par value common stock. The following table provides common stock activity for the years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | |
COMMON STOCK ACTIVITY |
| |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Common shares outstanding, January 1 | 250,152,514 |
| | 248,298,080 |
| | 246,330,884 |
|
RSUs vesting(1) | 362,022 |
| | 1,363,555 |
| | 1,499,062 |
|
Stock options exercised | 164,454 |
| | 167,742 |
| | 227,815 |
|
Savings plan issuance | 567,428 |
| | 653,607 |
| | 652,631 |
|
Common stock investment plan(2) | 254,047 |
| | 266,056 |
| | 249,665 |
|
Issuance of RSUs held in our Deferred Compensation Plan | 7,811 |
| | — |
| | — |
|
Shares repurchased(3) | (149,299 | ) | | (596,526 | ) | | (661,977 | ) |
Common shares outstanding, December 31 | 251,358,977 |
| | 250,152,514 |
| | 248,298,080 |
|
| |
(1) | Includes dividend equivalents. |
| |
(2) | Participants in the Direct Stock Purchase Plan may reinvest dividends to purchase newly issued shares. |
| |
(3) | From time to time, we purchase shares of our common stock or units from long-term incentive plan participants who elect to sell to us a sufficient number of vested RSAs or RSUs to meet minimum statutory tax withholding requirements. |
On January 9, 2018, we completed the offering of 23,364,486 shares of our common stock in a registered public offering, pursuant to forward sale agreements. In connection with the overallotment option granted to the underwriters, on January 9, 2018, we issued 3,504,672 shares of our common stock and received net proceeds of $368 million (net of underwriting discounts, but before deducting other related expenses) for such shares, which we discuss in Note 18.
NOTE 13. SAN ONOFRE NUCLEAR GENERATING STATION
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, after an extended outage beginning in 2012, 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 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 costs. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Consolidated Statements of Operations.
SONGS STEAM GENERATOR REPLACEMENT PROJECT
As part of the 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. These issues with the steam generators ultimately resulted in Edison’s decision to permanently retire SONGS.
The replacement steam generators were designed and provided by 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 recovery of damages. The other SONGS co-owners, SDG&E and the City of Riverside, participated as claimants and respondents.
On March 13, 2017, the Tribunal overseeing the arbitration found MHI liable for breach of contract, subject to a contractual limitation of liability, and rejected claimants’ other claims. The Tribunal awarded $118 million in damages to the SONGS co-owners, but determined that MHI was the prevailing party and awarded it 95 percent of its arbitration costs. The damage award is offset by these costs, resulting in a net award of approximately $60 million in favor of the SONGS co-owners. SDG&E’s specific allocation of the damage award is $24 million reduced by costs awarded to MHI of approximately $12 million, resulting in a net damage award of $12 million, which was paid by MHI to SDG&E in March 2017. These amounts include certain adjustments to calculations supporting the Tribunal’s findings. In accordance with the Amended Settlement Agreement discussed below, SDG&E recorded the proceeds from the MHI arbitration by reducing Operation and Maintenance for previously incurred legal costs of $11 million, and shared the remaining $1 million equally between ratepayers and shareholders.
SETTLEMENT AGREEMENT TO RESOLVE THE CPUC’S ORDER INSTITUTING INVESTIGATION INTO THE SONGS OUTAGE
In November 2012, in response to the outage, the CPUC issued the SONGS OII, which was intended to determine the ultimate recovery of the investment in SONGS and the costs incurred since the commencement of this outage.
In November 2014, the CPUC issued a final decision approving an Amended and Restated Settlement Agreement (Amended Settlement Agreement) in the SONGS OII proceeding executed by SDG&E along with Edison, TURN, ORA and two other intervenors. The Amended Settlement Agreement does not affect ongoing or future proceedings before the NRC, or any litigation or arbitration related to potential future recoveries from third parties (except for the allocation to ratepayers of any recoveries addressed in the final decision) or any proceedings addressing decommissioning activities and costs.
The Amended Settlement Agreement provides for various disallowances, refunds and rate recoveries, including authorizing SDG&E to recover in rates its remaining investment in SONGS, including base plant and construction work in progress, but excluding its investment in the SGRP, generally over a ten-year period commencing February 1, 2012, together with a return on investment at a reduced rate equal to:
| |
▪ | SDG&E’s weighted-average return on debt, plus |
| |
▪ | 50 percent of SDG&E’s weighted-average return on preferred stock, as authorized in the CPUC’s cost of capital (discussed in Note 14) proceeding then in effect (collectively, SONGS return on rate base) |
In May 2016, following the filing of petitions for modification by various parties, the CPUC issued a procedural ruling reopening the record of the OII to address the issue of whether the Amended Settlement Agreement is reasonable and in the public interest.
In December 2016, the CPUC issued another procedural ruling directing parties to the SONGS OII to determine whether an agreement could be reached to modify the Amended Settlement Agreement previously approved by the CPUC, to resolve allegations that unreported ex parte communications between Edison and the CPUC resulted in an unfair advantage at the time the settlement agreement was negotiated. Pursuant to the December ruling and a subsequent procedural ruling, the parties met to confer, engaged a mediator and held confidential mediation discussions in June, July and August of 2017.
In August 2017, the parties filed status reports providing their recommendations for resolving the OII given their unsuccessful efforts at reaching a settlement through mediation. SDG&E and Edison recommended that the Amended Settlement Agreement, as adopted by the CPUC, should be affirmed and the pending intervenor petitions dismissed. Intervening parties recommended various alternative courses of action, including modifying the Amended Settlement Agreement or rejecting it in favor of litigation. In October 2017, the CPUC issued a ruling establishing a process to bring the proceeding to a conclusion. This ruling establishes a status conference and includes a preliminary schedule for additional testimony, hearings and briefings.
On January 30, 2018, SDG&E, Edison, ORA, TURN and other intervenors entered into a settlement agreement (Revised Settlement Agreement). On the same date, a Joint Motion for Adoption of the Settlement Agreement was filed with the CPUC. If approved by the CPUC, the Revised Settlement Agreement will resolve all issues under consideration in the SONGS OII and will modify the Amended Settlement Agreement approved by the CPUC in November 2014. The Revised Settlement Agreement was the result of multiple mediation sessions in 2017 and January 2018 and was signed following a settlement conference in the SONGS OII, as required under CPUC rules. On February 1, 2018, the parties filed a motion to stay the proceedings in the OII pending the CPUC’s consideration of the Revised Settlement Agreement. On February 6, 2018, the CPUC granted the parties’
motion to stay the proceedings and established a tentative procedural schedule with public participation hearings in April and July, evidentiary hearings in April and May, and briefing in June of 2018.
The Revised Settlement Agreement is subject to CPUC approval. The parties to the Revised Settlement Agreement have agreed to exercise their best efforts to obtain CPUC approval. In the event that the CPUC fails to approve the Revised Settlement Agreement, the proceeding will remain open and subject to previous rulings in the SONGS OII, and the Amended Settlement Agreement will remain in effect, unless it is modified or set aside by the CPUC as a result of the OII proceeding.
In connection with the Revised Settlement Agreement, and in exchange for the release of certain SONGS-related claims, SDG&E and Edison entered into the Utility Shareholder Agreement, described below, in which Edison has agreed to pay for the amounts that SDG&E would have received in rates under the Amended Settlement Agreement but will not receive upon implementation of the Revised Settlement Agreement. The Utility Shareholder Agreement is not subject to the approval of the CPUC. However, it is not effective unless and until the CPUC approves the Revised Settlement Agreement.
The timing of a ruling by the CPUC on the Joint Motion for Adoption of the Settlement Agreement is unclear. There is no assurance that the Revised Settlement Agreement will be adopted or that the Amended Settlement Agreement will not be modified or set aside as a result of the OII proceeding, which could result in a substantial reduction in our expected recovery or in payments to customers. These outcomes could have a material adverse effect on Sempra Energy’s and SDG&E’s results of operations, financial condition and cash flows.
Disallowances, Refunds and Recoveries
If the Revised Settlement Agreement is approved by the CPUC, SDG&E and Edison will cease rate recovery of SONGS costs as authorized under the Amended Settlement Agreement as of the date their combined remaining SONGS regulatory assets equal $775 million (the Cessation Date). Currently, the estimated Cessation Date is December 19, 2017. The Cessation Date is partly dependent on the outcome of Edison’s pending request to the CPUC, in a separate proceeding, for approval to apply certain proceeds received from the DOE to reduce Edison’s SONGS regulatory asset. If this request is rejected by the CPUC, then the estimated Cessation Date will be April 21, 2018. In either case, under the Utility Shareholder Agreement, Edison is obligated to pay SDG&E the full amount of SDG&E’s revenue requirement not recovered from ratepayers, as described below. SDG&E and Edison will refund to customers SONGS-related amounts recovered in rates after the Cessation Date.
In the event that the CPUC takes an action that has the effect of invalidating the Utility Shareholder Agreement, SDG&E may, in its discretion, withdraw from the Revised Settlement Agreement, in which case Edison shall remain a party to the Revised Settlement Agreement, but the Revised Settlement Agreement shall be terminated as to SDG&E. In such a scenario, SDG&E would return to its litigation position before the CPUC in the SONGS OII that existed prior to the Revised Settlement Agreement.
Pursuant to the CPUC’s rules, no settlement becomes binding unless the CPUC approves the settlement based on a finding that it is reasonable in light of the whole record, consistent with law, and in the public interest. The CPUC has discretion to approve or disapprove a settlement, or to condition its approval on changes to the settlement, which the parties may accept or reject, negotiating in good faith to seek a resolution acceptable to all parties. CPUC rules do not provide for any fixed time period for the CPUC to act on proposed settlements.
Utility Shareholder Agreement
On January 10, 2018, SDG&E and Edison entered into the Utility Shareholder Agreement. Under the terms of the Utility Shareholder Agreement, Edison has an obligation to compensate SDG&E for the revenue requirement amounts that SDG&E will no longer recover because of the Revised Settlement Agreement. In exchange for Edison’s reimbursement, the parties will mutually release each other from the “SONGS Issues,” a defined term that consists of 18 broad categories. The effect of the agreement is that SDG&E will release Edison from any and all claims that SDG&E had or could have asserted related to the steam generator replacement failure and its aftermath. The Utility Shareholder Agreement becomes effective only upon CPUC approval of the Revised Settlement Agreement. Edison’s payment obligation commences 30 days after the first fiscal quarter in which the CPUC approves the Revised Settlement Agreement, and amounts are due to SDG&E quarterly thereafter until April 2022, which approximates the amounts and timing of amounts of what would have been SDG&E’s recoveries from ratepayers contemplated under the Amended Settlement Agreement.
Accounting and Financial Impacts
As a result of the Revised Settlement Agreement by the settling parties and the Utility Shareholder Agreement, SDG&E recorded a receivable from Edison totaling $152 million, $32 million classified as current and $120 million classified as noncurrent, as of December 31, 2017. This receivable reflects amounts Edison is obligated to pay to SDG&E in lieu of amounts SDG&E would
have collected from ratepayers associated with the SONGS regulatory asset, which SDG&E believes is now no longer probable of recovery.
Assuming the Revised Settlement Agreement is approved, SDG&E and Sempra Energy do not expect that implementation of the Revised Settlement Agreement in combination with the Utility Shareholder Agreement will have a material adverse impact on either company. However, until the CPUC approves the Revised Settlement Agreement as proposed, there can be no assurance that the SONGS OII proceeding will conclude as contemplated by SDG&E in accordance with the Revised Settlement Agreement and the Utility Shareholder Agreement, or that the CPUC will not order refunds to customers above those contemplated by the Amended Settlement Agreement, or take other action that may be adverse to SDG&E and Sempra Energy. Such alternative outcomes could have a material adverse effect on SDG&E’s and Sempra Energy’s results of operations, financial condition and cash flows.
SETTLEMENT WITH NEIL
As we discuss below, NEIL insures domestic and international nuclear utilities for the costs associated with interruptions, damages, decontaminations and related nuclear risks. In October 2015, the SONGS co-owners (Edison, SDG&E and the City of Riverside) reached an agreement with NEIL to resolve all of SONGS’ insurance claims arising out of the failures of the replacement steam generators for a total payment by NEIL of $400 million, SDG&E’s share of which was $80 million. Pursuant to the terms of the Amended Settlement Agreement, after reimbursement of legal fees and a 5-percent allocation to shareholders, the net proceeds of $75 million were allocated to ratepayers through the ERRA.
NUCLEAR DECOMMISSIONING AND FUNDING
As a result of Edison’s decision to permanently retire SONGS Units 2 and 3, Edison began the decommissioning phase of the plant. Decommissioning of Unit 1, removed from service in 1992, is largely complete. The remaining work for Unit 1 will be done once Units 2 and 3 are dismantled. In December 2016, Edison announced that, following a 10-month competitive bid process, it had contracted with a joint venture of AECOM and EnergySolutions (known as SONGS Decommissioning Solutions) as the general contractor to complete the dismantlement of SONGS. The majority of the dismantlement work is expected to take 10 years. SDG&E is responsible for approximately 20 percent of the total contract price.
In accordance with state and federal requirements and regulations, SDG&E has assets held in the NDT to fund its share of decommissioning costs for SONGS Units 1, 2 and 3. The amounts collected in rates for SONGS’ decommissioning are invested in the NDT, which is comprised of externally managed trust funds. Amounts held by the NDT are invested in accordance with CPUC regulations. The NDT assets are presented on the Sempra Energy and SDG&E Consolidated Balance Sheets at fair value with the offsetting credits recorded in noncurrent Regulatory Liabilities.
In April 2016, the CPUC adopted a decision approving a total decommissioning cost estimate for SONGS Units 2 and 3 of $4.4 billion (in 2014 dollars), of which SDG&E’s share is $899 million. 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. SDG&E has received authorization from the CPUC to access NDT funds of up to $362 million for 2013 through 2018 (2018 forecasted) SONGS decommissioning costs. This includes up to $60 million authorized by the CPUC in January 2018 to be withdrawn from the NDT for forecasted 2018 SONGS Units 2 and 3 costs as decommissioning costs are incurred.
In December 2016, the IRS and the U.S. Department of the Treasury issued proposed regulations that clarify the definition of “nuclear decommissioning costs,” which are costs that may be paid for or reimbursed from a qualified trust fund. The proposed regulations state that costs related to the construction and maintenance of independent spent fuel management installations are included in the definition of “nuclear decommissioning costs.” The proposed regulations will be effective prospectively once they are finalized; however, the IRS has stated that it will not challenge taxpayer positions consistent with the proposed regulations for taxable years ending on or after the date the proposed regulations were issued. SDG&E is awaiting the adoption of, or additional refinement to, the proposed regulations before determining whether the proposed regulations will allow SDG&E to access the NDT funds for reimbursement or payment of the spent fuel management costs that were or will be incurred in 2016 and subsequent years. Further clarification of the proposed regulations could enable SDG&E to access the NDT to recover spent fuel management costs before Edison reaches final settlement with the DOE regarding the DOE’s reimbursement of these costs. Historically, the DOE’s reimbursements of spent fuel storage costs have not resulted in timely or complete recovery of these costs. We discuss the DOE’s responsibility for spent nuclear fuel below. The IRS held public hearings on the proposed regulations in October 2017. It is unclear when clarification of the proposed regulations might be provided or when the proposed regulations will be finalized.
Nuclear Decommissioning Trusts
The amounts collected in rates for SONGS’ decommissioning are invested in the NDT, which is comprised of 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 Consolidated Balance Sheets at fair value with the offsetting credits recorded in noncurrent Regulatory Liabilities.
The following table shows the fair values and gross unrealized gains and losses for the securities held in the NDT. We provide additional fair value disclosures for the NDT in Note 10.
|
| | | | | | | | | | | | | | | |
NUCLEAR DECOMMISSIONING TRUSTS |
(Dollars in millions) |
| Cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
At December 31, 2017: | | | | | | | |
Debt securities: | | | | | | | |
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies(1) | $ | 54 |
| | $ | — |
| | $ | — |
| | $ | 54 |
|
Municipal bonds(1) | 245 |
| | 7 |
| | (2 | ) | | 250 |
|
Other securities(2) | 215 |
| | 3 |
| | (1 | ) | | 217 |
|
Total debt securities | 514 |
| | 10 |
| | (3 | ) | | 521 |
|
Equity securities | 171 |
| | 326 |
| | (1 | ) | | 496 |
|
Cash and cash equivalents | 16 |
| | — |
| | — |
| | 16 |
|
Total | $ | 701 |
| | $ | 336 |
| | $ | (4 | ) | | $ | 1,033 |
|
At December 31, 2016: | |
| | |
| | |
| | |
|
Debt securities: | |
| | |
| | |
| | |
|
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | $ | 52 |
| | $ | — |
| | $ | — |
| | $ | 52 |
|
Municipal bonds | 203 |
| | 4 |
| | (1 | ) | | 206 |
|
Other securities | 141 |
| | 2 |
| | (2 | ) | | 141 |
|
Total debt securities | 396 |
| | 6 |
| | (3 | ) | | 399 |
|
Equity securities | 143 |
| | 366 |
| | (1 | ) | | 508 |
|
Cash and cash equivalents | 119 |
| | — |
| | — |
| | 119 |
|
Total | $ | 658 |
| | $ | 372 |
| | $ | (4 | ) | | $ | 1,026 |
|
| |
(1) | Maturity dates are 2018-2048. |
| |
(2) | Maturity dates are 2018-2064. |
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) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Proceeds from sales(1) | $ | 1,314 |
| | $ | 1,134 |
| | $ | 577 |
|
Gross realized gains | 157 |
| | 111 |
| | 29 |
|
Gross realized losses | (14 | ) | | (29 | ) | | (15 | ) |
| |
(1) | Excludes securities that are held to maturity. |
Net unrealized gains and losses, as well as realized gains and losses that are reinvested in the NDT, are included in noncurrent Regulatory Liabilities on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets. We determine the cost of securities in the trusts on the basis of specific identification. In 2017 and 2016, sale and purchase activities in our NDT increased significantly compared to 2015 as a result of continuing changes to our asset allocations initiated in the fourth quarter of 2016 to reduce our equity volatility, lower our duration risk, and increase exposure to municipal bonds and intermediate credit. This shift in our asset mix is intended to reduce the overall risk profile of the NDT in anticipation of significant cash withdrawals over the next 10 years to fund the SONGS decommissioning.
