You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto and "Item 1A. Risk Factors" contained in this report, and the Consolidated Financial Statements and the Notes thereto, "Item 7. MD&A" and "Item 1A. Risk Factors" contained in the Annual Report. OVERVIEWSempra Energy is aCalifornia -based energy-services holding company whose businesses invest in, develop and operate energy infrastructure, and provide electric and gas services to customers inNorth America . As we discuss in Note 12 of the Notes to Condensed Consolidated Financial Statements, our businesses consist of five separately managed reportable segments. 79 -------------------------------------------------------------------------------- InJanuary 2019 , our board of directors approved a plan to sell our South American businesses, which were previously included in ourSempra South American Utilities segment. Our South American businesses and certain activities associated with those businesses have been presented as discontinued operations for all periods presented. Nominal activities that are not classified as discontinued operations have been subsumed into Parent and other. Our discussions below exclude discontinued operations, unless otherwise noted. We provide additional information about discontinued operations in Note 5 of the Notes to Condensed Consolidated Financial Statements and about our reportable segments in Note 12 of the Notes to Condensed Consolidated Financial Statements in this report and in "Item 1. Business" in the Annual Report. This report includes information for the following separate registrants: ?Sempra Energy and its consolidated entities
? SDG&E and its consolidated VIE (until deconsolidation of Otay Mesa VIE in
August 2019 ) ? SoCalGas References to "we," "us," "our" and "Sempra Energy Consolidated" are toSempra Energy and its consolidated entities, collectively, unless otherwise indicated by the context. We refer to SDG&E and SoCalGas collectively as theCalifornia Utilities , which do not include ourTexas utilities or the utility in our SempraMexico segment. It also does not include utilities within our South American businesses that have been presented as discontinued operations. All references in this MD&A to our reportable segments are not intended to refer to any legal entity with the same or similar name. Throughout this report, we refer to the following as Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements when discussed together or collectively: ? the Condensed Consolidated Financial Statements and related Notes of Sempra
Energy and its subsidiaries and VIEs;
? the Condensed Consolidated Financial Statements and related Notes of SDG&E and
its VIE (until deconsolidation of Otay Mesa VIE in
? the Condensed Financial Statements and related Notes of SoCalGas.
RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
? Overall results of operations of
? Segment results
? Significant changes in revenues, costs and earnings
? Impact of foreign currency and inflation rates on our results of operations
OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY In the three months endedMarch 31, 2020 , we reported earnings of$760 million and diluted EPS of$2.53 compared to earnings of$441 million and diluted EPS of$1.59 for the same period in 2019. The change in diluted EPS in the three months endedMarch 31, 2020 included a decrease of$(0.34) due to an increase in weighted-average common shares outstanding. Our results and diluted EPS were impacted by variances discussed in "Segment Results" below. SEGMENT RESULTS This section presents earnings (losses) bySempra Energy segment, as well as Parent and other, in the three months endedMarch 31, 2020 and 2019, and the related discussion of the changes in segment earnings (losses) between these periods. Throughout the MD&A, our reference to earnings represents earnings attributable to common shares. Variance amounts presented are the after-tax earnings impact (based on applicable statutory tax rates), unless otherwise noted, and before NCI, where applicable. 80 -------------------------------------------------------------------------------- SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT (Dollars in millions) Three months ended March 31, 2020 2019 SDG&E$ 262 $ 176 SoCalGas 303 264 Sempra Texas Utilities 105 94 Sempra Mexico 191 57 Sempra Renewables - 13 Sempra LNG 75 5 Parent and other(1) (248 ) (117 ) Discontinued operations 72
(51 )
Earnings attributable to common shares
(1) Includes intercompany eliminations recorded in consolidation and certain
corporate costs. Due to the delay in the issuance of the CPUC's final decision in theCalifornia Utilities' 2019 GRC, theCalifornia Utilities recorded revenues in the first quarter of 2019 based on levels authorized for 2018 under the 2016 GRC. The 2019 GRC FD, which was issued by the CPUC inSeptember 2019 , was effective retroactively toJanuary 1, 2019 .The California Utilities' CPUC-authorized base revenues for the first quarter of 2020 are based on the revenues authorized for the 2019 test year plus the amount authorized for attrition for 2020. Had the 2019 GRC FD been in effect in the first quarter of 2019, SDG&E's and SoCalGas' earnings for the first quarter of 2019 would have been higher by$36 million and$84 million , respectively. These amounts were recorded in earnings in the third quarter of 2019. We provide additional information on the 2019 GRC FD in Note 4 of the Notes to Condensed Consolidated Financial Statements in this report and in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. SDG&E The increase in earnings of$86 million (49%) in the three months endedMarch 31, 2020 was primarily due to: ?$65 million higher CPUC base operating margin, net of operating expenses,
including
in the issuance of the 2019 GRC FD;
?
impacts from the
•
•
settlement for 2019. The settlement proceeding increased SDG&E's authorized
ROE from 10.05% to 10.60%, effective
?
?
liability established in connection with 2017 tax reform for excess deferred
income tax balances that the CPUC directed to be allocated to shareholders in a
?
SoCalGas
The increase in earnings of$39 million (15%) in the three months endedMarch 31, 2020 was primarily due to: ?$109 million higher CPUC base operating margin, net of operating expenses,
including
in the issuance of the 2019 GRC FD;
?
?
offset by
?
facility litigation; and
?
decision allocating certain excess deferred income tax balances to
shareholders.
Sempra Texas Utilities The increase in earnings of$11 million (12%) in the three months endedMarch 31, 2020 was primarily due to higher equity earnings fromOncor Holdings in 2020, driven mainly by the impact of Oncor's acquisition ofInfraREIT, Inc. inMay 2019 and higher revenues due to rate updates to reflect increases in invested transmission capital, partially offset by higher operating costs and lower consumption due to weather. 81 -------------------------------------------------------------------------------- Sempra Mexico The increase in earnings of$134 million in the three months endedMarch 31, 2020 was primarily due to: ?$253 million favorable impact from foreign currency and inflation effects net
of foreign currency derivatives effects, comprised of:
• in 2020,
offset by a
• in 2019,
offset by a
?
?
million earnings in 2019; and
?
primarily from force majeure payments that ended in
Sempra Renewables As we discuss in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report, Sempra Renewables sold its remaining wind assets and investments inApril 2019 , upon which date the segment ceased to exist. Sempra LNG The increase in earnings of$70 million in the three months endedMarch 31, 2020 was primarily due to: ?$43 million higher equity earnings from Cameron LNG JV primarily due to Train 1
and Train 2 commencing commercial operations under their tolling agreements in
?
driven by changes in natural gas prices; offset by
?
Parent and Other The increase in losses of$131 million in the three months endedMarch 31, 2020 was primarily due to: ?$100 million equity losses from our investment inRBS Sempra Commodities to
settle pending tax matters and related legal costs, which we discuss in Note 11
of the Notes to Condensed Consolidated Financial Statements; and
?
investment gains in 2019 on dedicated assets in support of our employee
nonqualified benefit plan and deferred compensation obligations.
Discontinued Operations Discontinued operations that were previously in ourSempra South American Utilities segment include our 100% interest in Chilquinta Energía inChile , our 83.6% interest in Luz del Sur inPeru and our interests in two energy-services companies, Tecnored andTecsur , which provide electric construction and infrastructure services to Chilquinta Energía and Luz del Sur, respectively, as well as third parties. Discontinued operations also include activities, mainly income taxes related to the South American businesses, that were previously included in the holding company of the South American businesses at Parent and other. Earnings of$72 million in the three months endedMarch 31, 2020 compared to losses of$51 million for the same period in 2019 was primarily due to the following income tax impacts resulting from changes in outside basis differences in our South American businesses: ?$103 million income tax expense in 2019 related to outside basis differences
existing as of the
American businesses; and
?
expense in 2019 related to changes in outside basis differences from earnings
and foreign currency effects sinceJanuary 25, 2019 . 82
-------------------------------------------------------------------------------- SIGNIFICANT CHANGES IN REVENUES, COSTS AND EARNINGS This section contains a discussion of the differences between periods in the specific line items of the Condensed Consolidated Statements of Operations forSempra Energy , SDG&E and SoCalGas. Utilities Revenues Our utilities revenues include natural gas revenues at ourCalifornia Utilities and Sempra Mexico's Ecogas and electric revenues at SDG&E. Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Condensed Consolidated Statements of Operations. SoCalGas and SDG&E currently operate under a regulatory framework that permits: ? The cost of natural gas purchased for core customers (primarily residential and
small commercial and industrial customers) to be passed through to customers in
rates substantially as incurred. However, SoCalGas' GCIM provides SoCalGas the
opportunity to share in the savings and/or costs from buying natural gas for
its core customers at prices below or above monthly market-based benchmarks.