ASSET RETIREMENT OBLIGATION AND SPENT NUCLEAR FUEL
SDG&E’s asset retirement obligation related to decommissioning costs for the SONGS units was $607 million at December 31, 2017. That amount includes the cost to decommission Units 2 and 3, and the remaining cost to complete the decommissioning of Unit 1, which is substantially complete. The asset retirement obligation at December 31, 2017 for Unit 1 is based on a cost study prepared in 2016 that is pending CPUC approval. The asset retirement obligation at December 31, 2017 for Units 2 and 3 is based on a CPUC-approved cost study prepared in 2014 that reflects the acceleration of the start of decommissioning of these units as a result of the early closure of the plant. SDG&E’s share of total decommissioning costs in 2017 dollars is approximately $1 billion.
U.S. Department of Energy Nuclear Fuel Disposal
Spent nuclear fuel from SONGS is currently stored on-site in an ISFSI licensed by the NRC or temporarily in spent fuel pools. In October 2015, the CCC approved Edison’s application for the proposed expansion of the ISFSI at SONGS. The ISFSI expansion began construction in 2016 and is expected to be fully loaded with spent fuel by 2019 and to operate until 2049, when it is assumed that the DOE will have taken custody of all the SONGS spent fuel. The ISFSI would then be decommissioned, and the site restored to its original environmental state. Until then, SONGS owners are responsible for interim storage of spent nuclear fuel at SONGS.
The Nuclear Waste Policy Act of 1982 made the DOE responsible for accepting, transporting, and disposing 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 continue to support Edison in its pursuit of claims on behalf of the SONGS co-owners against the DOE for its failure to timely accept the spent nuclear fuel. In April 2016, Edison executed a spent fuel settlement agreement with the DOE for $162 million covering damages incurred from 2006 through 2013. In May 2016, Edison refunded SDG&E $32 million for its respective share of the damage award paid. In applying this refund, SDG&E recorded a $23 million reduction to the SONGS regulatory asset, an $8 million reduction of its nuclear decommissioning balancing account and a $1 million reduction in its SONGS O&M cost balancing account.
In September 2016, Edison filed claims with the DOE for $56 million in spent fuel management costs incurred in 2014 and 2015 on behalf of the SONGS co-owners under the terms of the 2016 spent fuel settlement agreement. In February 2017, the DOE reduced the request to approximately $43 million primarily due to reductions to the claimed fuel canister costs. SDG&E received its $9 million respective share of the claim from Edison in May 2017 and recorded the proceeds in balancing accounts or as reductions to regulatory assets for the benefit of ratepayers.
In October 2017, Edison filed claims with the DOE for $58 million in spent fuel management costs incurred in 2016 on behalf of the SONGS co-owners under the terms of the 2016 spent fuel settlement agreement. SDG&E’s respective share of the claim is $12 million. It is unclear whether the claim will be resolved through settlement or arbitration, when resolution is expected, and whether Edison will receive an award for the full claim amount.
The 2016 spent fuel settlement agreement governs the submission of claims for costs incurred through December 31, 2016. It is unclear whether Edison will enter into a new settlement with the DOE or pursue litigation claims for spent fuel management costs incurred on or after January 1, 2017.
NUCLEAR INSURANCE
Edison requested and was granted approval in January 2018 by the NRC to reduce the nuclear liability and property damage insurance requirement, as described below. However, these changes in SONGS nuclear insurance levels require approval from all SONGS owners, which has not yet been obtained. We expect a decision in the first quarter of 2018.
SDG&E and the other owners of SONGS have insurance to cover claims from nuclear liability incidents arising at SONGS. Currently, this insurance provides $450 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 billion of SFP. If a nuclear liability loss occurring at any U.S. licensed/commercial reactor exceeds the $450 million insurance limit, all nuclear reactor owners could be required to contribute to the SFP. In such case, SDG&E’s contribution would be up to $50.9 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. Effective January 5, 2018, the NRC approved Edison’s request to reduce the nuclear liability insurance requirement from $450 million to $100 million and withdraw from participation in the SFP for SONGS.
The SONGS owners, including SDG&E, also maintain nuclear property damage insurance that exceeds the minimum federal requirements of $1.06 billion. This insurance coverage is provided through 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 $10.4 million of retrospective premiums based on overall member claims. All of SONGS’ insurance claims arising out of the failures of the MHI replacement steam generators have been settled with NEIL, as we discuss above. Effective January 10, 2018, the NRC approved Edison’s request to reduce its property damage insurance requirement for SONGS from $1.06 billion to $50 million.
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.
NOTE 14. REGULATORY MATTERS
REGULATORY ASSETS AND LIABILITIES
We show the details of regulatory assets and liabilities in the following table, and discuss each of them separately below.
|
| | | | | | | |
REGULATORY ASSETS (LIABILITIES) |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
SDG&E: | | | |
Fixed-price contracts and other derivatives | $ | 96 |
| | $ | 141 |
|
Costs related to SONGS plant closure(1) | — |
| | 183 |
|
Costs related to wildfire litigation | — |
| | 353 |
|
Deferred income taxes (refundable) recoverable in rates | (281 | ) | | 1,014 |
|
Pension and other postretirement benefit plan obligations | 153 |
| | 210 |
|
Removal obligations | (1,846 | ) | | (1,725 | ) |
Unamortized loss on reacquired debt | 9 |
| | 12 |
|
Environmental costs | 29 |
| | 48 |
|
Legacy meters(1) | — |
| | 16 |
|
Sunrise Powerlink fire mitigation | 119 |
| | 118 |
|
Regulatory balancing accounts(2) | | | |
Commodity – electric | 82 |
| | 35 |
|
Gas transportation | 22 |
| | 61 |
|
Safety and reliability | 48 |
| | 20 |
|
Public purpose programs | (70 | ) | | (106 | ) |
Other balancing accounts | 233 |
| | 249 |
|
Other regulatory liabilities | (70 | ) | | (2 | ) |
Total SDG&E | (1,476 | ) | | 627 |
|
SoCalGas: | |
| | |
|
Pension and other postretirement benefit plan obligations | 513 |
| | 563 |
|
Employee benefit costs | 45 |
| | 45 |
|
Removal obligations | (924 | ) | | (972 | ) |
Deferred income taxes (refundable) recoverable in rates | (437 | ) | | 417 |
|
Unamortized loss on reacquired debt | 8 |
| | 10 |
|
Environmental costs | 22 |
| | 22 |
|
Workers’ compensation | 12 |
| | 10 |
|
Regulatory balancing accounts(2) | | | |
Commodity – gas, including transportation | 151 |
| | 207 |
|
Safety and reliability | 266 |
| | 230 |
|
Public purpose programs | (274 | ) | | (270 | ) |
Other balancing accounts | (114 | ) | | (204 | ) |
Other regulatory (liabilities) assets | (64 | ) | | 8 |
|
Total SoCalGas | (796 | ) | | 66 |
|
Sempra Mexico: | | | |
Deferred income taxes recoverable in rates | 83 |
| | 71 |
|
Total Sempra Energy Consolidated | $ | (2,189 | ) | | $ | 764 |
|
| |
(1) | Regulatory assets earning a rate of return. |
| |
(2) | At December 31, 2017, the noncurrent portion of regulatory balancing accounts – net undercollected for SDG&E was $63 million. At December 31, 2017 and 2016, the noncurrent portion of regulatory balancing accounts – net undercollected for SoCalGas was $118 million and $85 million, respectively. |
In the table above:
| |
▪ | Regulatory assets arising from fixed-price contracts and other derivatives are offset by corresponding liabilities arising from purchased power and natural gas commodity and transportation contracts. The regulatory asset is increased/decreased based on changes in the fair market value of the contracts. It is also reduced as payments are made for commodities and services under these contracts. We discuss these fixed-price contracts and other derivatives further in Note 9. |
| |
▪ | Regulatory assets arising from the SONGS plant closure are associated with SDG&E’s investment in SONGS as of the plant closure date and the cost of operations since Units 2 and 3 were taken offline. Pursuant to the Revised Settlement Agreement, rate recovery of SONGS costs remaining as a regulatory asset as of the Cessation Date will cease. Under the Utility Shareholder Agreement, SDG&E recorded a receivable from Edison in lieu of amounts SDG&E would have collected from ratepayers. We discuss these matters further in Note 13. |
| |
▪ | Regulatory assets for CPUC-related costs for wildfire litigation are costs in excess of liability insurance coverage and amounts recovered from third parties. In December 2017, the CPUC issued a final decision, denying SDG&E’s request to recover these costs. In 2017, SDG&E wrote off the wildfire regulatory asset resulting in a charge of $351 million, as we discuss in Note 15 in “SDG&E – 2007 Wildfire Litigation and Net Cost Recovery Status.” |
| |
▪ | Deferred income taxes refundable/recoverable in rates are based on current regulatory ratemaking and income tax laws. SDG&E, SoCalGas and Sempra Mexico expect to refund/recover net regulatory liabilities/assets related to deferred income taxes over the lives of the assets that give rise to the related accumulated deferred income tax balances. Regulatory assets include certain income tax benefits associated with flow-through repair allowance deductions, which we discuss further below. In 2017, as a result of the TCJA, lowering the U.S. statutory corporate federal income tax from 35 percent to 21 percent resulted in excess deferred income tax balances that we expect to refund to ratepayers in accordance with the IRS normalization rules and as determined by the CPUC and the FERC. We discuss the TCJA and the impacts on Sempra Energy, SDG&E and SoCalGas in more detail in Note 6. |
| |
▪ | Regulatory assets/liabilities related to pension and other postretirement benefit plan obligations are offset by corresponding liabilities/assets and are being recovered in rates as the plans are funded. |
| |
▪ | The regulatory asset related to employee benefit costs represents our liability associated with long-term disability insurance that will be recovered from customers in future rates as expenditures are made. |
| |
▪ | Regulatory liabilities from removal obligations represent cumulative amounts collected in rates for future asset removal costs. |
| |
▪ | Regulatory assets related to unamortized losses on reacquired debt are recovered over the remaining amortization periods of the losses on reacquired debt. These periods range from 1 year to 10 years for SDG&E and from 3 years to 8 years for SoCalGas. |
| |
▪ | Regulatory assets related to environmental costs represent the portion of our environmental liability recognized at the end of the period in excess of the amount that has been recovered through rates charged to customers. We expect this amount to be recovered in future rates as expenditures are made. We discuss environmental issues further in Note 15. |
| |
▪ | The regulatory asset related to the legacy meters removed from service and replaced under the Smart Meter Program is their undepreciated value. SDG&E has fully recovered this asset in rate base. |
| |
▪ | The regulatory asset related to Sunrise Powerlink fire mitigation is offset by a corresponding liability for the funding of a trust to cover the mitigation costs. SDG&E expects to recover the regulatory asset in rates as the trust is funded over a remaining 52-year period. We discuss the trust further in Note 15. |
| |
▪ | The regulatory asset related to workers’ compensation represents accrued costs for future claims that will be recovered from customers in future rates as expenditures are made. |
| |
▪ | Over- and undercollected regulatory balancing accounts reflect the difference between customer billings and recorded or CPUC-authorized costs, including commodity costs. Depreciation and return on rate base may also be included in certain accounts. Amounts in the balancing accounts are recoverable (receivable) or refundable (payable) in future rates, subject to CPUC approval. Absent balancing account treatment, variations in covered costs, such as the cost of fuel supply and certain O&M costs, from amounts approved by the CPUC would increase volatility in utility earnings. Balancing account treatment eliminates the volatility in earnings that would otherwise result from variances in the covered costs compared to the authorized amounts. |
Amortization expense on regulatory assets for the years ended December 31, 2017, 2016 and 2015 was $50 million, $65 million and $62 million, respectively, at Sempra Energy Consolidated, $49 million, $63 million and $60 million, respectively, at SDG&E, and $1 million, $2 million and $2 million, respectively at SoCalGas.
CALIFORNIA UTILITIES MATTERS
CPUC General Rate Case
The CPUC uses a GRC proceeding to set sufficient rates to allow the California Utilities to recover their reasonable cost of O&M and to provide the opportunity to realize their authorized rates of return on their investment.
2019 General Rate Case
On October 6, 2017, SDG&E and SoCalGas filed their 2019 GRC applications requesting CPUC approval of test year revenue requirements for 2019 and attrition year adjustments for 2020 through 2022. SDG&E and SoCalGas requested revenue requirements for 2019 of $2.199 billion and $2.989 billion, respectively, which is an increase of $217 million and $533 million over their respective 2018 revenue requirements (the 2018 revenue requirements reflect the impact of updated testimony filed in January 2018). The California Utilities are proposing post-test year revenue requirement changes using various adjustment factors which are estimated to result in annual increases of approximately 5 percent to 7 percent at SDG&E and approximately 6 percent to 8 percent at SoCalGas. Our 2019 GRC applications do not reflect the impact of the TCJA, which we discuss in Note 6. In April 2018, SDG&E and SoCalGas will be updating their applications to reflect the impact of the TCJA. We are assessing the impact of the new tax law on our 2018 operations and have a tax tracking mechanism for net tax benefits that will flow to ratepayers. We intend to work with the CPUC to determine the mechanism for passing on the savings to ratepayers.
As part of the 2019 GRC, the CPUC will review the California Utilities’ interim accountability reports, which compare the authorized and actual spending for certain safety-related activities for 2014 through 2016. In June 2017, SDG&E and SoCalGas filed their first interim accountability reports comparing authorized and actual spending in 2014 and 2015 for certain safety-related activities. Similar data for 2016 was provided with the 2019 GRC filings in a second interim accountability report. The stated purpose of the interim accountability reports is to provide data and metrics for key safety and risk mitigation areas that will be considered in the 2019 GRC.
The results of the rate case may materially and adversely differ from what is contained in the GRC applications.
Risk Assessment Mitigation Phase Reporting and Impact on the 2019 GRC Filings
In December 2014, the CPUC issued a decision incorporating a risk-based decision-making framework into all future GRC application filings for major natural gas and electric utilities in California. The framework is intended to assist in assessing safety risks and the utilities’ plans to help ensure that such risks are adequately addressed. In advance of filing the California Utilities’ 2019 GRC applications discussed above, two proceedings occurred: the Safety Model Assessment Proceeding and the RAMP. In the Safety Model Assessment Proceeding, the California Utilities demonstrated the models used to prioritize and mitigate risks in order for the CPUC to establish guidelines and standards for these models.
In November 2016, as part of the new framework, SDG&E and SoCalGas filed their first RAMP report presenting a comprehensive assessment of their key safety risks and proposed activities for mitigating such risks. The report details these key safety risks, which include critical operational issues such as natural gas pipeline safety and wildfire safety, and addresses their classification, scoring, mitigation, alternatives, safety culture, quantitative analysis, data collection and lessons learned.
In March 2017, the CPUC’s Safety and Enforcement Division issued its evaluation report providing generally favorable feedback on the California Utilities’ RAMP report, but recommending more detailed analysis of the risks the California Utilities presented in the report. The new GRC framework does not require the CPUC to adopt the RAMP report. However, SDG&E and SoCalGas included funding requests in their respective 2019 GRC filings for proposed projects or activities outlined in their RAMP reports.
Senate Bill 549. In September 2017, SB 549 was signed into law, requiring that SDG&E and SoCalGas (as electric and gas corporations) annually notify the CPUC when revenue authorized by the CPUC for maintenance, safety or reliability is redirected to other purposes. This requirement is effective beginning January 1, 2018. The form of this reporting is not yet defined by the CPUC, though it could be incorporated into an ongoing proceeding or report otherwise required to be submitted to the CPUC.
2016 General Rate Case
In June 2016, the CPUC issued a final decision in the 2016 GRC. The 2016 GRC FD adopted a 2016 revenue requirement of $2.204 billion for SoCalGas and $1.791 billion for SDG&E. The 2016 GRC FD was effective retroactive to January 1, 2016, and the California Utilities recorded the retroactive impacts in the second quarter of 2016. The 2016 GRC FD also required certain refunds to be paid to customers and establishes a two-way income tax expense memorandum account, each discussed below.
The 2016 GRC FD also adopted subsequent annual escalation of the adopted revenue requirements by 3.5 percent for years 2017 and 2018 and continuation of the Z-Factor mechanism for qualifying cost recovery. The Z-Factor mechanism allows the California Utilities to seek cost recovery of significant cost increases, under certain unforeseen circumstances, incurred between GRC filings, subject to a $5 million deductible per event. Also, the 2016 GRC FD denied a separate request for a four-year GRC period and instead adopted a three-year GRC period (through 2018).
The 2016 GRC FD results in certain accounting impacts associated with flow-through income tax repairs deductions. In general, the 2016 GRC FD considers that the income tax benefits obtained from income tax repairs deductions exceeded amounts forecasted by the California Utilities from 2011 to 2015, and that they were attributed to shareholders during that time. The 2016
GRC FD reallocated the economic benefit of this tax deduction forecasting difference to ratepayers. Accordingly, revenues corresponding to income tax repair deductions that exceeded forecasted amounts relating to 2015, which were tracked in memorandum accounts, were ordered to be refunded to customers. The 2015 estimated amounts in the memorandum accounts totaled $72 million for SoCalGas and $37 million for SDG&E. Pursuant to this refund requirement, SoCalGas and SDG&E recorded regulatory liabilities for these amounts, resulting in after-tax charges to earnings of $43 million and $22 million, respectively, in the second quarter of 2016 (summarized below). In addition, the 2016 GRC FD reduced rate base by $38 million at SoCalGas and $55 million at SDG&E. The corresponding reductions in the 2016 revenue requirement were $5 million at SoCalGas and $7 million at SDG&E (which reductions are included in the adopted 2016 revenue requirement amounts described above). The rate base reductions reallocate to ratepayers the economic benefits associated with tax repair deductions that were previously provided to the shareholders for the period of 2012-2014 for SoCalGas and 2011-2014 for SDG&E. The rate base reductions did not result in an impairment of any of our reported assets, but have impacted our revenues and earnings prospectively.