This mechanism permits full recovery of costs incurred when average purchase
costs are within a price range around the benchmark price. Any higher costs
incurred or savings realized outside this range are shared between the core
customers and SoCalGas. We provide further discussion in Note 3 of the Notes to
Consolidated Financial Statements and in "Item 1. Business - Ratemaking
Mechanisms" in the Annual Report.
? SDG&E to recover the actual cost incurred to generate or procure electricity
based on annual estimates of the cost of electricity supplied to customers. The
differences in cost between estimates and actual are recovered or refunded in
subsequent periods through rates.
?
the CPUC, or "refundable programs."
Because changes in SoCalGas' and SDG&E's cost of natural gas and/or electricity are recovered in rates, changes in these costs are offset in the changes in revenues, and therefore do not impact earnings. In addition to the changes in cost or market prices, natural gas or electric revenues recorded during a period are impacted by customer billing cycles causing a difference between customer billings and recorded or authorized costs. These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts. We discuss balancing accounts and their effects further in Note 4 of the Notes to Condensed Consolidated Financial Statements in this report and in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.The California Utilities' revenues are decoupled from, or not tied to, actual sales volumes. 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 of each year. SDG&E's authorized revenue recognition is also impacted by seasonal factors, resulting in higher earnings in the third quarter when electric loads are typically higher than in the other three quarters of the year. We discuss this decoupling mechanism and its effects further in Note 3 of the Notes to Consolidated Financial Statements in the Annual Report. 83 -------------------------------------------------------------------------------- The table below summarizes revenues and cost of sales for our consolidated utilities. UTILITIES REVENUES AND COST OF SALES (Dollars in millions) Three months ended March 31, 2020 2019 Natural gas revenues: SoCalGas$ 1,395 $ 1,361 SDG&E 219 205 Sempra Mexico 20 27 Eliminations and adjustments (17 ) (17 ) Total 1,617 1,576 Electric revenues: SDG&E 1,050 940 Eliminations and adjustments (2 ) (1 ) Total 1,048 939 Total utilities revenues$ 2,665 $ 2,515 Cost of natural gas: SoCalGas $ 278 $ 455 SDG&E 60 79 Sempra Mexico 3 5 Eliminations and adjustments (4 ) (8 ) Total $ 337 $ 531 Cost of electric fuel and purchased power: SDG&E $ 231 $
258
Eliminations and adjustments (2 ) (2 ) Total $ 229 $ 256 Natural Gas Revenues and Cost of Natural Gas The table below summarizes the average cost of natural gas sold by theCalifornia Utilities and included in Cost of Natural Gas. The average cost of natural gas sold at each utility is impacted by market prices, as well as transportation, tariff and other charges.CALIFORNIA UTILITIES AVERAGE COST OF NATURAL GAS (Dollars per thousand cubic feet) Three months ended March 31, 2020 2019 SoCalGas $ 2.54$ 3.85 SDG&E 3.75 4.60
In the three months ended
•
revenues in 2019 due to the delay in the issuance of the 2019 GRC FD, and
•
refundable programs, which revenues are offset in O&M, offset by
•
?
•
revenues in 2019 due to the delay in the issuance of the 2019 GRC FD, offset
by
•
84 --------------------------------------------------------------------------------
In the three months ended
natural gas prices and
?
volumes driven by weather.
Electric Revenues and Cost ofElectric Fuel and Purchased Power In the three months endedMarch 31, 2020 , our electric revenues, substantially all of which are at SDG&E, increased by$109 million (12%) to$1.0 billion , including: ?$67 million increase in transmission operations, including the following
impacts related to the
•
•
TO5 settlement for 2019; and
?
programs, which revenues are offset in O&M; offset by
?
below.