The 2016 GRC FD also requires us to notify the CPUC if the 2012-2015 repairs deductions estimated in this GRC are different from the actual repairs deductions for SoCalGas and SDG&E. SoCalGas and SDG&E recorded regulatory liabilities of $11 million and $15 million, respectively, related to 2012-2014, resulting in after-tax charges to earnings for these differences of $6 million and $9 million in the second quarter of 2016 for SoCalGas and SDG&E, respectively (summarized below). In the third quarter of 2016, SoCalGas and SDG&E completed their 2015 calendar year tax returns, and final tax deductions associated with tax repair benefits to be refunded to ratepayers associated with the 2015 memo account were lower than the amounts estimated in 2015. Accordingly, the amounts to be refunded decreased by $19 million for SoCalGas and $5 million for SDG&E. In October 2016, SoCalGas and SDG&E filed a regulatory account update with the CPUC to reflect their final total 2015 repair allowance deductions of $53 million and $32 million, respectively. After recording the related income tax effect and corresponding regulatory revenue adjustments for income tax purposes, there was no net impact to earnings from the adjustments to the 2015 tax repairs deductions recorded in the third quarter of 2016. Accordingly, the earnings impacts in the table below are also the earnings impacts for the year ended December 31, 2016.
Following is a summary of the 2016 earnings impacts from the 2016 GRC FD:
|
| | | | | | | | | | | | | | | |
EARNINGS IMPACTS IN 2016 FROM THE 2016 GRC FD |
(Dollars in millions) |
| SoCalGas | | SDG&E |
| Pretax earnings (charge) | | After-tax earnings (charge) | | Pretax earnings (charge) | | After-tax earnings (charge) |
Adjustments to revenue related to tax | | | | | | | |
repairs deductions: | | | | | | | |
2015 memorandum account balance | $ | (72 | ) | | $ | (43 | ) | | $ | (37 | ) | | $ | (22 | ) |
True-up of 2012-2014 estimates to actuals | (11 | ) | | (6 | ) | | (15 | ) | | (9 | ) |
Total | $ | (83 | ) | | $ | (49 | ) | | $ | (52 | ) | | $ | (31 | ) |
As discussed above, the 2016 GRC FD required the establishment of two-way income tax expense memorandum accounts to track any revenue variances resulting from certain differences between the income tax expense forecasted in the GRC and the income tax expense incurred by SoCalGas and SDG&E from 2016 through 2018. The variances to be tracked include tax expense differences relating to:
| |
▪ | mandatory tax law, tax accounting, tax procedural, or tax policy changes; and |
| |
▪ | elective tax law, tax accounting, tax procedural, or tax policy changes. |
Starting in the second quarter of 2016, SoCalGas and SDG&E began tracking the differences in the income tax expense forecasted in the GRC proceedings and the income tax expense incurred. At December 31, 2017, the recorded regulatory liability associated with these tracked amounts totaled $69 million and $65 million for SoCalGas and SDG&E, respectively. The recorded liability is primarily related to lower income tax expense incurred than was forecasted in the GRC relating to tax repairs deductions, self-developed software deductions and certain book-over-tax depreciation. We are currently assessing the impact of federal tax reform on 2018 operations and will track such impacts in the tracking accounts. The tracking accounts will remain open, and we expect they will be reviewed in the 2019 GRC proceedings. Federal tax reform, which we discuss in Note 6, could result in significant amounts recorded in these tracking accounts beginning in 2018.
CPUC Cost of Capital
In July 2017, the CPUC issued a final decision adopting, with certain modifications, the joint petition filed in February 2017 by SDG&E, SoCalGas, PG&E and Edison, along with ORA and TURN. The final decision provides a two-year extension for each of the utilities to file its next respective cost of capital application, extending the filing date to April 2019 for a 2020 test year. The final decision also reduces the ROE for SDG&E from 10.30 percent to 10.20 percent and for SoCalGas from 10.10 percent to 10.05 percent, effective from January 1, 2018 through December 31, 2019. SDG&E’s and SoCalGas’ ratemaking capital structures will remain at current levels until modified, if at all, by a future cost of capital decision by the CPUC. In September 2017, SDG&E and SoCalGas filed advice letters to update their cost of capital for the actual cost of long-term debt through August 2017 and forecasted cost through 2018. SDG&E and SoCalGas did not file for changes to preferred stock costs, because no issuances of preferred stock through 2018 are anticipated.
In October 2017, the CPUC approved the embedded cost of debt presented in the filed advice letters, resulting in a revised return on rate base for SDG&E from 7.79 percent to 7.55 percent and for SoCalGas from 8.02 percent to 7.34 percent, effective January 1, 2018, as depicted in the table below:
|
| | | | | | | | | | | | |
AUTHORIZED COST OF CAPITAL AND RATE STRUCTURE – CPUC |
| | | | | | | | | | | | |
SDG&E | | SoCalGas |
Authorized weighting | Return on rate base | Weighted return on rate base | | Authorized weighting | Return on rate base | Weighted return on rate base |
45.25 | % | 4.59 | % | 2.08 | % | Long-Term Debt | 45.60 | % | 4.33 | % | 1.97 | % |
2.75 | | 6.22 | | 0.17 | | Preferred Stock | 2.40 | | 6.00 | | 0.14 | |
52.00 | | 10.20 | | 5.30 | | Common Equity | 52.00 | | 10.05 | | 5.23 | |
100.00 | % | | | 7.55 | % | | 100.00 | % | | | 7.34 | % |
As a result of the updates included in the filed advice letters, the impact of the changes to the embedded cost of debt and return on rate base is summarized below:
|
| | | | | | | | | | | | | |
IMPACT OF THE EMBEDDED COST OF DEBT | |
| |
| SDG&E | | SoCalGas |
| Cost of debt | Return on rate base | | Cost of debt | Return on rate base |
Current | 5.00 |
| % | 7.79 |
| % | | 5.77 |
| % | 8.02 |
| % |
Authorized, effective January 1, 2018 | 4.59 |
| % | 7.55 |
| % | | 4.33 |
| % | 7.34 |
| % |
Differences | (41 | ) | bps | (24 | ) | bps | | (144 | ) | bps | (68 | ) | bps |
The automatic CCM will be in effect to adjust 2019 cost of capital, if necessary. Unless changed by the operation of the CCM, the updated costs of long-term debt and the new ROEs will remain in effect through December 31, 2019. The cost of capital changes will also apply to capital expenditures in 2018 and 2019 for incremental projects not funded through the GRC revenue requirement.
SDG&E MATTERS
FERC Rate Matters and Cost of Capital
SDG&E files separately with the FERC for its authorized ROE on FERC-regulated electric transmission operations and assets.
SDG&E’s current estimated FERC return on rate base under the TO4 formula rate request filing is 7.51 percent based on its capital structure as follows:
|
| | | | | | | | | |
SDG&E COST OF CAPITAL AND RATE STRUCTURE – FERC |
|
| | Weighting | | | Return on rate base | | | Weighted return on rate base | |
Long-Term Debt | | 43.44 | % | | 4.21 | % | | 1.83 | % |
Common Equity | | 56.56 | | | 10.05 | | | 5.68 | |
| | 100.00 | % | | | | | 7.51 | % |
SDG&E expects to file its TO5 formula rate request with the FERC by June 2018, to be effective January 1, 2019.
NOTE 15. 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 December 31, 2017, loss contingency accruals for legal matters, including associated legal fees, that are probable and estimable were $92 million for Sempra Energy Consolidated, including $3 million for SDG&E and $88 million for SoCalGas. Amounts for Sempra Energy and SoCalGas include $83 million for matters related to the Aliso Canyon natural gas storage facility gas leak, which we discuss below. We discuss our policy regarding accrual of legal fees in Note 1.
SDG&E
2007 Wildfire Litigation and Net Cost Recovery Status
SDG&E has resolved all litigation associated with three wildfires that occurred in October 2007, except one appeal that remains pending after judgment in the trial court. 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 maintains reserves for the wildfire litigation and adjusts these reserves as information becomes available and amounts are estimable.
SDG&E recorded regulatory assets for CPUC-related costs incurred to resolve wildfire claims in excess of its liability insurance coverage and the amounts recovered from third parties. In September 2015, SDG&E filed an application with the CPUC seeking authority to recover these CPUC-related costs in rates over a six- to ten-year period. The requested amount was the net estimated CPUC-related cost incurred by SDG&E after deductions for insurance reimbursement and third-party settlement recoveries, and reflected a voluntary 10-percent shareholder contribution applied to the net regulatory asset for wildfire costs. In August 2017, the CPUC issued a proposed decision denying SDG&E’s request to recover the 2007 wildfire costs submitted in our application. In consideration of the proposed decision (including the actions not taken through the October 26, 2017 CPUC meeting), we concluded that the wildfire regulatory asset no longer met the probability threshold for recovery required by U.S. GAAP. Accordingly, SDG&E wrote off the wildfire regulatory asset, resulting in a charge of $351 million ($208 million after-tax) in the third quarter of 2017, in Write-off of Wildfire Regulatory Asset on the Consolidated Statements of Operations for Sempra Energy and SDG&E. In December 2017, the CPUC issued a final decision upholding the proposed decision. SDG&E will continue to vigorously pursue recovery of these costs, which were incurred through settling claims brought under the doctrine of inverse condemnation. SDG&E applied to the CPUC for rehearing of its decision on January 2, 2018. The CPUC may grant a rehearing, modify its decision, or deny the request and affirm its original decision. We will appeal the decision with the California Courts of Appeal seeking to reverse the CPUC’s decision, if necessary.
Concluded Matter
SDG&E participated as a claimant and respondent in an arbitration proceeding initiated by Edison in October 2013 against MHI seeking damages stemming from the failure of the MHI replacement steam generators at the SONGS nuclear power plant. In
March 2017, the Tribunal found MHI liable for breach of contract, subject to a contractual limitation of liability, but determined that MHI was the prevailing party and awarded it 95 percent of its arbitration costs. We discuss this arbitration and decision further in Note 13.
SoCalGas
Aliso Canyon Natural Gas Storage Facility Gas Leak
On October 23, 2015, SoCalGas discovered a leak at one of its injection-and-withdrawal wells, SS25, at its Aliso Canyon natural gas storage facility (the Leak), located in the northern part of the San Fernando Valley in Los Angeles County. The Aliso Canyon natural gas storage facility has been operated by SoCalGas since 1972. SS25 is one of more than 100 injection-and-withdrawal wells at the storage facility. SoCalGas worked closely with several of the world’s leading experts to stop the Leak, and on February 18, 2016, DOGGR confirmed that the well was permanently sealed. SoCalGas calculated that approximately 4.62 Bcf of natural gas was released from the Aliso Canyon natural gas storage facility as a result of the Leak.
Local Community Mitigation Efforts. Pursuant to a stipulation and order by the LA Superior Court, SoCalGas provided temporary relocation support to residents in the nearby community who requested it before the well was permanently sealed. Following the permanent sealing of the well, the DPH conducted testing in certain homes in the Porter Ranch community, and concluded that indoor conditions did not present a long-term health risk and that it was safe for residents to return home. In May 2016, the LA Superior Court ordered SoCalGas to offer to clean residents’ homes at SoCalGas’ expense as a condition to ending the relocation program. SoCalGas completed the residential cleaning program and the relocation program ended in July 2016.
In May 2016, the DPH also issued a directive that SoCalGas additionally professionally clean (in accordance with the proposed protocol prepared by the DPH) the homes of all residents located within the Porter Ranch Neighborhood Council boundary, or who participated in the relocation program, or who are located within a five-mile radius of the Aliso Canyon natural gas storage facility and experienced symptoms from the Leak (the Directive). SoCalGas disputes the Directive, contending that it is invalid and unenforceable, and has filed a petition for writ of mandate to set aside the Directive.
The costs incurred to remediate and stop the Leak and to mitigate local community impacts have been significant and may increase, and we may be subject to potentially significant damages, restitution, and civil, administrative and criminal fines, penalties and other costs. To the extent any of these costs are not covered by insurance (including any costs in excess of applicable policy limits), or if there were to be significant delays in receiving insurance recoveries, such costs could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Cost Estimates and Accounting Impact. At December 31, 2017, SoCalGas estimates that its costs related to the Leak are $913 million, which includes $887 million of costs recovered or probable of recovery from insurance. Of the $913 million of costs, approximately 60 percent is for the temporary relocation program (including cleaning costs and certain labor costs). Other estimated costs include amounts for efforts to control the well, stop the Leak, stop or reduce the emissions, and the estimated cost of the root cause analysis being conducted by an independent third party to investigate the cause of the Leak. The remaining portion of the $913 million includes legal costs incurred to defend litigation, the value of lost gas, the costs to mitigate the actual natural gas released, the estimated costs to settle certain actions and other costs. The value of lost gas reflects the replacement cost of volumes purchased through December 2017 and estimates for purchases in 2018. As of mid-January 2018, SoCalGas has replaced all lost gas. SoCalGas adjusts its estimated total liability associated with the Leak as additional information becomes available. The $913 million represents management’s best estimate of these costs related to the Leak. Of these costs, a substantial portion has been paid and $84 million is accrued as Reserve for Aliso Canyon Costs as of December 31, 2017 on SoCalGas’ and Sempra Energy’s Consolidated Balance Sheets for amounts expected to be paid after December 31, 2017.
As of December 31, 2017, we recorded the expected recovery of the costs described in the immediately preceding paragraph related to the Leak of $418 million as Insurance Receivable for Aliso Canyon Costs on SoCalGas’ and Sempra Energy’s Consolidated Balance Sheets. This amount is net of insurance retentions and $469 million of insurance proceeds we received through December 31, 2017 related to control-of-well expenses, lost gas and temporary relocation costs. If we were to conclude that this receivable or a portion of it was no longer probable of recovery from insurers, some or all of this receivable would be charged against earnings, which could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
As described in “Governmental Investigations and Civil and Criminal Litigation” below, the actions against us seek compensatory and punitive damages, restitution, and civil, administrative and criminal fines, penalties and other costs, which except for the amounts paid or estimated to settle certain actions, are not included in the above amounts as it is not possible at this time to predict the outcome of these actions or reasonably estimate the amount of damages, restitution or civil, administrative or criminal fines, penalties or other costs that may be imposed. The recorded amounts above also do not include the costs to clean additional
homes pursuant to the Directive, future legal costs necessary to defend litigation, and other potential costs that we currently do not anticipate incurring or that we cannot reasonably estimate. Furthermore, the cost estimate of $913 million does not include certain other costs expensed by Sempra Energy through December 31, 2017 associated with defending shareholder derivative lawsuits.
In March 2016, the CPUC ordered SoCalGas to establish a memorandum account to prospectively track its authorized revenue requirement and all revenues that it receives for its normal, business-as-usual costs to own and operate the Aliso Canyon natural gas storage facility and, in September 2016, approved SoCalGas’ request to begin tracking these revenues as of March 17, 2016. The CPUC will determine at a later time whether, and to what extent, the authorized revenues tracked in the memorandum account may be refunded to ratepayers.
Insurance. Excluding directors’ and officers’ liability insurance, we have four kinds of insurance policies that together provide between $1.2 billion to $1.4 billion in insurance coverage, depending on the nature of the claims. We cannot predict all of the potential categories of costs or the total amount of costs that we may incur as a result of the Leak. Subject to various policy limits, exclusions and conditions, based on what we know as of the filing date of this report, we believe that our insurance policies collectively should cover the following categories of costs: costs incurred for temporary relocation (including cleaning costs and certain labor costs), costs to address the Leak and stop or reduce emissions, the root cause analysis being conducted to investigate the cause of the Leak, the value of lost natural gas, costs incurred to mitigate the actual natural gas released, costs associated with litigation and claims by nearby residents and businesses, any costs to clean additional homes pursuant to the Directive, and, in some circumstances depending on their nature and manner of assessment, fines and penalties. We have been communicating with our insurance carriers and, as discussed above, we have received insurance payments for portions of control-of-well expenses, lost gas and temporary relocation costs. We intend to pursue the full extent of our insurance coverage for the costs we have incurred or may incur. There can be no assurance that we will be successful in obtaining additional insurance recovery for these costs under the applicable policies, and to the extent we are not successful in obtaining coverage or these costs exceed the amount of our coverage, such costs could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
At December 31, 2017, SoCalGas’ estimated costs related to the Leak of $913 million include $887 million of costs recovered or probable of recovery from insurance. This estimate may rise significantly as more information becomes available. Any costs not included in the $913 million cost estimate could be material. To the extent not covered by insurance (including any costs in excess of applicable policy limits), or if there were to be significant delays in receiving insurance recoveries, such costs could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Governmental Investigations and Civil and Criminal Litigation. Various governmental agencies, including DOGGR, DPH, SCAQMD, CARB, Los Angeles Regional Water Quality Control Board, California Division of Occupational Safety and Health, CPUC, PHMSA, EPA, Los Angeles County District Attorney’s Office and California Attorney General’s Office, have investigated or are investigating this incident. Other federal agencies (e.g., the DOE and the U.S. Department of the Interior) investigated the incident as part of a joint interagency task force. In January 2016, DOGGR and the CPUC selected Blade Energy Partners to conduct, under their supervision, an independent analysis of the technical root cause of the Leak, to be funded by SoCalGas. The timing of the root cause analysis is under the control of Blade Energy Partners, DOGGR and the CPUC.
As of February 22, 2018, 373 lawsuits, including over 45,000 plaintiffs, are pending against SoCalGas, some of which have also named Sempra Energy. All of these cases, other than a matter brought by the Los Angeles County District Attorney and the federal securities class action discussed below, are coordinated before a single court in the LA Superior Court for pretrial management (the Coordination Proceeding).
Pursuant to the Coordination Proceeding, in March 2017, the individuals and business entities asserting tort and Proposition 65 claims filed a Second Amended Consolidated Master Case Complaint for Individual Actions, through which their separate lawsuits will be managed for pretrial purposes. The consolidated complaint asserts causes of action for negligence, negligence per se, private and public nuisance (continuing and permanent), trespass, inverse condemnation, strict liability, negligent and intentional infliction of emotional distress, fraudulent concealment, loss of consortium and violations of Proposition 65 against SoCalGas, with certain causes also naming Sempra Energy. The consolidated complaint seeks compensatory and punitive damages for personal injuries, lost wages and/or lost profits, property damage and diminution in property value, injunctive relief, costs of future medical monitoring, civil penalties (including penalties associated with Proposition 65 claims alleging violation of requirements for warning about certain chemical exposures), and attorneys’ fees.
In January 2017, pursuant to the Coordination Proceeding, two consolidated class action complaints were filed against SoCalGas and Sempra Energy, one on behalf of a putative class of persons and businesses who own or lease real property within a five-mile radius of the well (the Property Class Action), and a second on behalf of a putative class of all persons and entities conducting business within five miles of the facility (the Business Class Action). Both complaints assert claims for strict liability for ultra-hazardous activities, negligence and violation of California Unfair Competition Law. The Property Class Action also asserts
claims for negligence per se, trespass, permanent and continuing public and private nuisance, and inverse condemnation. The Business Class Action also asserts a claim for negligent interference with prospective economic advantage. Both complaints seek compensatory, statutory and punitive damages, injunctive relief and attorneys’ fees. In December 2017, the California Court of Appeal, Second Appellate District ruled that the purely economic damages alleged in the Business Class Action are not recoverable under the law.
In addition to the lawsuits described above, a federal securities class action alleging violation of the federal securities laws has been filed against Sempra Energy and certain of its officers and certain of its directors in the SDCA. Five shareholder derivative actions are also pending in the Coordination Proceeding alleging breach of fiduciary duties against certain officers and certain directors of Sempra Energy and/or SoCalGas, four of which were joined in a Consolidated Shareholder Derivative Complaint in August 2017.
Three actions filed by public entities are pending in the Coordination Proceeding. First, in July 2016, the County of Los Angeles, on behalf of itself and the people of the State of California, filed a complaint against SoCalGas in the LA Superior Court for public nuisance, unfair competition, breach of franchise agreement, breach of lease, and damages. This suit alleges that the four natural gas storage fields operated by SoCalGas in Los Angeles County require safety upgrades, including the installation of a sub-surface safety shut-off valve on every well. It additionally alleges that SoCalGas failed to comply with the DPH Directive. It seeks preliminary and permanent injunctive relief, civil penalties, and damages for the County’s costs to respond to the Leak, as well as punitive damages and attorneys’ fees.
Second, in August 2016, the California Attorney General, acting in an independent capacity and on behalf of the people of the State of California and the CARB, together with the Los Angeles City Attorney, filed a third amended complaint on behalf of the people of the State of California against SoCalGas alleging public nuisance, violation of the California Unfair Competition Law, violations of California Health and Safety Code sections 41700 (prohibiting discharge of air contaminants that cause annoyance to the public) and 25510 (requiring reporting of the release of hazardous material), as well as California Government Code section 12607 for equitable relief for the protection of natural resources. The complaint seeks an order for injunctive relief, to abate the public nuisance, and to impose civil penalties.
Third, a petition for writ of mandate filed by the County of Los Angeles is pending against DOGGR and its State Oil and Gas Supervisor and the CPUC and its Executive Director, as to which SoCalGas is the real party in interest. The petition alleges that in issuing its July 2017 determination that the requirements for the resumption of injection operations were met (discussed under “Natural Gas Storage Operations and Reliability” below), DOGGR failed to comply with the provisions of SB 380, which requires a comprehensive safety review of the Aliso Canyon natural gas storage facility before injection of natural gas may resume. The County alleges, among other things, that DOGGR failed to comply with the provisions of SB 380 in declaring the safety review complete and authorizing the resumption of injection of natural gas into the facility before the root cause analysis was complete, failing to make its safety-review documents available to the public and failing to address seismic risks to the field as part of its safety review. The County further alleges that CEQA required DOGGR to prepare an EIR before the resumption of injection of natural gas at the facility may be approved. The petition seeks a writ of mandate requiring DOGGR and the State Oil and Gas Supervisor to comply with SB 380 and CEQA, and to produce records in response to the County’s Public Records Act request as well as declaratory and injunctive relief against any authorization to inject natural gas and attorneys’ fees.
A complaint filed by the SCAQMD against SoCalGas seeking civil penalties for alleged violations of several nuisance related statutory provisions arising from the Leak and delays in stopping the Leak was settled in February 2017, pursuant to which SoCalGas paid $8.5 million, of which $1 million is to be used to pay for a health study. The SCAQMD’s complaint was dismissed in February 2017.
Separately, in February 2016, the Los Angeles County District Attorney’s Office filed a misdemeanor criminal complaint against SoCalGas seeking penalties and other remedies for alleged failure to provide timely notice of the Leak pursuant to California Health and Safety Code section 25510(a), Los Angeles County Code section 12.56.030, and Title 19 California Code of Regulations section 2703(a), and for allegedly violating California Health and Safety Code section 41700 prohibiting discharge of air contaminants that cause annoyance to the public. Pursuant to a settlement agreement with the Los Angeles County District Attorney’s Office, SoCalGas agreed to plead no contest to the notice charge under Health and Safety Code section 25510(a) and agreed to pay the maximum fine of $75,000, penalty assessments of approximately $233,500, and operational commitments estimated to cost approximately $5 million, reimbursement and assessments in exchange for the Los Angeles County District Attorney’s Office moving to dismiss the remaining counts at sentencing and settling the complaint (the District Attorney Settlement). In November 2016, SoCalGas completed the commitments and obligations under the District Attorney Settlement, and on November 29, 2016, the LA Superior Court approved the settlement and entered judgment on the notice charge. Certain individuals residing near the Aliso Canyon natural gas storage facility who objected to the settlement have filed a notice of appeal of the judgment, contending they should be granted restitution.
The costs of defending against these civil and criminal lawsuits, cooperating with these investigations, and any damages, restitution, and civil, administrative and criminal fines, penalties and other costs, if awarded or imposed, as well as the costs of mitigating the actual natural gas released, could be significant and to the extent not covered by insurance (including any costs in excess of applicable policy limits), or if there were to be significant delays in receiving insurance recoveries, such costs could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Regulatory Proceedings. In February 2017, the CPUC opened a proceeding pursuant to SB 380 to determine the feasibility of minimizing or eliminating the use of the Aliso Canyon natural gas storage facility while still maintaining energy and electric reliability for the region. The CPUC indicated it intends to conduct the proceeding in two phases, with Phase 1 undertaking a comprehensive effort to develop the appropriate analyses and scenarios to evaluate the impact of reducing or eliminating the use of the Aliso Canyon natural gas storage facility and Phase 2 using those analyses and scenarios to evaluate the impacts of reducing or eliminating the use of the Aliso Canyon natural gas storage facility. The order establishing the scope of the proceeding expressly excludes issues with respect to air quality, public health, causation, culpability or cost responsibility regarding the Leak. The CPUC adopted a high-level Phase 1 schedule contemplating public participation hearings and workshops beginning in April 2017, but no hearings until Phase 2.
Section 455.5 of the California Public Utilities Code, among other things, directs regulated utilities to notify the CPUC if all or any portion of a major facility has been out of service for nine consecutive months. Although SoCalGas does not believe the Aliso Canyon natural gas storage facility or any portion of the facility was out of service (as that term is meant in Section 455.5) for nine consecutive months, SoCalGas provided notification out of an abundance of caution to demonstrate its commitment to regulatory compliance and transparency, and because obtaining authorization to resume injection operations at the facility required more time than initially contemplated. In response, and as required by section 455.5, the CPUC issued an OII to address whether the Aliso Canyon natural gas storage facility or any portion of the facility was out of service for nine consecutive months under section 455.5, and if so, whether the CPUC should disallow costs for such period from SoCalGas’ rates. Under section 455.5, hearings on the investigation are to be held, if necessary, in conjunction with SoCalGas’ 2019 GRC proceeding. If the CPUC determines that all or any portion of the facility was out of service for nine consecutive months, the amount of any refund to ratepayers and the inability to earn a return on those assets could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Governmental Orders and Additional Regulation. In January 2016, the Governor of the State of California issued an order (the Governor’s Order) proclaiming a state of emergency in Los Angeles County due to the Leak. The Governor’s Order imposes various orders with respect to: stopping the Leak; protecting public health and safety; ensuring accountability; and strengthening oversight. Most of the directives in the Governor’s Order have been fulfilled, with the following remaining open items: (1) applicable agencies must convene an independent panel of scientific and medical experts to review public health concerns stemming from the natural gas leak and evaluate whether additional measures are needed to protect public health; (2) the CPUC must ensure that SoCalGas covers costs related to the natural gas leak and its response while protecting ratepayers, and CARB must develop a program to fully mitigate the leak’s emissions of methane by March 31, 2016, with such program to be funded by SoCalGas; and (3) DOGGR, CPUC, CARB and the CEC must submit to the Governor’s Office a report that assesses the long-term viability of natural gas storage facilities in California.
In December 2015, SoCalGas made a commitment to mitigate the actual natural gas released from the Leak and has been working on a plan to accomplish the mitigation. In March 2016, pursuant to the Governor’s Order, the CARB issued its Aliso Canyon Methane Leak Climate Impacts Mitigation Program, which set forth its recommended approach to achieve full mitigation of the emissions from the Leak. The CARB program requires that reductions in short-lived climate pollutants and other greenhouse gases be at least equivalent to the amount of the emissions from the Leak, and that the amount of reductions required be derived using the global warming potential based on a 20-year term (rather than the 100-year term the CARB and other state and federal agencies use in regulating emissions), resulting in a target of approximately 9,000,000 metric tons of carbon dioxide equivalent. CARB’s program also calls for all of the mitigation to occur in California over the next five to ten years without the use of allowances or offsets. In October 2016, CARB issued its final report concluding that the incident resulted in total emissions from 90,350 to 108,950 metric tons of methane, and asserting that SoCalGas should mitigate 109,000 metric tons of methane to fully mitigate the greenhouse gas impacts of the Leak. We have not agreed with CARB’s estimate of methane released and continue to work with CARB on developing a mitigation plan.
Natural Gas Storage Operations and Reliability. Natural gas withdrawn from storage is important for service reliability during peak demand periods, including peak electric generation needs in the summer and heating needs in the winter. The Aliso Canyon natural gas storage facility, with a storage capacity of 86 Bcf (which represents 63 percent of SoCalGas’ natural gas storage inventory capacity), is the largest SoCalGas storage facility and an important element of SoCalGas’ delivery system. Beginning October 25, 2015, pursuant to orders by DOGGR and the Governor of the State of California, and in accordance with SB 380, SoCalGas suspended injection of natural gas into the Aliso Canyon natural gas storage facility. In April and June of 2017,
SoCalGas advised the CAISO, CEC, CPUC and PHMSA of its concerns that the inability to inject natural gas into the Aliso Canyon natural gas storage facility posed a risk to energy reliability in Southern California. Limited withdrawals of natural gas from the Aliso Canyon natural gas storage facility were made in 2017 to augment natural gas supplies during critical demand periods.
On July 19, 2017, DOGGR issued its determination that SoCalGas had met the requirements of SB 380 for the resumption of injection operations, including all safety requirements. On the same date, the CPUC’s Executive Director issued his concurrence with that determination, and DOGGR issued its Order to: Test and Take Temporary Actions Upon Resuming Injection: Aliso Canyon Gas Storage Facility lifting the prohibition on injection at the Aliso Canyon natural gas storage facility, subject to certain requirements after injection resumed, including limitations on the rate at which SoCalGas may withdraw natural gas from the field. The CPUC additionally issued a directive to SoCalGas to maintain a range of working gas in the Aliso Canyon natural gas storage facility at a target of 23.6 Bcf (approximately 28 percent of its maximum capacity), and at all times above 14.8 Bcf, later amended to require the range be maintained from zero Bcf to 24.6 Bcf of working gas. The County of Los Angeles filed a petition for writ of mandate seeking declaratory and injunctive relief and a stay of DOGGR’s order lifting the prohibition against injecting natural gas at the facility. We provide further detail regarding the County of Los Angeles’ suit above in “Governmental Investigations and Civil and Criminal Litigation.” Having completed the steps outlined by state agencies to safely begin injections at the Aliso Canyon natural gas storage facility, as of July 31, 2017, SoCalGas resumed limited injections.
If the Aliso Canyon natural gas storage facility were determined to have been out of service for any meaningful period of time or permanently closed, or if future cash flows were otherwise insufficient to recover its carrying value, it could result in an impairment of the facility and significantly higher than expected operating costs and/or additional capital expenditures, and natural gas reliability and electric generation could be jeopardized. At December 31, 2017, the Aliso Canyon natural gas storage facility has a net book value of $644 million, including $252 million of construction work in progress for the project to construct a new compressor station. Any significant impairment of this asset could have a material adverse effect on SoCalGas’ and Sempra Energy’s results of operations for the period in which it is recorded. Higher operating costs and additional capital expenditures incurred by SoCalGas may not be recoverable in customer rates, and could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Sempra Mexico
Property Disputes and Permit Challenges
Energía Costa Azul. Sempra Mexico has been engaged in a long-running land dispute relating to property adjacent to its ECA LNG terminal near Ensenada, Mexico. A claimant to the adjacent property filed complaints in the federal Agrarian Court challenging the refusal of the SEDATU in 2006 to issue a title to him for the disputed property. In November 2013, the federal Agrarian Court ordered that SEDATU issue the requested title and cause it to be registered. Both SEDATU and Sempra Mexico challenged the ruling, due to lack of notification of the underlying process. Both challenges are pending to be resolved by a Federal Court in Mexico. Sempra Mexico expects additional proceedings regarding the claims.
Several administrative challenges are pending in Mexico before the Mexican environmental protection agency and the Federal Tax and Administrative Courts seeking revocation of the environmental impact authorization issued to ECA in 2003. These cases generally allege that the conditions and mitigation measures in the environmental impact authorization are inadequate and challenge findings that the activities of the terminal are consistent with regional development guidelines.
Two real property cases have been filed against ECA. In one case, filed in the federal Agrarian Court in 2006, the plaintiffs seek to annul the recorded property title for a parcel on which the ECA LNG terminal is situated and to obtain possession of a different parcel that allegedly sits in the same place. A second complaint was served in April 2012 seeking to invalidate the contract by which ECA purchased another of the terminal parcels, on the grounds the purchase price was unfair; the plaintiff filed a second complaint in 2013 in the federal Agrarian Court seeking an order that SEDATU issue title to her. In January 2016, the federal Agrarian Court ruled against the plaintiff, and the plaintiff appealed the ruling. Sempra Mexico expects further proceedings on these two matters.
Guaymas-El Oro Segment of the Sonora Pipeline. IEnova’s Sonora natural gas pipeline consists of two segments, the Sasabe-Puerto Libertad-Guaymas segment, and the Guaymas-El Oro segment. Each segment has its own service agreement with the CFE. In 2015, the Yaqui tribe, with the exception of some members living in the Bácum community, granted its consent and a right-of-way easement agreement for the construction of the Guaymas-El Oro segment of the Sonora natural gas pipeline that crosses its territory. Representatives of the Bácum community filed a legal challenge in Mexican Federal Court demanding the right to withhold consent for the project, the stoppage of work in the Yaqui territory and damages. The judge granted a suspension order that prohibited the construction of such segment through the Bácum community territory. Because the pipeline does not pass through the Bácum community, IEnova did not believe the order prohibited construction in the remainder of the Yaqui territory.
As a result of the dispute, however, IEnova was delayed in the construction of the approximately 14 kilometers of pipeline that pass through territory of the Yaqui tribe. The CFE agreed to extend the deadline for commercial operations until the second quarter of 2017. Construction of the Guaymas-El Oro segment was completed, and commercial operations began in May 2017. Following the start of commercial operations, an appellate court ruled that the scope of the suspension encompassed the wider Yaqui territory. The legal challenge remains pending. IEnova has subsequently reported damage and declared a force majeure event for the Guaymas-El Oro segment of the Sonora pipeline in the Yaqui territory that has interrupted its operations since August 23, 2017. There is no material economic impact as of December 31, 2017. The Sasabe-Puerto Libertad-Guaymas segment remains in full operation.
Concluded Matters
Energía Costa Azul. A property claimant 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 ECA 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. In September 2015, the Court granted Sempra Energy’s motion for summary judgment and closed the case. The claimant appealed the summary judgment and an earlier order dismissing certain of his causes of action. In July 2017, the Ninth Circuit Court of Appeal issued a ruling affirming the summary judgment and dismissal of his other causes of action, except one alleging theft of personal property in connection with the alleged eviction. In September 2017, the District Court dismissed the remaining claim.
Energía Sierra Juárez.In December 2012, Backcountry Against Dumps, Donna Tisdale and the Protect Our Communities Foundation filed a complaint in the SDCA seeking to invalidate the presidential permit issued by the DOE for Energía Sierra Juárez’s cross-border generation tie line connecting the Energía Sierra Juárez wind project in Mexico to the electric grid in the U.S. The suit alleged violations of the NEPA, the Endangered Species Act, the Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act. Plaintiffs filed a motion for summary judgment, which the court largely denied in September 2015. One NEPA claim, however, was not resolved – whether the Environmental Impact Statement’s assessment of alleged extraterritorial impacts of the generation tie line in the U.S. on the environment in Mexico was inadequate (the “extraterritorial impact issue”) – and was the subject of additional briefing in 2016. On January 30, 2017, the Court issued a ruling on the extraterritorial impact issue and, contrary to its prior ruling, ruled that the Environmental Impact Statement was deficient for not considering the effects in Mexico of both the U.S. and Mexican portion of the generation tie line and the wind farm itself. On August 29, 2017, the Court denied the plaintiffs request to vacate the presidential permit or enjoin operation of the generation tie line and remanded the case to the DOE for preparation of a supplemental Environmental Impact Statement that addresses the deficiencies identified by the Court, and entered judgment ending the case.