Our utility cost of electric fuel and purchased power, substantially all of which is at SDG&E, decreased by$27 million (11%) to$229 million in the three months endedMarch 31, 2020 , primarily due to a decrease in residential demand primarily from an increase in rooftop solar adoption. Energy-Related Businesses: Revenues and Cost of Sales The table below shows revenues and cost of sales for our energy-related businesses. ENERGY-RELATED BUSINESSES: REVENUES AND COST OF SALES (Dollars in millions) Three months ended March 31, 2020 2019 REVENUES Sempra Mexico$ 289 $ 356 Sempra Renewables - 7 Sempra LNG 123 141 Parent and other(1) (48 ) (121 ) Total revenues$ 364 $ 383 COST OF SALES(2) Sempra Mexico $ 69$ 121 Sempra LNG 39 103 Parent and other(1) (49 ) (116 ) Total cost of sales $ 59$ 108 (1) Includes eliminations of intercompany activity.
(2) Excludes depreciation and amortization, which are presented separately on
the Sempra Energy Condensed Consolidated Statements of Operations.
In the three months ended
•
prices and volumes,
•
and volumes, and
•
in
pipeline, offset by
•
power generation facilities and from renewable assets placed in service in 2019; and
?
85 --------------------------------------------------------------------------------
•
prices and volumes and from fewer LNG cargoes sold, offset by
•
changes in natural gas prices; offset by
?
with sales between Sempra LNG and Sempra Mexico.
In the three months ended
primarily from lower natural gas purchases; and
?
from the marketing business and TdM as a result of lower natural gas prices and
volumes; offset by
?
with sales between Sempra LNG and Sempra Mexico.
Operation and Maintenance Our O&M increased by$119 million (14%) to$951 million in the three months endedMarch 31, 2020 primarily due to: ?$133 million increase at SoCalGas primarily due to:
•
facility litigation, and
•
programs for which costs incurred are recovered in revenue; and
?
•
programs, offset by
•
insurance premium costs for 2019 that were not balanced due to the delay in
the 2019 GRC FD; offset by
?
compensation expense.
Other (Expense) Income, Net As part of our central risk management function, we enter into foreign currency derivatives to hedge Sempra Mexico parent's exposure to movements in the Mexican peso from its controlling interest in IEnova. The gains/losses associated with these derivatives are included in Other (Expense) Income, Net, as described below, and partially mitigate the transactional effects of foreign currency and inflation included in Income Tax Benefit (Expense) for Sempra Mexico's consolidated entities and in Equity Earnings for Sempra Mexico's equity method investments. We also utilize foreign currency derivatives to hedge exposure to fluctuations in the Peruvian sol and Chilean peso related to the sale of our operations inPeru andChile , respectively. We discuss policies governing our risk management in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report. Other expense, net, in the three months endedMarch 31, 2020 was$254 million compared to other income, net, of$82 million in the same period in 2019. The change was primarily due to: ?$276 million net losses in 2020 from interest rate and foreign exchange
instruments and foreign currency transactions compared to net gains of
million for the same period in 2019 primarily due to:
•
currency gains in 2019 on a Mexican peso-denominated loan to IMG JV, which is
offset in Equity Earnings, and
•
currency derivatives as a result of fluctuation of the Mexican peso, offset
by
•
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sale of our operations in
?
in 2019 on dedicated assets in support of our executive retirement and deferred
compensation plans; offset by
?
86 -------------------------------------------------------------------------------- Income Taxes The table below shows the income tax expense and ETRs forSempra Energy Consolidated, SDG&E and SoCalGas. INCOME TAX (BENEFIT) EXPENSE AND EFFECTIVE INCOME TAX RATES (Dollars in millions) Three months endedMarch 31, 2020 2019
Sempra Energy Consolidated:
Income tax (benefit) expense from continuing operations
Income from continuing operations before income taxes and equity earnings
$ 397$ 501 Equity (losses) earnings, before income tax(1) (43 ) 5 Pretax income $ 354$ 506 Effective income tax rate (58 )% 8 % SDG&E: Income tax expense $ 58 $ 5 Income before income taxes $ 320$ 182 Effective income tax rate 18 % 3 % SoCalGas: Income tax expense $ 52$ 19 Income before income taxes $ 355$ 283 Effective income tax rate 15 % 7 % (1) We discuss how we recognize equity earnings in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report. Sempra Energy Consolidated Income tax benefit in the three months endedMarch 31, 2020 compared to an income tax expense in the same period in 2019 was due to a lower ETR and lower pretax income. The change in ETR was primarily due to: ?$308 million income tax benefit in 2020 compared to$23 million income tax
expense in 2019 from foreign currency and inflation effects primarily as a
result of fluctuation of the Mexican peso; and
?