Other Litigation
Sempra Energy holds a noncontrolling interest in RBS Sempra Commodities, a limited liability partnership in the process of being liquidated. RBS, our partner in the joint venture, paid an £86 million assessment in October 2014 to HMRC for denied VAT refund claims filed in connection with the purchase of carbon credit allowances by RBS SEE, a subsidiary of RBS Sempra Commodities. RBS SEE has since been sold to JP Morgan and later to Mercuria Energy Group, Ltd. HMRC asserted that RBS was not entitled to reduce its VAT liability by VAT paid on certain carbon credit purchases during 2009 because RBS knew or should have known that certain vendors in the trading chain did not remit their own VAT to HMRC. After paying the assessment, RBS filed a Notice of Appeal of the assessment with the First-Tier Tribunal. The First-Tier Tribunal held a preliminary hearing in September 2016 to determine whether HMRC’s assessment was time-barred. In January 2017, the First-Tier Tribunal issued a decision in favor of HMRC concluding that the assessment was not time-barred. RBS has decided not to appeal the First-Tier Tribunal’s decision to the Upper Tribunal. There will be a hearing on the substantive matter regarding whether RBS knew or should have known that certain vendors in the trading chain did not remit their VAT to HMRC.
During 2015, liquidators, acting on behalf of ten companies (the 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 asserting damages of £160 million against RBS and Mercuria Energy Europe Trading Limited (the Defendants). The claim alleges that the Defendants’ participation in the purchase and sale of carbon credits resulted in the Companies’ carbon credit trading transactions creating a VAT liability they were unable to pay. The £160 million is comprised of a claim by the Companies for £80 million for equitable compensation due to dishonest assistance, and a claim by the liquidators for compensation in the same amount under the Insolvency Act of 1986. The parties have agreed that to the extent the Companies’ claims are successful, the liquidators cannot collect under the Insolvency Act of 1986; however, the award amount is ultimately determined by the Court. Trial of the matter has been set for the summer of 2018. JP Morgan has notified us that Mercuria Energy Group, Ltd. has sought indemnity for the claim, and JP Morgan has in turn sought indemnity from us and RBS.
Our remaining investment in RBS Sempra Commodities of $67 million at December 31, 2017 is accounted for under the equity method and 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.
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
Natural Gas Contracts
SoCalGas has the responsibility for procuring natural gas for both SDG&E’s and SoCalGas’ core customers in a combined portfolio. SoCalGas buys natural gas under short-term and long-term contracts for this portfolio. Purchases are from various producing regions in the southwestern U.S., U.S. Rockies, and Canada and are primarily based on published monthly bid-week indices.
SoCalGas transports natural gas primarily under long-term firm interstate pipeline capacity agreements that provide for annual reservation charges, which are recovered in rates. SoCalGas has commitments with interstate pipeline companies for firm pipeline capacity under contracts that expire at various dates through 2031.
Sempra LNG & Midstream’s and Sempra Mexico’s businesses have various capacity agreements for natural gas storage and transportation. In addition, Sempra Mexico has a natural gas purchase agreement to fuel a natural gas-fired power plant.
In May 2016, Sempra LNG & Midstream permanently released certain pipeline capacity that it held with Rockies Express and others. The effect of the permanent capacity releases resulted in a pretax charge of $206 million ($123 million after-tax), which is included in Other Cost of Sales on the Sempra Energy Consolidated Statement of Operations. The charge represented an acceleration of costs that would otherwise have been recognized over the duration of the contracts. Sempra LNG & Midstream has recorded a liability for these costs, less expected proceeds generated from the permanent capacity releases. Sempra LNG & Midstream’s related obligation to make future capacity payments through November 2019 is included in the table below.
In May 2017, Sempra LNG & Midstream received settlement proceeds of $57 million from a breach of contract claim against a counterparty in bankruptcy court. Of the total proceeds, $47 million related to the $206 million charge we recorded in 2016 resulting from the permanent release of certain pipeline capacity. Sempra LNG & Midstream recorded the settlement proceeds as a reduction to Other Cost of Sales on Sempra Energy’s Consolidated Statement of Operations in 2017.
At December 31, 2017, the future estimated payments under existing natural gas contracts and natural gas storage and transportation contracts are as follows:
|
| | | | | | | | | | | |
FUTURE ESTIMATED PAYMENTS – SEMPRA ENERGY CONSOLIDATED |
(Dollars in millions) | | | | | |
| Storage and transportation | | Natural gas(1) | | Total(1) |
2018 | $ | 231 |
| | $ | 61 |
| | $ | 292 |
|
2019 | 146 |
| | — |
| | 146 |
|
2020 | 48 |
| | — |
| | 48 |
|
2021 | 46 |
| | 1 |
| | 47 |
|
2022 | 44 |
| | 1 |
| | 45 |
|
Thereafter | 127 |
| | — |
| | 127 |
|
Total estimated payments | $ | 642 |
| | $ | 63 |
| | $ | 705 |
|
| |
(1) | Excludes amounts related to the LNG purchase agreement discussed below. |
|
| | | | | | | | | | | |
FUTURE ESTIMATED PAYMENTS – SOCALGAS |
(Dollars in millions) | | | | | |
| Transportation | | Natural gas | | Total |
2018 | $ | 108 |
| | $ | — |
| | $ | 108 |
|
2019 | 59 |
| | — |
| | 59 |
|
2020 | 29 |
| | — |
| | 29 |
|
2021 | 27 |
| | 1 |
| | 28 |
|
2022 | 27 |
| | 1 |
| | 28 |
|
Thereafter | 81 |
| | — |
| | 81 |
|
Total estimated payments | $ | 331 |
| | $ | 2 |
| | $ | 333 |
|
Total payments under natural gas contracts and natural gas storage and transportation contracts as well as payments to meet additional portfolio needs at Sempra Energy Consolidated and SoCalGas were as follows:
|
| | | | | | | | | | | |
PAYMENTS UNDER NATURAL GAS CONTRACTS |
(Dollars in millions) | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 1,429 |
| | $ | 1,169 |
| | $ | 1,200 |
|
SoCalGas | 1,213 |
| | 966 |
| | 975 |
|
LNG Purchase Agreement
Sempra LNG & Midstream has a purchase agreement for the supply of LNG to the ECA terminal. The commitment amount is calculated using a predetermined formula based on estimated forward prices of the index applicable from 2018 to 2029. Although this agreement specifies a number of cargoes to be delivered, under its terms, the customer may divert certain cargoes, which would reduce amounts paid under the agreement by Sempra LNG & Midstream.
At December 31, 2017, the following LNG commitment amounts are based on the assumption that all cargoes, less those already confirmed to be diverted, under the agreement are delivered:
|
| | | |
LNG COMMITMENT AMOUNTS |
(Dollars in millions) |
2018 | $ | 302 |
|
2019 | 383 |
|
2020 | 391 |
|
2021 | 403 |
|
2022 | 411 |
|
Thereafter | 2,935 |
|
Total | $ | 4,825 |
|
Actual LNG purchases in 2017, 2016 and 2015 have been significantly lower than the maximum amount provided under the agreement due to the customer electing to divert most cargoes as allowed by the agreement.
Purchased-Power Contracts
For 2018, SDG&E expects to meet its customer power requirements from the following resource types:
| |
▪ | Long-term contracts: 43 percent (of which 37 percent is provided by renewable energy contracts expiring on various dates through 2041) |
| |
▪ | Other SDG&E-owned generation and tolling contracts (including OMEC): 56 percent |
| |
▪ | Spot market purchases: 1 percent |
Chilquinta Energía and Luz del Sur also have purchased-power contracts, expiring on various dates extending through 2031, which cover most of the consumption needs of the companies’ customers. These commitments are included under Sempra Energy Consolidated in the table below.
At December 31, 2017, the future estimated payments under long-term purchased-power contracts are as follows:
|
| | | | | | | |
FUTURE ESTIMATED PAYMENTS – PURCHASED-POWER CONTRACTS |
(Dollars in millions) |
| Sempra Energy Consolidated | | SDG&E |
2018 | $ | 702 |
| | $ | 577 |
|
2019 | 690 |
| | 571 |
|
2020 | 631 |
| | 510 |
|
2021 | 633 |
| | 510 |
|
2022 | 598 |
| | 496 |
|
Thereafter | 5,726 |
| | 5,457 |
|
Total estimated payments(1)(2) | $ | 8,980 |
| | $ | 8,121 |
|
| |
(1) | Excludes purchase agreements accounted for as capital leases and amounts related to Otay Mesa VIE, as it is consolidated by Sempra Energy and SDG&E. |
| |
(2) | Includes $5.4 billion of expected payments under purchase agreements accounted for as operating leases at SDG&E, comprising renewable energy PPAs for which there are no future minimum operating lease payments. |
Payments on these contracts represent capacity charges and minimum energy and transmission purchases that exceed the minimum commitment. SDG&E and Luz del Sur are required to pay additional amounts for actual purchases of energy that exceed the minimum energy commitments. Total payments under purchased-power contracts were as follows:
|
| | | | | | | | | | | |
PAYMENTS UNDER PURCHASED-POWER CONTRACTS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 1,694 |
| | $ | 1,667 |
| | $ | 1,573 |
|
SDG&E | 781 |
| | 752 |
| | 715 |
|
Operating Leases
Sempra Energy Consolidated, SDG&E and SoCalGas have operating leases on real and personal property expiring at various dates from 2018 through 2054. Certain leases on office facilities contain escalation clauses requiring annual increases in rent ranging from two percent to five percent at Sempra Energy Consolidated, SDG&E and SoCalGas. The rentals payable under these leases may increase by a fixed amount each year or by a percentage of a base year, and most leases contain extension options that we could exercise.
The California Utilities have operating lease agreements for future acquisitions of fleet vehicles with an aggregate maximum lease limit of $250 million, $133 million of which has been utilized as of December 31, 2017.
Rent expense for operating leases was as follows:
|
| | | | | | | | | | | |
RENT EXPENSE – OPERATING LEASES |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated | $ | 109 |
| | $ | 77 |
| | $ | 78 |
|
SDG&E | 28 |
| | 28 |
| | 27 |
|
SoCalGas | 43 |
| | 38 |
| | 39 |
|
At December 31, 2017, the rental commitments payable in future years under all noncancelable operating leases, including estimated payments, are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
FUTURE RENTAL PAYMENTS – OPERATING LEASES |
(Dollars in millions) |
| 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total |
Sempra Energy Consolidated: | | | | | | | |
Future minimum lease payments | $ | 85 |
| $ | 57 |
| $ | 51 |
| $ | 48 |
| $ | 42 |
| $ | 300 |
| $ | 583 |
|
Future estimated rental payments | 13 |
| 12 |
| 12 |
| 12 |
| 13 |
| 46 |
| 108 |
|
Total future rental commitments | $ | 98 |
| $ | 69 |
| $ | 63 |
| $ | 60 |
| $ | 55 |
| $ | 346 |
| $ | 691 |
|
SDG&E: | | | | | | | |
Future minimum lease payments | $ | 22 |
| $ | 21 |
| $ | 20 |
| $ | 19 |
| $ | 18 |
| $ | 54 |
| $ | 154 |
|
Future estimated rental payments | 2 |
| 2 |
| 2 |
| 2 |
| 2 |
| 3 |
| 13 |
|
Total future rental commitments | $ | 24 |
| $ | 23 |
| $ | 22 |
| $ | 21 |
| $ | 20 |
| $ | 57 |
| $ | 167 |
|
SoCalGas: | | | | | | | |
Future minimum lease payments | $ | 29 |
| $ | 25 |
| $ | 20 |
| $ | 19 |
| $ | 13 |
| $ | 36 |
| $ | 142 |
|
Future estimated rental payments | 11 |
| 10 |
| 10 |
| 10 |
| 11 |
| 43 |
| 95 |
|
Total future rental commitments | $ | 40 |
| $ | 35 |
| $ | 30 |
| $ | 29 |
| $ | 24 |
| $ | 79 |
| $ | 237 |
|
Capital Leases
Power Purchase Agreements
SDG&E has five PPAs with peaker plant facilities, one of which went into commercial operation in June 2017. All five are accounted for as capital leases, four with a 25-year term and one with a 9-year term. At December 31, 2017, the aggregate carrying value of these capital lease obligations is $731 million.
In 2017, SDG&E satisfied all of the conditions precedent for a CPUC-approved 20-year PPA with a 500-MW power plant facility that is under construction. Beginning with the initial delivery of the contracted power, scheduled in June 2018, the PPA will be accounted for as a capital lease.
The entities that own the peaker plant facilities are VIEs of which SDG&E is not the primary beneficiary. SDG&E does not have any additional implicit or explicit financial responsibility related to these VIEs.
At December 31, 2017, the future minimum lease payments and present value of the net minimum lease payments under these capital leases for both Sempra Energy Consolidated and SDG&E are as follows:
|
| | | |
FUTURE MINIMUM PAYMENTS – POWER PURCHASE AGREEMENTS |
(Dollars in millions) |
2018 | $ | 192 |
|
2019 | 210 |
|
2020 | 210 |
|
2021 | 210 |
|
2022 | 210 |
|
Thereafter | 3,299 |
|
Total minimum lease payments(1) | 4,331 |
|
Less: estimated executory costs | (502 | ) |
Less: interest(2) | (2,548 | ) |
Present value of net minimum lease payments(3) | $ | 1,281 |
|
| |
(1) | This amount will be recorded over the lives of the leases as Cost of Electric Fuel and Purchased Power on Sempra Energy’s and SDG&E’s 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 present value at the inception of the leases. |
| |
(3) | Includes $13 million in Current Portion of Long-Term Debt and $718 million in Long-Term Debt on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets at December 31, 2017. The remaining present value of net minimum lease payments of $550 million will be recorded as a capital lease obligation when construction of the power plant facility is completed and delivery of contracted power commences, which is scheduled to occur in June 2018. |
The annual amortization charge for the PPAs was $8 million in 2017 and $4 million in each of 2016 and 2015.
Headquarters Build-to-Suit Lease
Sempra Energy has a 25-year, build-to-suit lease for its San Diego, California, headquarters completed in 2015. We began occupying the building in the second half of 2015, concurrent with the termination of the prior headquarters lease. As a result of our involvement during and after the construction period, we have recorded the related assets and financing liability for construction costs incurred under this build-to-suit leasing arrangement.
The building is being depreciated on a straight-line basis over its estimated useful life and the associated lease payments are allocated between interest expense and amortization of the financing obligation over the lease period. Further, a portion of the lease payments pertain to the lease of the underlying land and are recorded as rental expense. The balance of the financing obligation, representing the net present value of the future minimum lease payments on the building, is $138 million at December 31, 2017.
At December 31, 2017, the future minimum lease payments on the lease are as follows:
|
| | | |
FUTURE MINIMUM PAYMENTS – BUILD-TO-SUIT LEASE |
(Dollars in millions) |
2018 | $ | 10 |
|
2019 | 10 |
|
2020 | 11 |
|
2021 | 11 |
|
2022 | 11 |
|
Thereafter | 234 |
|
Total minimum lease payments | $ | 287 |
|
Other Capital Leases
At December 31, 2017, the future minimum lease payments under capital leases for fleet vehicles and other assets for Sempra Energy Consolidated are $4 million in 2018, $2 million in 2019, $1 million in 2020, negligible in 2021 and 2022 and $8 million thereafter. The net present value of the minimum lease payments is $8 million at December 31, 2017.
The California Utilities entered into new capital leases in 2017 for additional fleet vehicles. At December 31, 2017, the related capital lease obligations were $1 million each at SDG&E and SoCalGas, payable in 2018.
The annual depreciation charge for fleet vehicles and other assets in 2017, 2016 and 2015 was $3 million, $2 million and $4 million, respectively, at Sempra Energy Consolidated, including $1 million, $1 million and $2 million, respectively, at SDG&E and $2 million, $1 million and $2 million, respectively, at SoCalGas.
Construction and Development Projects
Sempra Energy Consolidated has various capital projects in progress in the U.S., Mexico and South America. Sempra Energy’s total commitments under these projects are approximately $527 million, requiring future payments of $257 million in 2018, $62 million in 2019, $44 million in 2020, $24 million in 2021, $16 million in 2022 and $124 million thereafter. The following is a summary by segment of contractual commitments and contingencies related to such projects.
SDG&E
At December 31, 2017, SDG&E has commitments to make future payments of $117 million for construction projects that include
| |
▪ | $72 million for infrastructure improvements for natural gas and electric transmission and distribution operations; |
| |
▪ | $35 million for the engineering, material procurement and construction costs primarily associated with the Sycamore-Peñasquitos Transmission Project; and |
| |
▪ | $10 million related to spent fuel management at SONGS. |
SDG&E expects future payments under these contractual commitments to be $78 million in 2018, $9 million in 2019, $19 million in 2020, $5 million in 2021, $1 million in 2022 and $5 million thereafter.
California Utilities
At December 31, 2017, SDG&E and SoCalGas have commitments to make future payments of $10 million for contracts related to the procurement of gas rotary meters. SDG&E expects the future payments under these contractual commitments to approximate $1 million each year in 2018 through 2020. SoCalGas expects the future payments under these contractual commitments to approximate $3 million in 2018 and $2 million each year in 2019 and 2020.
Sempra South American Utilities
At December 31, 2017, Sempra South American Utilities has commitments to make future payments of $16 million for the construction of substations and related transmission lines. The future payments under these contractual commitments are all expected to be made in 2018.
Sempra Mexico
At December 31, 2017, Sempra Mexico has commitments to make future payments of $289 million for contracts related to the construction of various natural gas pipelines and ongoing maintenance services. Sempra Mexico expects future payments under these contractual commitments to be $73 million in 2018, $46 million in 2019, $19 million in 2020, $17 million in 2021, $15 million in 2022 and $119 million thereafter.
Sempra Renewables
At December 31, 2017, Sempra Renewables has commitments to make future payments of $89 million for contracts related to the construction of renewable energy projects. Sempra Renewables expects future payments under these contractual commitments to be $80 million in 2018, $4 million in 2019, $3 million in 2020 and $2 million in 2021.