expense in 2019 related to share-based compensation; offset by
?
liabilities at SDG&E and SoCalGas established in connection with 2017 tax
reform for excess deferred income tax balances that the CPUC directed be
allocated to shareholders in a
?
allowance against certain NOL carryforwards as a result of our decision to sell
our South American businesses.
We discuss the impact of foreign currency exchange rates and inflation on income taxes below in "Impact of Foreign Currency and Inflation Rates on Results of Operations." See Note 1 of the Notes to Condensed Consolidated Financial Statements in this report and Notes 1 and 8 of the Notes to Consolidated Financial Statements in the Annual Report for further details about our accounting for income taxes and items subject to flow-through treatment. SDG&E The increase in SDG&E's income tax expense in the three months endedMarch 31, 2020 was due to a higher ETR and higher pretax income. The change in ETR was primarily due to$31 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in aJanuary 2019 decision. SoCalGas The increase in SoCalGas' income tax expense in the three months endedMarch 31, 2020 was due to a higher ETR and higher pretax income. The change in ETR was primarily due to$35 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in aJanuary 2019 decision. 87 -------------------------------------------------------------------------------- Equity Earnings In the three months endedMarch 31, 2020 , equity earnings increased by$162 million to$263 million primarily due to: ?$171 million higher equity earnings at IMG JV, primarily due to foreign
currency effects, including
compared to
peso-denominated loans from its JV owners, which is fully offset in Other
(Expense) Income, Net, and the start of commercial operations of the Sur de
?
and Train 2 commencing commercial operations under their tolling agreements in
?
benefits in 2020; offset by
?
an estimate of our obligations to settle pending tax matters and related legal
costs at our equity method investment.
Earnings Attributable to Noncontrolling Interests Earnings attributable to NCI increased by$110 million to$151 million in the three months endedMarch 31, 2020 primarily due to an increase in earnings attributable to NCI at Sempra Mexico primarily from foreign currency effects as a result of fluctuation of theMexico peso. IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS Because operations inSouth America and our natural gas distribution utility inMexico use their local currency as their functional currency, revenues and expenses are translated intoU.S. dollars at average exchange rates for the period for consolidation in Sempra Energy Consolidated's results of operations. We discuss further the impact of foreign currency and inflation rates on results of operations, including impacts on income taxes and related hedging activity, in "Item 7. MD&A - Impact of Foreign Currency and Inflation Rates on Results of Operations" in the Annual Report. Foreign Currency Translation Any difference in average exchange rates used for the translation of income statement activity from year to year can cause a variance inSempra Energy Consolidated's comparative results of operations. Changes in foreign currency translation rates between periods resulted in$4 million lower earnings within discontinued operations in the first three months of 2020 compared to the same period in 2019. Transactional Impacts Income statement activities at our foreign operations and their JVs are also impacted by transactional gains and losses, a summary of which is shown in the table below: TRANSACTIONAL (LOSSES) GAINS FROM FOREIGN CURRENCY AND INFLATION (Dollars in millions)
Transactional (losses) gains included
Total reported amounts in reported amounts Three months ended March 31, 2020 2019 2020 2019 Other (expense) income, net$ (254 ) $ 82 $ (276 ) $ 20 Income tax benefit (expense) 207 (42 ) 308 (23 ) Equity earnings 263 101 181 (12 ) Income from continuing operations, net of income tax 867 560 242 (18 ) Income (loss) from discontinued operations, net of income tax 80 (42 ) 16 - Earnings attributable to common shares 760 441 150 (10 ) 88
-------------------------------------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY OVERVIEW The COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization declared the COVID-19 outbreak to be a pandemic. PresidentDonald Trump officially declared a national emergency onMarch 13, 2020 . The COVID-19 pandemic is causing a significant impact on the economy and people's livelihoods, including substantial volatility and erosion of value in financial markets and a historic surge in unemployment claims while individuals adhere to shelter-in-place mandates and practice social distancing, and has resulted in sweeping action by governments and other authorities to help address these effects. The following describes some of these government actions and their current and anticipated impact on our businesses: ? OnMarch 4, 2020 , GovernorGavin Newsom proclaimed a State of Emergency in
Governor imposed a
Order that will remain in place indefinitely. The Governor's Executive Order
requires all individuals living in
residence except as needed to maintain the continuity of 16 critical
infrastructure sectors. Our businesses that invest in, develop and operate
energy infrastructure and provide electric and gas services to customers in
Order.