Sempra LNG & Midstream
At December 31, 2017, Sempra LNG & Midstream has commitments to make future payments of $6 million primarily for natural gas transportation projects. The future payments under these contractual commitments are all expected to be made in 2018.
OTHER COMMITMENTS
SDG&E
We discuss nuclear insurance and nuclear fuel disposal related to SONGS in Note 13.
In connection with the completion of the Sunrise Powerlink project in 2012, the CPUC required that SDG&E establish a fire mitigation fund to minimize the risk of fire as well as reduce the potential wildfire impact on residences and structures near the Sunrise Powerlink. The future payments for these contractual commitments are expected to be $3 million per year in 2018 through 2022 and $104 million thereafter, subject to escalation of 2 percent per year, for a remaining 52-year period. At December 31, 2017, the present value of these futurepayments of $119 million has been recorded as a regulatory asset as the amounts represent a cost that is expected to be recovered from customers in the future, and the related liability was $119 million.
Sempra LNG & Midstream
Additional consideration for a 2006 comprehensive legal settlement with the State of California to resolve the Continental Forge litigation included an agreement that, for a period of 18 years beginning in 2011, Sempra LNG & Midstream would sell to the California Utilities, subject to annual CPUC approval, up to 500 million cubic feet per day of regasified LNG from Sempra Mexico’s ECA facility that is not delivered or sold in Mexico at the price indexed to the California border minus $0.02 per MMBtu. There are no specified minimums required, and to date, Sempra LNG & Midstream has not been required to deliver any natural gas pursuant to this agreement.
ENVIRONMENTAL ISSUES
Our operations are subject to federal, state and local environmental laws. We also are subject to regulations related to hazardous wastes, air and water quality, land use, solid waste disposal and the protection of wildlife. These laws and regulations require that we investigate and correct the effects of the release or disposal of materials at sites associated with our past and our present operations. These sites include those at which we have been identified as a PRP under the federal Superfund laws and similar state laws.
In addition, we are required to obtain numerous governmental permits, licenses and other approvals to construct facilities and operate our businesses. The related costs of environmental monitoring, pollution control equipment, cleanup costs, and emissions fees are significant. Increasing national and international concerns regarding global warming and mercury, carbon dioxide, nitrogen oxide and sulfur dioxide emissions could result in requirements for additional pollution control equipment or significant emissions fees or taxes that could adversely affect Sempra LNG & Midstream and Sempra Mexico. The California Utilities’ costs to operate their facilities in compliance with these laws and regulations generally have been recovered in customer rates.
We discuss environmental matters related to the natural gas leak at SoCalGas’ Aliso Canyon natural gas storage facility above in “Legal Proceedings – SoCalGas – Aliso Canyon Natural Gas Storage Facility Gas Leak.”
Other Environmental Issues
We generally capitalize the significant costs we incur to mitigate or prevent future environmental contamination or extend the life, increase the capacity, or improve the safety or efficiency of property used in current operations. The following table shows our capital expenditures (including construction work in progress) in order to comply with environmental laws and regulations:
|
| | | | | | | | | | | |
CAPITAL EXPENDITURES FOR ENVIRONMENTAL ISSUES |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Sempra Energy Consolidated(1) | $ | 92 |
| | $ | 53 |
| | $ | 64 |
|
SDG&E | 46 |
| | 17 |
| | 24 |
|
SoCalGas | 45 |
| | 35 |
| | 39 |
|
| |
(1) | In cases of non-wholly owned affiliates, includes only our share. |
We have not identified any significant environmental issues outside the U.S.
At the California Utilities, costs that relate to current operations or an existing condition caused by past operations are generally recorded as a regulatory asset due to the probability that these costs will be recovered in rates.
The environmental issues currently facing us, except for those related to the Aliso Canyon natural gas storage facility leak as we discuss above or resolved during the last three years, include (1) investigation and remediation of the California Utilities’ manufactured-gas sites, (2) cleanup of third-party waste-disposal sites used by the California Utilities at sites for which we have been identified as a PRP and (3) mitigation of damage to the marine environment caused by the cooling-water discharge from SONGS.
The table below shows the status at December 31, 2017 of the California Utilities’ manufactured-gas sites and the third-party waste-disposal sites for which we have been identified as a PRP:
|
| | | | | |
STATUS OF ENVIRONMENTAL SITES |
| | | |
| # Sites complete(1) | | # Sites in process |
SDG&E: | | | |
Manufactured-gas sites | 3 |
| | — |
|
Third-party waste-disposal sites | 2 |
| | 1 |
|
SoCalGas: | | | |
Manufactured-gas sites | 39 |
| | 3 |
|
Third-party waste-disposal sites | 5 |
| | 2 |
|
| |
(1) | There may be ongoing compliance obligations for completed sites, such as regular inspections, adherence to land use covenants and water quality monitoring. |
We record environmental liabilities at undiscounted amounts when our liability is probable and the costs can be reasonably estimated. In many cases, however, investigations are not yet at a stage where we can determine whether we are liable or, if the liability is probable, to reasonably estimate the amount or range of amounts of the costs. Estimates of our liability are further subject to uncertainties such as the nature and extent of site contamination, evolving cleanup standards and imprecise engineering evaluations. We review our accruals periodically and, as investigations and cleanups proceed, we make adjustments as necessary.
The following table shows our accrued liabilities for environmental matters at December 31, 2017:
|
| | | | | | | | | | | | | | | |
ACCRUED LIABILITIES FOR ENVIRONMENTAL MATTERS |
(Dollars in millions) |
| Manufactured- gas sites | | Waste disposal sites (PRP)(1) | | Other hazardous waste sites | | Total(2) |
SDG&E(3) | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | 4 |
|
SoCalGas(4) | 22 |
| | 1 |
| | 1 |
| | 24 |
|
Other | — |
| | 1 |
| | — |
| | 1 |
|
Total Sempra Energy | $ | 22 |
| | $ | 4 |
| | $ | 3 |
| | $ | 29 |
|
| |
(1) | Sites for which we have been identified as a PRP. |
| |
(2) | Includes $9 million, $1 million and $8 million classified as current liabilities, and $20 million, $3 million and $16 million classified as noncurrent liabilities on Sempra Energy’s, SDG&E’s and SoCalGas’ Consolidated Balance Sheets, respectively. |
| |
(3) | Does not include SDG&E’s liability for SONGS marine environment mitigation. |
| |
(4) | Does not include SoCalGas’ liability for environmental matters for the natural gas leak at the Aliso Canyon natural gas storage facility. We discuss matters related to the leak above in “Legal Proceedings – SoCalGas – Aliso Canyon Natural Gas Storage Facility Gas Leak.” |
We expect to pay the majority of these accruals over the next three years.
In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached an agreement with the CCC to mitigate the damage to the marine environment caused by the cooling-water discharge from SONGS during its operation. SONGS’ early retirement, described in Note 13, does not reduce SDG&E’s mitigation obligation. SDG&E’s share of the estimated mitigation costs is $68 million, of which $44 million has been incurred through December 31, 2017 and $24 million is accrued for remaining costs through 2050, which is recoverable in rates and included in noncurrent Regulatory Assets on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets. The requirements for enhanced fish protection and restoration of coastal wetlands for the SONGS mitigation are in process. Work on the artificial reef that was dedicated in 2008 continues. The CCC has stated that it now requires an expansion of the reef because the existing reef may be too small to consistently meet the performance standards. In December 2016, SDG&E and Edison filed a joint application with the CPUC seeking rate recovery of the costs of the reef expansion. In October 2017, SDG&E, Edison, TURN and ORA filed a joint motion requesting approval of a settlement agreement that amends the rate recovery application and allows costs to be recorded to a memorandum account until rate recovery is approved in the second half of 2018. Rates, if approved, would be effective January 2019. SDG&E’s share of the reef expansion costs currently forecasted through 2020 is $4 million. We expect a decision on the settlement agreement in the first half of 2018.
CONCENTRATION OF CREDIT RISK
We maintain credit policies and systems designed to manage our overall credit risk. These policies include an evaluation of potential counterparties’ financial condition and an assignment of credit limits. These credit limits are established based on risk and return considerations under terms customarily available in the industry. We grant credit to utility customers and counterparties, substantially all of whom are located in our service territory, which covers most of Southern California and a portion of central California for SoCalGas, and all of San Diego County and an adjacent portion of Orange County for SDG&E. We also grant credit to utility customers and counterparties of our other companies providing natural gas or electric services in Mexico, Chile and Peru.
As they become operational, projects owned or partially owned by Sempra LNG & Midstream, Sempra Renewables, Sempra South American Utilities and Sempra Mexico place significant reliance on the ability of their suppliers, customers and partners to perform under long-term agreements and on our ability to enforce contract terms in the event of nonperformance. We consider many factors, including the negotiation of supplier and customer agreements, when we evaluate and approve development projects.
NOTE 16. SEGMENT INFORMATION
We have six separately managed reportable segments, as follows:
| |
▪ | SDG&E provides electric service to San Diego and southern Orange counties and natural gas service to San Diego County. |
| |
▪ | SoCalGas is a natural gas distribution utility, serving customers throughout most of Southern California and part of central California. |
| |
▪ | Sempra South American Utilities develops, owns and operates, or holds interests in, electric transmission, distribution and generation infrastructure in Chile and Peru. |
| |
▪ | Sempra Mexico develops, owns and operates, or holds interests in, natural gas, electric, LNG, LPG, ethane and liquid fuels infrastructure, and has marketing operations for the purchase of LNG and the purchase and sale of natural gas in Mexico. In February 2016, management approved a plan to market and sell the TdM natural gas-fired power plant located in Mexicali, Baja California, as we discuss in Note 3. |
| |
▪ | Sempra Renewables develops, owns and operates, or holds interests in, wind and solar energy generation facilities serving wholesale electricity markets in the U.S. |
| |
▪ | Sempra LNG & Midstream develops, owns and operates, or holds interests in, a terminal for the import and export of LNG and sale of natural gas, and natural gas pipelines, storage facilities and marketing operations, all within the U.S. In September 2016, Sempra LNG & Midstream sold EnergySouth, the parent company of Mobile Gas and Willmut Gas, and in May 2016, sold its 25-percent interest in Rockies Express. Sempra LNG & Midstream 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. We discuss these divestitures in Note 3. |
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.
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 Consolidated Statements of Operations and Consolidated Balance Sheets. We provide information about our equity method investments by segment in Note 4. Amounts labeled as “All other” in the following tables consist primarily of parent organizations.
|
| | | | | | | | | | | |
SEGMENT INFORMATION | | | | | |
(Dollars in millions) | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
REVENUES | | | | | |
SDG&E | $ | 4,476 |
| | $ | 4,253 |
|
| $ | 4,219 |
|
SoCalGas | 3,785 |
| | 3,471 |
|
| 3,489 |
|
Sempra South American Utilities | 1,567 |
| | 1,556 |
|
| 1,544 |
|
Sempra Mexico | 1,196 |
| | 725 |
|
| 669 |
|
Sempra Renewables | 94 |
| | 34 |
|
| 36 |
|
Sempra LNG & Midstream | 540 |
| | 508 |
|
| 653 |
|
Adjustments and eliminations | (1 | ) | | — |
|
| (2 | ) |
Intersegment revenues(1) | (450 | ) | | (364 | ) |
| (377 | ) |
Total | $ | 11,207 |
| | $ | 10,183 |
|
| $ | 10,231 |
|
INTEREST EXPENSE | |
| | |
| | |
|
SDG&E | $ | 203 |
| | $ | 195 |
| | $ | 204 |
|
SoCalGas | 102 |
| | 97 |
| | 84 |
|
Sempra South American Utilities | 38 |
| | 38 |
| | 32 |
|
Sempra Mexico | 97 |
| | 13 |
| | 23 |
|
Sempra Renewables | 15 |
| | 4 |
| | 3 |
|
Sempra LNG & Midstream | 39 |
| | 43 |
| | 72 |
|
All other | 284 |
| | 282 |
| | 263 |
|
Intercompany eliminations | (119 | ) | | (119 | ) | | (120 | ) |
Total | $ | 659 |
| | $ | 553 |
| | $ | 561 |
|
INTEREST INCOME | |
| | |
| | |
|
SoCalGas | $ | 1 |
| | $ | 1 |
| | $ | 4 |
|
Sempra South American Utilities | 28 |
| | 21 |
| | 19 |
|
Sempra Mexico | 23 |
| | 6 |
| | 7 |
|
Sempra Renewables | 7 |
| | 5 |
| | 4 |
|
Sempra LNG & Midstream | 56 |
| | 71 |
| | 75 |
|
Intercompany eliminations | (69 | ) | | (78 | ) | | (80 | ) |
Total | $ | 46 |
| | $ | 26 |
| | $ | 29 |
|
DEPRECIATION AND AMORTIZATION | |
| | |
| | |
|
SDG&E | $ | 670 |
| | $ | 646 |
| | $ | 604 |
|
SoCalGas | 515 |
| | 476 |
| | 461 |
|
Sempra South American Utilities | 54 |
| | 49 |
| | 50 |
|
Sempra Mexico | 156 |
| | 77 |
| | 70 |
|
Sempra Renewables | 38 |
| | 6 |
| | 6 |
|
Sempra LNG & Midstream | 42 |
| | 47 |
| | 49 |
|
All other | 15 |
| | 11 |
| | 10 |
|
Total | $ | 1,490 |
| | $ | 1,312 |
| | $ | 1,250 |
|
INCOME TAX EXPENSE (BENEFIT) | |
| | |
| | |
|
SDG&E | $ | 155 |
| | $ | 280 |
| | $ | 284 |
|
SoCalGas | 160 |
| | 143 |
| | 138 |
|
Sempra South American Utilities | 80 |
| | 80 |
| | 67 |
|
Sempra Mexico | 227 |
| | 188 |
| | 11 |
|
Sempra Renewables | (226 | ) | | (38 | ) | | (49 | ) |
Sempra LNG & Midstream | (119 | ) | | (80 | ) | | 28 |
|
All other | 999 |
| | (184 | ) | | (138 | ) |
Total | $ | 1,276 |
| | $ | 389 |
| | $ | 341 |
|
|
| | | | | | | | | | | |
SEGMENT INFORMATION (CONTINUED) |
(Dollars in millions) |
| Years ended December 31 or at December 31, |
| 2017 | | 2016 | | 2015 |
EARNINGS (LOSSES) | | | | | |
SDG&E | $ | 407 |
| | $ | 570 |
| | $ | 587 |
|
SoCalGas(2) | 396 |
| | 349 |
| | 419 |
|
Sempra South American Utilities | 186 |
| | 156 |
| | 175 |
|
Sempra Mexico | 169 |
| | 463 |
| | 213 |
|
Sempra Renewables | 252 |
| | 55 |
| | 63 |
|
Sempra LNG & Midstream | 150 |
| | (107 | ) | | 44 |
|
All other | (1,304 | ) | | (116 | ) | | (152 | ) |
Total | $ | 256 |
| | $ | 1,370 |
| | $ | 1,349 |
|
ASSETS | |
| | |
| | |
|
SDG&E | $ | 17,844 |
| | $ | 17,719 |
| | $ | 16,515 |
|
SoCalGas | 14,159 |
| | 13,424 |
| | 12,104 |
|
Sempra South American Utilities | 4,060 |
| | 3,591 |
| | 3,235 |
|
Sempra Mexico | 8,554 |
| | 7,542 |
| | 3,783 |
|
Sempra Renewables | 2,898 |
| | 3,644 |
| | 1,441 |
|
Sempra LNG & Midstream | 4,872 |
| | 5,564 |
| | 5,566 |
|
All other | 915 |
| | 475 |
| | 734 |
|
Intersegment receivables | (2,848 | ) | | (4,173 | ) | | (2,228 | ) |
Total | $ | 50,454 |
| | $ | 47,786 |
| | $ | 41,150 |
|
EXPENDITURES FOR PROPERTY, PLANT & EQUIPMENT | |
| | |
| | |
|
SDG&E | $ | 1,555 |
| | $ | 1,399 |
| | $ | 1,133 |
|
SoCalGas | 1,367 |
| | 1,319 |
| | 1,352 |
|
Sempra South American Utilities | 244 |
| | 194 |
| | 154 |
|
Sempra Mexico | 248 |
| | 330 |
| | 302 |
|
Sempra Renewables | 497 |
| | 835 |
| | 81 |
|
Sempra LNG & Midstream | 20 |
| | 117 |
| | 87 |
|
All other | 18 |
| | 20 |
| | 47 |
|
Total | $ | 3,949 |
| | $ | 4,214 |
| | $ | 3,156 |
|
GEOGRAPHIC INFORMATION | | | | | |
Long-lived assets(3): | | | | | |
United States | $ | 31,487 |
|
| $ | 28,351 |
| | $ | 26,132 |
|
Mexico | 5,363 |
| | 4,814 |
| | 3,160 |
|
South America | 2,180 |
| | 1,863 |
| | 1,652 |
|
Total | $ | 39,030 |
| | $ | 35,028 |
| | $ | 30,944 |
|
Revenues(4): | |
| | |
| | |
|
United States | $ | 8,547 |
| | $ | 8,004 |
| | $ | 8,119 |
|
South America | 1,567 |
| | 1,556 |
| | 1,544 |
|
Mexico | 1,093 |
| | 623 |
| | 568 |
|
Total | $ | 11,207 |
| | $ | 10,183 |
| | $ | 10,231 |
|
| |
(1) | Revenues for reportable segments include intersegment revenues of $7 million, $74 million, $103 million and $266 million for 2017, $6 million, $76 million, $102 million and $180 million for 2016, and $9 million, $75 million, $101 million and $192 million for 2015 for SDG&E, SoCalGas, Sempra Mexico and Sempra LNG & Midstream, respectively. |
| |
(2) | After preferred dividends. |
| |
(3) | Includes net PP&E and investments. |
| |
(4) | Amounts are based on where the revenue originated, after intercompany eliminations. |
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
We provide quarterly financial information for Sempra Energy Consolidated, SDG&E and SoCalGas below:
|
| | | | | | | | | | | | | | | |
SEMPRA ENERGY |
(In millions, except per share amounts) |
| Quarters ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2017: | | | | | | | |
Revenues | $ | 3,031 |
| | $ | 2,533 |
| | $ | 2,679 |
| | $ | 2,964 |
|
Expenses and other income | $ | 2,276 |
| | $ | 2,118 |
| | $ | 2,664 |
| | $ | 2,564 |
|
| | | | | | | |
Net income (loss) | $ | 452 |
| | $ | 248 |
| | $ | 102 |
| | $ | (451 | ) |
Earnings (losses) attributable to Sempra Energy | $ | 441 |
| | $ | 259 |
| | $ | 57 |
| | $ | (501 | ) |
| | | | | | | |
Basic per-share amounts(1): | |
| | |
| | |
| | |
|
Net income (loss) | $ | 1.80 |
| | $ | 0.99 |
| | $ | 0.41 |
| | $ | (1.80 | ) |
Earnings (losses) attributable to Sempra Energy | $ | 1.76 |
| | $ | 1.03 |
| | $ | 0.23 |
| | $ | (1.99 | ) |
Weighted-average common shares outstanding | 251.1 |
| | 251.4 |
| | 251.7 |
| | 251.9 |
|
| | | | | | | |
Diluted per-share amounts(1)(2): | |
| | |
| | |
| | |
|
Net income (loss) | $ | 1.79 |
| | $ | 0.98 |
| | $ | 0.41 |
| | $ | (1.80 | ) |
Earnings (losses) attributable to Sempra Energy | $ | 1.75 |
| | $ | 1.03 |
| | $ | 0.22 |
| | $ | (1.99 | ) |
Weighted-average common shares outstanding | 252.2 |
| | 252.8 |
| | 253.4 |
| | 251.9 |
|
2016: | |
| | |
| | |
| | |
|
Revenues | $ | 2,622 |
| | $ | 2,156 |
| | $ | 2,535 |
| | $ | 2,870 |
|
Expenses and other income | $ | 2,167 |
| | $ | 2,268 |
| | $ | 1,553 |
| | $ | 2,365 |
|
| | | | | | | |
Net income | $ | 364 |
| | $ | 27 |
| | $ | 719 |
| | $ | 409 |
|
Earnings attributable to Sempra Energy | $ | 353 |
| | $ | 16 |
| | $ | 622 |
| | $ | 379 |
|
| | | | | | | |
Basic per-share amounts(1): | |
| | |
| | |
| | |
|
Net income | $ | 1.46 |
| | $ | 0.11 |
| | $ | 2.87 |
| | $ | 1.63 |
|
Earnings attributable to Sempra Energy | $ | 1.41 |
| | $ | 0.06 |
| | $ | 2.48 |
| | $ | 1.51 |
|
Weighted-average common shares outstanding | 249.7 |
| | 250.1 |
| | 250.4 |
| | 250.6 |
|
| | | | | | | |
Diluted per-share amounts(1): | |
| | |
| | |
| | |
|
Net income | $ | 1.45 |
| | $ | 0.11 |
| | $ | 2.85 |
| | $ | 1.62 |
|
Earnings attributable to Sempra Energy | $ | 1.40 |
| | $ | 0.06 |
| | $ | 2.46 |
| | $ | 1.51 |
|
Weighted-average common shares outstanding | 251.5 |
| | 252.0 |
| | 252.4 |
| | 251.6 |
|
| |
(1) | Earnings per share are computed independently for each of the quarters and therefore may not sum to the total for the year. |
| |
(2) | In the quarter ended December 31, 2017, the total weighted-average number of potentially dilutive securities was 0.8 million. However, these securities were not included in the computation of U.S. GAAP losses per common share since to do so would have decreased the loss per share. |
In 2017, Sempra Energy’s income tax expense included $870 million related to the impact of the TCJA, as we discuss in Note 6.