? On
voluntarily instituting a suspension of all customer disconnections for
nonpayment of customer bills until further notice.
? On
energy companies under its jurisdiction, including the
should take action to implement several emergency customer protection measures
to support
small business customers affected by the COVID-19 pandemic and include
suspending service disconnections due to nonpayment, waiving late payment fees,
and offering flexible payment plans for all customers experiencing difficulty
paying their electric or gas bills. Similarly, on
issued orders that require retail electric providers to offer a deferred
payment plan to customers, upon request, and authorized customer assistance
programs for certain residential customers of electric service. The
continuation of these circumstances could result in a material reduction in
payments received from our customers and a material increase in uncollectible
accounts that we may not be able to recover in rates, which could have a
material adverse effect on the cash flows, financial condition and results of
operations for
? On
sanitary emergency, suspending all non-essential activities and urging people
in
to
may continue to operate during the health emergency include the conservation,
maintenance and repair of critical infrastructure that ensures the production
and distribution of electric and gas services.
? On
incremental costs associated with complying with measures implemented by the
CPUC related to the COVID-19 pandemic. Although we are tracking these costs,
which will include incremental amounts associated with customer nonpayments,
CPUC approval is required to collect all or any portion of the balance of the
CPPMA, which is not assured. Similarly, the PUCT has provided for the use of a
regulatory asset accounting mechanism and a subsequent process through which
regulated utility companies may seek future recovery of expenses resulting from
the effects of the COVID-19 pandemic, as well as the creation of a COVID-19
Electricity Relief Program fund through which transmission and distribution
utilities and retail electric providers may seek to recover a reasonable
portion of the cost of providing uninterrupted services to customers facing
financial hardship due to the effects of the COVID-19 pandemic. There can be no
assurance, however, that our
costs they incur from their response to the COVID-19 pandemic through these
programs or otherwise.
? On
(CARES Act) was enacted and signed into law in response to the COVID-19
pandemic. The CARES Act contains significant business tax provisions, including
a delay of payment of employer payroll taxes and an acceleration of refunds of
corporate alternative minimum tax (AMT) credits.
SoCalGas expect to benefit from deferring payment of the employer's share of
payroll taxes through the end of 2020, with half of such taxes to be paid by
the end of 2021 and the other half to be paid by the end of 2022.
has filed a refund claim for its corporate AMT credits and expects to receive
approximately
89 -------------------------------------------------------------------------------- In addition, we and other companies, including our partners, are taking steps to try to protect the health and well-being of our employees and other stakeholders. As our businesses continue to operate, our priority is the safety of our employees, customers, partners and the communities we serve. For example, we have activated our business continuity plans and continue to work closely with local, state and federal authorities to provide essential services with minimum interruption to customers and in accordance with applicable shelter-in-place orders. We have implemented precautionary measures across our businesses, including requiring employees to work remotely when possible, restricting non-essential business travel, increasing facility sanitization and communicating proper health and safety protocols to employees. Additionally, SDG&E announced that it is postponing all noncritical planned outages, while continuing with those related to public safety, emergencies and wildfire mitigation, to try to protect employees and maintain service to customers as seamlessly as possible. We also have engaged an infectious disease expert to advise us during this public health crisis. Through the end of the first quarter of 2020, these actions have not required significant outlays of capital and have not had a material impact on our results of operations, but these or other measures that we may implement in the future could have a substantial effect on our liquidity, cash flows, financial position and results of operations if circumstances related to the COVID-19 pandemic worsen or continue for an extended period of time. The COVID-19 pandemic and its widespread effects may also impact our capital plans, liquidity and asset values. For example: ? Our capital projects and planned expenditures could experience delays due to
the COVID-19 pandemic, either because we decide to postpone certain activities
in an effort to preserve cash or other resources or for other reasons related
to the pandemic that are beyond our control, including supply chain and
contractor performance delays or delays in the issuance of required permits.
Any such delay could have a material effect on our capital plans and results of
operations. We discuss the potential for these delays in further detail with
respect to each of our segments below.
? The decline and volatility in the financial markets has had a significant
impact on certain of the markets that we typically access for working capital
and other liquidity requirements. See the discussion in "Liquidity" below for
more information.
? We have significant investments in several trusts to provide for future
payments of pensions and other postretirement benefits and nuclear
decommissioning. Although all of our trust funds' investments are diversified
and managed in compliance with applicable laws and regulations, the value of
the investments in these trusts declined significantly in the second half of
the first quarter of 2020 due to a decline in the equity markets and volatility
in the fixed income market triggered by the COVID-19 pandemic. These markets
continue to be volatile. The decrease in asset values has not affected the
funds' ability to make their required payments; however, this could change if
conditions worsen or continue for an extended period. Moreover, if asset values
do not recover, our funding requirements for pension and other postretirement
benefit plans in 2021 may increase. Other factors may also impact funding
requirements for pension and other postretirement benefit plans, including
changes to discount rates, assumed rates of return, mortality tables and
regulations. Funding requirements for SDG&E's NDT could be impacted by the
value of the assets as well as the timing and amount of SONGS decommissioning
costs. At the
recoverable in rates. We discuss our employee benefit plans and SDG&E's NDT,
including our investment allocation strategies for assets in these trusts, in
Notes 9 and 15, respectively, of the Notes to Consolidated Financial Statements
in the Annual Report.
? We perform recovery testing of our recorded asset values when market conditions
indicate that such values may not be recoverable. Given the current economic
environment, including the significant decline in the price of our common
stock, market volatility and potential reduction in customer collections, we
considered whether these events or changes in circumstances triggered the need
for an interim impairment analysis for our long-lived assets, intangible assets
and goodwill. We determined that, given the existing headroom in our prior
quantitative tests and assessment of the impact of these conditions on our
businesses, there was no triggering event as of
effects of the COVID-19 pandemic continue to evolve, we will continue to assess
the need to perform an interim impairment test. To the extent the recorded
(carrying) value is in excess of the fair value, we would record a noncash
impairment charge. A significant impairment charge related to our long-lived
assets, intangible assets or goodwill would have a material adverse effect on
our results of operations in the period in which it is recorded.
For a further discussion of risks and uncertainties related to the COVID-19 pandemic, see below in "Item 1A. Risk Factors." Liquidity We expect to meet our cash requirements through cash flows from operations, unrestricted cash and cash equivalents, proceeds from recent and planned asset sales, borrowings under our credit facilities, distributions from our equity method investments, issuances of debt, project financing and partnering in JVs. We believe that these cash flow sources, combined with available funds, will be adequate to fund our current operations, including to: ? finance capital expenditures
? meet liquidity requirements
? fund dividends
? fund new business or asset acquisitions or start-ups
90 --------------------------------------------------------------------------------
? fund capital contribution requirements
? repay maturing long-term debt
? fund expenditures related to the natural gas leak at
natural gas storage facility
Sempra Energy and theCalifornia Utilities currently have reasonable access to the long-term debt markets and are not currently constrained in any significant way in their ability to borrow money at reasonable rates from commercial banks, under existing revolving credit facilities or through public offerings registered with theSEC . There have been, however, substantial disruptions caused by the COVID-19 pandemic in the commercial paper markets during the second half of the first quarter of 2020, which have historically been a primary source of working capital forSempra Energy and theCalifornia Utilities . In addition, the capital markets in general and the availability of financing from commercial banks also have shown