In September 2017, SDG&E recognized a charge of $351 million ($208 million after-tax) for the write-off of its wildfire regulatory asset, which we discuss in Note 15.
In June 2017 and September 2016, Sempra Mexico recognized impairment charges of $71 million ($47 million after noncontrolling interests) and $131 million ($111 million after-tax; $90 million after-tax and after noncontrolling interests), respectively, related to assets held for sale at TdM. We discuss the impairments in Notes 3 and 10.
In September 2016, Sempra Mexico recorded a $617 million noncash gain ($432 million after-tax; $350 million after-tax and after noncontrolling interests) associated with the remeasurement of its equity interest in IEnova Pipelines, which we discuss in Note 3.
In May 2016, Sempra LNG & Midstream recorded a pretax charge of $206 million ($123 million after-tax) related to permanently released pipeline capacity with Rockies Express and others, which we discuss in Note 15. In May 2017, Sempra LNG & Midstream recorded $47 million ($28 million after-tax) for settlement proceeds received from a breach of contract claim against a counterparty related to the charge.
In March 2016, Sempra LNG & Midstream recognized an impairment charge of $44 million ($27 million after-tax) on its investment in Rockies Express, which we discuss in Notes 3 and 10.
|
| | | | | | | | | | | | | | | |
SDG&E |
(Dollars in millions) |
| Quarters ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2017: | | | | | | | |
Operating revenues | $ | 1,057 |
| | $ | 1,058 |
| | $ | 1,236 |
| | $ | 1,125 |
|
Operating expenses | 779 |
| | 817 |
| | 1,290 |
| | 877 |
|
Operating income (loss) | $ | 278 |
| | $ | 241 |
| | $ | (54 | ) | | $ | 248 |
|
| | | | | | | |
Net income (loss) | $ | 157 |
| | $ | 153 |
| | $ | (19 | ) | | $ | 130 |
|
(Earnings) losses attributable to noncontrolling interest | (2 | ) | | (4 | ) | | (9 | ) | | 1 |
|
Earnings (losses) attributable to common shares | $ | 155 |
| | $ | 149 |
| | $ | (28 | ) | | $ | 131 |
|
2016: | |
| | |
| | |
| | |
|
Operating revenues | $ | 991 |
| | $ | 992 |
| | $ | 1,209 |
| | $ | 1,061 |
|
Operating expenses | 755 |
| | 822 |
| | 886 |
| | 800 |
|
Operating income | $ | 236 |
| | $ | 170 |
| | $ | 323 |
| | $ | 261 |
|
| | | | | | | |
Net income | $ | 137 |
| | $ | 87 |
| | $ | 194 |
| | $ | 147 |
|
(Earnings) losses attributable to noncontrolling interest | (1 | ) | | 13 |
| | (11 | ) | | 4 |
|
Earnings attributable to common shares | $ | 136 |
| | $ | 100 |
| | $ | 183 |
| | $ | 151 |
|
|
| | | | | | | | | | | | | | | |
SOCALGAS |
(Dollars in millions) |
| Quarters ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2017: | | | | | | | |
Operating revenues | $ | 1,241 |
| | $ | 770 |
| | $ | 684 |
| | $ | 1,090 |
|
Operating expenses | 926 |
| | 675 |
| | 674 |
| | 888 |
|
Operating income | $ | 315 |
| | $ | 95 |
| | $ | 10 |
| | $ | 202 |
|
| | | | | | | |
Net income | $ | 203 |
| | $ | 59 |
| | $ | 7 |
| | $ | 128 |
|
Dividends on preferred stock | — |
| | (1 | ) | | — |
| | — |
|
Earnings attributable to common shares | $ | 203 |
| | $ | 58 |
| | $ | 7 |
| | $ | 128 |
|
2016: | |
| | |
| | |
| | |
|
Operating revenues | $ | 1,033 |
| | $ | 617 |
| | $ | 686 |
| | $ | 1,135 |
|
Operating expenses | 739 |
| | 628 |
| | 648 |
| | 899 |
|
Operating income (loss) | $ | 294 |
| | $ | (11 | ) | | $ | 38 |
| | $ | 236 |
|
| | | | | | | |
Net income | $ | 199 |
| | $ | — |
| | $ | — |
| | $ | 151 |
|
Dividends on preferred stock | — |
| | (1 | ) | | — |
| | — |
|
Earnings (losses) attributable to common shares | $ | 199 |
| | $ | (1 | ) |
| $ | — |
| | $ | 151 |
|
SoCalGas recognizes annual authorized revenue for core natural gas customers using seasonal factors established in the Triennial Cost Allocation Proceeding. Accordingly, a significant portion of SoCalGas’ annual earnings are recognized in the first and fourth quarters each year.
NOTE 18. SUBSEQUENT EVENTS
SEMPRA ENERGY
As part of our plans to finance the proposed Merger that we discuss in Note 3, we completed the following transactions in January 2018.
Common Stock Offering
On January 9, 2018, we completed the offering of 23,364,486 shares of our common stock, no par value, in a registered public offering at $107.00 per share ($105.074 per share after deducting the underwriting discount), pursuant to forward sale agreements with each of Morgan Stanley & Co. LLC, an affiliate of RBC Capital Markets, LLC and an affiliate of Barclays Capital Inc. (the forward purchasers). The shares offered pursuant to the forward sale agreements were borrowed by the underwriters and therefore are not newly issued shares. The underwriters of the offering fully exercised the option we granted them to purchase an additional 3,504,672 shares of common stock directly from us solely to cover overallotments. After the offering, including the issuance of shares pursuant to the exercise of the overallotment option, the aggregate shares of common stock sold in the offering totaled 26,869,158. We received net proceeds of $368 million (net of underwriting discounts, but before deducting other related expenses) from the sale of shares to cover overallotments.
The initial forward sale price under the forward sale agreements is $105.074 per share, which is the public offering price in the common stock offering less the underwriting discount. However, the forward sale price is subject to adjustment pursuant to the forward sale agreements. We did not initially receive any proceeds from the sale of our common stock sold by the forward sellers to the underwriters. We expect to settle a portion of the forward sale agreements and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock concurrently with, or prior to, the closing of our proposed Merger. We expect to settle the remaining portion of the forward sale agreements after the Merger, if completed, in multiple settlements on or prior to December 15, 2019, which is the final settlement date under the forward sale agreements. At the initial forward sale price of $105.074 per share, we expect that the net proceeds from full physical settlement of the forward sale agreements would be approximately $2.46 billion (after deducting the underwriting discount, but before deducting expenses, and subject to forward price adjustments under the forward sale agreements).
In the case of any forward sales that settle after the closing of the Merger, we intend to use the net proceeds to repay indebtedness incurred to finance a portion of the cost of the Merger Consideration and associated transaction costs. If for any reason the Merger has not closed on or prior to December 1, 2018, or the Merger Agreement is terminated at any time prior to such date, then we expect to use the net proceeds from this offering for general corporate purposes, which may include, in our sole discretion, voluntary redemption of the mandatory convertible preferred stock discussed below, debt repayment (including repayment of commercial paper), capital expenditures, investments and possibly repurchases of our common stock at the discretion of our board of directors.
Although we expect to settle the forward sale agreements entirely by the physical delivery of shares of our common stock in exchange for cash proceeds, we may elect cash settlement or net share settlement for all or a portion of our obligations under the forward sale agreements. The forward sale agreements are also subject to acceleration by the forward purchasers upon the occurrence of certain events.
Before the issuance of shares of our common stock, if any, upon settlement of the forward sale agreements, we expect that the shares issuable upon settlement of the forward sale agreements will be reflected in our diluted EPS calculation using the treasury stock method. Under this method, the number of shares of our common stock used in calculating diluted EPS is deemed to be increased by the excess, if any, of the number of shares of common stock that would be issued upon full physical settlement of the forward sale agreements over the number of shares of common stock that could be purchased by us in the market (based on the average market price of our common stock during the applicable reporting period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, we anticipate there will be no dilutive effect on our EPS except during periods when the average market price of shares of our common stock is above the applicable adjusted forward sale price, which is initially $105.074 per share, subject to increase or decrease based on the overnight bank funding rate, less a spread, and subject to decrease by amounts related to expected dividends on shares of our common stock during the term of the forward sale agreements. However, if we decide to physically settle or net share settle the forward sale agreements, delivery of our shares to the forward purchasers on any such physical settlement or net share settlement of the forward sale agreements would result in dilution to our EPS.
Mandatory Convertible Preferred Stock Offering
On January 9, 2018, in a separate registered public offering, we sold 17,250,000 shares of our 6% mandatory convertible preferred stock, series A (mandatory convertible preferred stock) at $100.00 per share (or $98.20 per share after deducting the underwriting discount), including 2,250,000 shares purchased by the underwriters as a result of fully exercising their option to purchase such shares from us solely to cover overallotments. Each share of mandatory convertible preferred stock has a liquidation value of $100.
We intend to use the net proceeds of approximately $1.69 billion (net of underwriting discounts, but before related expenses) from this offering to finance a portion of the Merger Consideration and associated transaction costs. If the proposed Merger is not consummated
on or prior to December 1, 2018, or the Merger Agreement is terminated at any time prior to such date, then we expect to use the net proceeds for general corporate purposes, which may include, in our sole discretion, the redemption of the mandatory convertible preferred stock, debt repayment (including repayment of commercial paper), capital expenditures, investments and possibly repurchases of our common stock at the discretion of our board of directors.
Mandatory Conversion
Unless earlier converted or redeemed, each share of the mandatory convertible preferred stock will automatically convert on the mandatory conversion date, which is expected to be January 15, 2021, into not less than 0.7629 and not more than 0.9345 shares of our common stock, subject to anti-dilution adjustments. The number of shares of our common stock issuable on conversion of the mandatory convertible preferred stock will be determined based on the volume-weighted average market value per share of our common stock over the 20 consecutive trading day period beginning on and including the 21st scheduled trading day immediately preceding January 15, 2021, which we refer to as the “settlement period.” The following table illustrates the conversion rate per share of the mandatory convertible preferred stock, subject to certain anti-dilution adjustments:
|
| | |
CONVERSION RATES |
| | |
Applicable market value per share of our common stock | | Conversion rate (number of shares of our common stock to be received upon conversion of each share of mandatory convertible preferred stock) |
| | |
Greater than $131.075 (which is the threshold appreciation price)
| | 0.7629 shares (approximately equal to $100.00 divided by the threshold appreciation price)
|
Equal to or less than $131.075 but greater than or equal to $107.00
| | Between 0.7629 and 0.9345 shares, determined by dividing $100.00 by the applicable market value of our common stock |
Less than $107.00 (which is the initial price)
| | 0.9345 shares (approximately equal to $100.00 divided by the initial price) |
Dividends
Dividends on the mandatory convertible preferred stock will be payable quarterly, beginning on April 15, 2018, on a cumulative basis when, as and if declared by our board of directors. We may pay quarterly declared dividends in cash, or subject to certain limitations, in shares of our common stock, no par value, or in any combination of cash and shares of our common stock. Shares of common stock used to pay dividends will be valued at 97 percent of the volume-weighted average price per share over the five consecutive trading day period beginning on, and including the sixth trading day prior to, the applicable dividend payment date. The holders of mandatory convertible preferred stock will have no voting rights. However, under certain circumstances regarding nonpayment for six or more dividend periods, whether or not consecutive, the authorized number of directors on our board of directors will automatically be increased by two and the holders of the mandatory convertible preferred stock, voting together as a single class with holders of any and all other outstanding preferred stock of equal rank having similar voting rights, will be entitled to elect two directors to fill such newly created directorships. This right shall terminate when all accumulated dividends have been paid in full and the authorized number of directors shall automatically decrease by two, subject to revesting of that right in the event of each subsequent nonpayment.
Acquisition Termination Redemption
If the proposed Merger has not closed on or before December 1, 2018, the Merger Agreement is terminated or if we determine in our reasonable judgment that the proposed Merger will not occur, we may, at our option, redeem the mandatory convertible preferred stock, in whole but not in part, at a redemption amount per share, in cash, equal to an acquisition termination make-whole amount. However, if the acquisition termination share price exceeds the initial price, then, subject to certain limitations, we may pay part or all of the redemption price in shares of our common stock.
The redemption of the mandatory convertible preferred stock gives us the option to redeem, in whole but not in part, the mandatory convertible preferred stock at a make-whole redemption price per share that includes a make-whole adjustment which could provide a redemption price that exceeds the initial public offering price of $100.00 per share, plus accrued and unpaid dividends. We may satisfy the redemption price by delivering cash, common stock or a combination thereof.
Conversion at the Option of the Holder
At any time prior to January 15, 2021, holders may elect to convert each share of the mandatory convertible preferred stock into shares of our common stock at the minimum conversion rate of 0.7629 shares of our common stock per share of the mandatory convertible preferred stock, subject to anti-dilution adjustments. However, if holders elect to convert any shares of the mandatory convertible preferred stock during a specified period beginning on the effective date of a fundamental change, as defined, such shares of the mandatory convertible preferred stock will be converted into shares of our common stock at a fundamental change conversion rate, and the holders will also be entitled to receive a fundamental change dividend make-whole amount and accumulated dividend amount.
Ranking
The mandatory convertible preferred stock will rank with respect to dividend rights and distribution rights upon our liquidation, winding-up or dissolution:
| |
▪ | senior to our common stock, including our capital stock established in the future, unless the terms of such capital stock expressly provide otherwise; |
| |
▪ | junior to our existing and future indebtedness and other liabilities; and |
| |
▪ | structurally subordinated to any existing and future indebtedness and other liabilities of our subsidiaries and capital stock of our subsidiaries held by third parties. |
The conversion of the mandatory convertible preferred stock would have resulted in the issuance of approximately 16.1 million shares of our common stock, subject to possible adjustment pursuant to the terms of the mandatory convertible preferred stock, based on the last reported sale price of our common stock on the New York Stock Exchange on December 29, 2017, which was $106.92 per share. However, if the mandatory convertible preferred stock had been issued January 1, 2017 and dividends paid for the full year 2017, an adjustment for the shares issuable on conversion would not have been reflected in our computation of diluted EPS for 2017 because the issuance of those shares would be anti-dilutive.
Long-Term Debt Offering
On January 12, 2018, we issued the following debt securities and received net proceeds of $4.9 billion (after deducting the underwriting discount, but before deducting expenses):
|
| | | | | | | |
NOTES ISSUED IN LONG-TERM DEBT OFFERING |
(Dollars in millions) |
Title of each class of securities | Aggregate principal amount | | Maturity | | Interest payments |
Floating Rate(1) Notes due 2019 | $ | 500 |
| | July 15, 2019 | | Quarterly |
Floating Rate(2) Notes due 2021 | 700 |
| | January 15, 2021 | | Quarterly |
2.400% Senior Notes due 2020 | 500 |
| | February 1, 2020 | | Semi-annually |
2.900% Senior Notes due 2023 | 500 |
| | February 1, 2023 | | Semi-annually |
3.400% Senior Notes due 2028 | 1,000 |
| | February 1, 2028 | | Semi-annually |
3.800% Senior Notes due 2038 | 1,000 |
| | February 1, 2038 | | Semi-annually |
4.000% Senior Notes due 2048 | 800 |
| | February 1, 2048 | | Semi-annually |
| |
(1) | Bears interest at a rate per annum equal to the 3-month LIBOR rate, plus 25 basis points. |
| |
(2) | Bears interest at a rate per annum equal to the 3-month LIBOR rate, plus 50 basis points. |
The 2019 floating rate notes are not subject to redemption at our option. At our option, we may redeem some or all of the 2021 floating rate notes at any time on or after January 14, 2019 at the applicable redemption price per the terms of the notes. At our option, we may redeem some or all of the fixed rate notes of each series at any time at the applicable redemption price for such series of fixed rate notes.
We intend to use the net proceeds from this offering to finance a portion of the Merger Consideration and associated transaction costs. If we do not consummate the Merger on or prior to December 1, 2018, or if, on or prior to such date, the Merger agreement is terminated, we will be required to redeem all of the outstanding notes (other than the 2028 notes) at a redemption price equal to 101 percent of the principal amount of the notes we are required to redeem, plus accrued and unpaid interest, if any. The 2028 notes are not subject to this special mandatory redemption. If we are required to redeem the notes, we may use all or a portion of the net proceeds we received from the issuance of these notes to pay all or a portion of the redemption price of the notes we are required to redeem, and we intend to use any remaining net proceeds for general corporate purposes, which may include, in our sole discretion, voluntary redemption of our mandatory convertible preferred stock, repayment of other debt (including repayment of commercial paper), capital expenditures, investments and possibly, repurchases of our common stock at the discretion of our board of directors.
Ranking
The notes are unsecured and unsubordinated obligations, ranking on a parity in right of payment with all of our other unsecured and unsubordinated indebtedness and guarantees. If the proposed Merger is consummated, the notes will also be effectively subordinated to all existing and future indebtedness and other liabilities of Oncor Holdings, Oncor and their respective subsidiaries.
|
| |
SCHEDULE I – SEMPRA ENERGY
| |
INDEX TO CONDENSED FINANCIAL INFORMATION OF PARENT | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
SEMPRA ENERGY |
CONDENSED STATEMENTS OF OPERATIONS |
(Dollars in millions, except per share amounts) |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Interest expense | $ | (293 | ) | | $ | (277 | ) | | $ | (261 | ) |
Operation and maintenance | (87 | ) | | (81 | ) | | (66 | ) |
Other income (expense), net | 107 |
| | (2 | ) | | 7 |
|
Income tax benefit | 33 |
| | 181 |
| | 150 |
|
Loss before equity in earnings of subsidiaries | (240 | ) | | (179 | ) | | (170 | ) |
Equity in earnings of subsidiaries, net of income taxes | 496 |
| | 1,549 |
| | 1,519 |
|
Net income/earnings | $ | 256 |
| | $ | 1,370 |
| | $ | 1,349 |
|
Basic earnings per common share | $ | 1.02 |
| | $ | 5.48 |
| | $ | 5.43 |
|
Weighted-average number of shares outstanding (thousands) | 251,545 |
| | 250,217 |
| | 248,249 |
|
Diluted earnings per common share | $ | 1.01 |
| | $ | 5.46 |
| | $ | 5.37 |
|
Weighted-average number of shares outstanding (thousands) | 252,300 |
| | 251,155 |
| | 250,923 |
|
See Notes to Condensed Financial Information of Parent.
|
| | | | | | | | | | | |
SEMPRA ENERGY |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(Dollars in millions) |
| Years ended December 31, |
| Pretax amount | | Income tax benefit (expense) | | Net-of-tax amount |
2017: | | | | | |
Net income | $ | 223 |
| | $ | 33 |
| | $ | 256 |
|
Other comprehensive income (loss): | |
| | |
| | |
|
Foreign currency translation adjustments | 107 |
| | — |
| | 107 |
|
Financial instruments | 2 |
| | 1 |
| | 3 |
|
Pension and other postretirement benefits | 20 |
| | (8 | ) | | 12 |
|
Total other comprehensive income | 129 |
| | (7 | ) | | 122 |
|
Comprehensive income | $ | 352 |
| | $ | 26 |
| | $ | 378 |
|
2016: | |
| | |
| | |
|
Net income | $ | 1,189 |
| | $ | 181 |
| | $ | 1,370 |
|
Other comprehensive income (loss): | |
| | |
| | |
|
Foreign currency translation adjustments | 42 |
| | — |
| | 42 |
|
Financial instruments | (6 | ) | | 11 |
| | 5 |
|
Pension and other postretirement benefits | (13 | ) | | 4 |
| | (9 | ) |
Total other comprehensive income | 23 |
| | 15 |
| | 38 |
|
Comprehensive income | $ | 1,212 |
| | $ | 196 |
| | $ | 1,408 |
|
2015: | |
| | |
| | |
|
Net income | $ | 1,199 |
| | $ | 150 |
| | $ | 1,349 |
|
Other comprehensive income (loss): | |
| | |
| | |
|
Foreign currency translation adjustments | (260 | ) | | — |
| | (260 | ) |
Financial instruments | (80 | ) | | 33 |
| | (47 | ) |
Pension and other postretirement benefits | (3 | ) | | 1 |
| | (2 | ) |
Total other comprehensive loss | (343 | ) | | 34 |
| | (309 | ) |
Comprehensive income | $ | 856 |
| | $ | 184 |
| | $ | 1,040 |
|
See Notes to Condensed Financial Information of Parent.
|
| | | | | | | |
SEMPRA ENERGY |
CONDENSED BALANCE SHEETS |
(Dollars in millions) |
| December 31, 2017 | | December 31, 2016 |
Assets: | | | |
Cash and cash equivalents | $ | 104 |
| | $ | 12 |
|
Due from affiliates | 83 |
| | 73 |
|
Income taxes receivable | 272 |
| | — |
|
Other current assets | 6 |
| | 2 |
|
Total current assets | 465 |
| | 87 |
|
| | | |
Investments in subsidiaries | 17,924 |
| | 17,329 |
|
Due from affiliates | 2 |
| | — |
|
Deferred income taxes | 1,802 |
| | 2,570 |
|
Other assets | 656 |
| | 592 |
|
Total assets | $ | 20,849 |
| | $ | 20,578 |
|
| | | |
Liabilities and shareholders’ equity: | |
| | |
|
Current portion of long-term debt | $ | 500 |
| | $ | 600 |
|
Due to affiliates | 280 |
| | 359 |
|
Income taxes payable | — |
| | 153 |
|
Other current liabilities | 396 |
| | 374 |
|
Total current liabilities | 1,176 |
| | 1,486 |
|
| | | |
Long-term debt | 6,198 |
| | 5,100 |
|
Due to affiliates | 300 |
| | 517 |
|
Other long-term liabilities | 505 |
| | 524 |
|
| | | |
Commitments and contingencies (Note 4) | | | |
| | | |
Shareholders’ equity | 12,670 |
| | 12,951 |
|
Total liabilities and shareholders’ equity | $ | 20,849 |
| | $ | 20,578 |
|
See Notes to Condensed Financial Information of Parent.
|
| | | | | | | | | | | |
SEMPRA ENERGY |
CONDENSED STATEMENTS OF CASH FLOWS |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016(1) | | 2015(1) |
| | | | | |
Net cash provided by (used in) operating activities | $ | 89 |
| | $ | (3 | ) | | $ | 95 |
|
| | | | | |
Expenditures for property, plant and equipment | (11 | ) | | (5 | ) | | (43 | ) |
Purchase of trust assets | — |
| | — |
| | (5 | ) |
Decrease (increase) in loans to affiliates, net | — |
| | 457 |
| | (457 | ) |
Expenditures for Merger-related transaction costs | (12 | ) | | — |
| | — |
|
Net cash (used in) provided by investing activities | (23 | ) | | 452 |
| | (505 | ) |
| | | | | |
Common stock dividends paid | (755 | ) | | (686 | ) | | (628 | ) |
Issuances of common stock | 47 |
| | 51 |
| | 52 |
|
Repurchases of common stock | (15 | ) | | (56 | ) | | (74 | ) |
Issuances of long-term debt | 1,595 |
| | 499 |
| | 1,248 |
|
Payments on long-term debt | (600 | ) | | (750 | ) | | — |
|
(Decrease) increase in loans from affiliates, net | (239 | ) | | 504 |
| | (230 | ) |
Tax benefit related to share-based compensation | — |
| | — |
| | 52 |
|
Other | (7 | ) | | (3 | ) | | (9 | ) |
Net cash provided by (used in) financing activities | 26 |
| | (441 | ) | | 411 |
|
| | | | | |
Increase in cash and cash equivalents | 92 |
| | 8 |
| | 1 |
|
Cash and cash equivalents, January 1 | 12 |
| | 4 |
| | 3 |
|
Cash and cash equivalents, December 31 | $ | 104 |
| | $ | 12 |
| | $ | 4 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |
| | |
| | |
|
Accrued Merger-related transaction costs | $ | 31 |
| | $ | — |
| | $ | — |
|
Financing of build-to-suit property | — |
| | — |
| | 61 |
|
Common dividends issued in stock | 53 |
| | 53 |
| | 55 |
|
Dividends declared but not paid | 207 |
| | 189 |
| | 174 |
|
| |
(1) | As adjusted for the retrospective adoption of ASU 2016-15, which we discuss in Note 2. |
See Notes to Condensed Financial Information of Parent.
SEMPRA ENERGY
NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT
NOTE 1. BASIS OF PRESENTATION
Sempra Energy accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.
Other Income, Net, on the Condensed Statements of Operations includes
| |
▪ | $56 million, $23 million and $3 million of gains on dedicated assets in support of our executive retirement and deferred compensation plans in 2017, 2016 and 2015, respectively; and |
| |
▪ | $50 million and $(28) million net gains (losses) primarily from the settlement of foreign currency derivatives to hedge Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova in 2017 and 2016, respectively. |
Additional information on Sempra Energy’s foreign currency derivatives is provided in Note 9 of the Notes to Consolidated Financial Statements.
NOTE 2. NEW ACCOUNTING STANDARDS
We describe below recent pronouncements that have had or may have a significant effect on Sempra Energy Parent’s financial condition, results of operations, cash flows or disclosures.
ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”:In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using net asset value per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively. There is an outstanding FASB exposure draft which clarifies that the prospective transition approach for equity investments without readily determinable fair values is meant only for instances in which the measurement alternative is elected.
For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. We adopted ASU 2016-01 on January 1, 2018 and it will not materially affect our financial condition, results of operations or cash flows.
ASU 2016-02, “Leases” and ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”: ASU 2016-02 requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating, and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. ASU 2018-01 allows entities to elect a transition practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP.
For public entities, these ASUs are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes practical expedients that may be elected, which would allow entities to continue to account for leases that
commence before the effective date of the standard in accordance with previous U.S. GAAP unless the lease is modified, except for the lessee requirement to begin recognizing right-of-use assets and lease liabilities for all operating leases on the balance sheet at the reporting date. We are currently evaluating the effect of the standards on our ongoing financial reporting and plan to adopt the standards on January 1, 2019. As part of our evaluation, we formed a steering committee comprised of members from relevant Sempra Energy business units, are compiling our population of contracts and are preparing our lease accounting assessments. Based on our assessment to date, we have determined that we will elect the practical expedients available under the transition guidance described above. We continue to monitor outstanding issues currently being addressed by the FASB, including guidance under a FASB exposure draft that would allow entities an optional transition method to apply ASU 2016-02 in the period of adoption rather than in the earliest period presented. Conclusions that the FASB reaches on outstanding issues may impact our application of these ASUs.
ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”: ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments. The standard introduces an “expected credit loss” impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the credit losses.
For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect of the standard on our ongoing financial reporting and have not yet selected the year in which we will adopt the standard.
ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”:ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows to reduce diversity in practice. Of the eight issues addressed in ASU 2016-15, we were impacted by the following issues:
| |
▪ | Issue 1 – debt prepayment or debt extinguishment costs (a negligible amount in each year presented below) |
| |
▪ | Issue 6 – distributions received from equity method investments |
The standard must be adopted retrospectively. We early adopted ASU 2016-15 in the fourth quarter of 2017. Upon adoption of ASU 2016-15, our Condensed Statements of Cash Flows for the years ended December 31, 2016 and 2015 were impacted as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
IMPACT FROM ADOPTION OF ASU 2016-15 |
(Dollars in millions) |
| Years ended December 31, |
| 2016 | | 2015 |
| As previously reported | | Effect of adoption | | As adjusted | | As previously reported | | Effect of adoption | | As adjusted |
Sempra Energy Condensed Statements of Cash Flows: | |
Cash flows from operating activities: | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (178 | ) | | $ | 175 |
| | $ | (3 | ) | | $ | (255 | ) | | $ | 350 |
| | $ | 95 |
|
| | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | |
Dividends received from subsidiaries(1) | 175 |
| | (175 | ) | | — |
| | 350 |
| | (350 | ) | | — |
|
Net cash provided by (used in) investing activities | 627 |
| | (175 | ) | | 452 |
| | (155 | ) | | (350 | ) | | (505 | ) |
| |
(1) | Prior to adoption of ASU 2016-15, because of its nature as a holding company, Sempra Energy Parent classified dividends received from subsidiaries as an investing cash flow. |
ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”: ASU 2017-07 requires the service cost component of net periodic benefit costs to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and the other components of net periodic benefit costs to be presented separately outside of operating income. The guidance also allows only the service cost component to be eligible for capitalization. For public entities, ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Amendments are to be applied retrospectively for presentation of costs and prospectively for capitalization of service costs. The guidance allows a practical expedient that permits use of previously disclosed service costs and other costs from the pension and other postretirement benefit plan note in the comparative periods as appropriate estimates
when retrospectively changing the presentation of these costs in the statements of operations. We adopted the standard on January 1, 2018 and elected the practical expedient available under the transition guidance.
In 2018, we expect the adoption of ASU 2017-07 to have the following impact on our Condensed Statements of Operations for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | |
EXPECTED IMPACT FROM ADOPTION OF ASU 2017-07 |
(Dollars in millions) |
| Years ended December 31, |
| 2017 | | 2016 |
| As reported | Recast | | As reported | Recast |
Sempra Energy Condensed Statements of Operations: | | | | | |
Operation and maintenance | $ | (87 | ) | $ | (80 | ) | | $ | (81 | ) | $ | (76 | ) |
Other income (expense), net | 107 |
| 100 |
| | (2 | ) | (7 | ) |
ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”: ASU 2018-02 contains amendments that allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the TCJA. Under ASU 2018-02, an entity will be required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from AOCI. The amendments in this update can be applied either as of the beginning of the period of adoption or retrospectively as of the date of enactment of the TCJA and to each period in which the effect of the TCJA is recognized. For public entities, ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted. We are currently evaluating the effect of the standard on our financial reporting and have not yet selected the adoption method or the year in which we will adopt the standard.
NOTE 3. LONG-TERM DEBT
The following table shows the detail and maturities of long-term debt outstanding:
|
| | | | | | | |
LONG-TERM DEBT |
(Dollars in millions) |
| December 31, |
| 2017 | | 2016 |
| | | |
2.3% Notes April 1, 2017 | $ | — |
| | $ | 600 |
|
6.15% Notes June 15, 2018 | 500 |
| | 500 |
|
9.8% Notes February 15, 2019 | 500 |
| | 500 |
|
1.625% Notes October 7, 2019 | 500 |
| | 500 |
|
2.4% Notes March 15, 2020 | 500 |
| | 500 |
|
2.85% Notes November 15, 2020 | 400 |
| | 400 |
|
Notes at variable rates (2.038% at December 31, 2017) March 15, 2021 | 850 |
| | — |
|
2.875% Notes October 1, 2022 | 500 |
| | 500 |
|
4.05% Notes December 1, 2023 | 500 |
| | 500 |
|
3.55% Notes June 15, 2024 | 500 |
| | 500 |
|
3.75% Notes November 15, 2025 | 350 |
| | 350 |
|
3.25% Notes June 15, 2027 | 750 |
| | — |
|
6% Notes October 15, 2039 | 750 |
| | 750 |
|
Fair value adjustments for interest rate swaps, net | (1 | ) | | (3 | ) |
Build-to-suit lease | 138 |
| | 137 |
|
| 6,737 |
| | 5,734 |
|
Current portion of long-term debt | (500 | ) | | (600 | ) |
Unamortized discount on long-term debt | (13 | ) | | (10 | ) |
|
| | | | | | | |
Unamortized debt issuance costs | (26 | ) | | (24 | ) |
Total long-term debt | $ | 6,198 |
| | $ | 5,100 |
|
Excluding the build-to-suit lease and market value adjustments for interest rate swaps, maturities of long-term debt are $500 million in 2018, $1 billion in 2019, $900 million in 2020, $850 million in 2021, $500 million in 2022 and $2.85 billion thereafter.
Additional information on Sempra Energy’s long-term debt is provided in Note 5 of the Notes to Consolidated Financial Statements.
NOTE 4. COMMITMENTS AND CONTINGENCIES
For contingencies and guarantees related to Sempra Energy, refer to Notes 4, 5 and 15 of the Notes to Consolidated Financial Statements.
NOTE 5. SUBSEQUENT EVENTS
For subsequent events related to Sempra Energy, refer to Note 18 of the Notes to Consolidated Financial Statements.