periods of significant distress in the second half of the first quarter of 2020 due to the COVID-19 pandemic, and our ability to access the capital markets or obtain credit from commercial banks outside of our committed revolving credit facilities could become materially constrained, especially if these conditions worsen or continue for an extended period. In addition, our financing activities and actions by credit rating agencies, as well as many other factors, could negatively affect the availability and cost of both short-term and long-term financing. Also, cash flows from operations may be impacted by the timing of commencement and completion, and potentially cost overruns, of large projects. If cash flows from operations were to be significantly reduced or we were unable to borrow under acceptable terms, we would likely first reduce or postpone discretionary capital expenditures (not related to safety) and investments in new businesses. We monitor our ability to finance the needs of our operating, investing and financing activities in a manner consistent with our intention to maintain our investment-grade credit ratings and capital structure. Available Funds Our committed lines of credit provide liquidity and support commercial paper. As we discuss in Note 7 of the Notes to Condensed Consolidated Financial Statements,Sempra Energy ,Sempra Global , SDG&E and SoCalGas each have five-year credit agreements expiring in 2024. The table below shows the amount of available funds atMarch 31, 2020 , including available unused credit on these primaryU.S. credit facilities. In addition, IEnova has$1.9 billion in lines of credit, with approximately$136 million available unused credit atMarch 31, 2020 . AVAILABLE FUNDS ATMARCH 31, 2020 (Dollars in millions)Sempra Energy Consolidated SDG&E
SoCalGas
Unrestricted cash and cash equivalents(1) $ 2,247
389
Available unused credit(2)(3) 4,010 1,300
750
(1) Amounts at Sempra Energy Consolidated include
jurisdictions. We discuss repatriation in Note 1 of the Notes to Condensed
Consolidated Financial Statements.
(2) Available unused credit is the total available on
Global's, SDG&E's and SoCalGas' credit facilities that we discuss in Note 7
of the Notes to Condensed Consolidated Financial Statements.
(3) Because 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. Short-Term Borrowings We use short-term debt primarily to meet liquidity requirements, fund shareholder dividends, and temporarily finance capital expenditures, acquisitions or start-ups. OurCalifornia Utilities use short-term debt primarily to meet working capital needs. Commercial paper, revolving lines of credit and term loans were our primary sources of short-term debt funding in the first quarter of 2020. In an effort to protect our liquidity in light of the COVID-19 pandemic,Sempra Energy ,Sempra Global , SDG&E, SoCalGas and IEnova each drew amounts under their respective credit facilities in the first quarter of 2020, a substantial portion of which were repaid through terms loans obtained in the first quarter of 2020 bySempra Energy and SDG&E. As we discuss in Note 7 of the Notes to Condensed Consolidated Financial Statements,Sempra Energy and SDG&E obtained 364-day term loans with aggregate principal amounts outstanding atMarch 31, 2020 , of$1,525 million and$200 million , respectively. AtMarch 31, 2020 , SDG&E classified a total of$400 million of its then outstanding revolving line of credit and term loan as long-term debt based on management's intent and ability to maintain this level of borrowing on a long-term basis. InApril 2020 , SDG&E completed a$400 million public offering of first mortgage bonds maturing in 2050 and repaid the amounts borrowed under its revolving line of credit. OnApril 1, 2020 ,Sempra Energy borrowed an additional$75 million under its term loan. 91 -------------------------------------------------------------------------------- Credit Ratings We provide additional information about the credit ratings ofSempra Energy , SDG&E and SoCalGas in "Item 1A. Risk Factors" and "Item 2. MD&A - Capital Resources and Liquidity" in the Annual Report. The credit ratings ofSempra Energy , SDG&E and SoCalGas remained at investment grade levels in the first three months of 2020. CREDIT RATINGS ATMARCH 31, 2020 Sempra Energy SDG&E SoCalGas Baa1 with a negative Baa1 with a positive A1 with a negative Moody's outlook outlook outlook BBB+ with a negative BBB+ with a stable A with a negative S&P outlook outlook outlook BBB+ with a stable BBB+ with a stable A with a stable Fitch outlook outlook outlook Our credit ratings may affect the rates at which borrowings bear interest and the commitment fees on available unused credit. A downgrade ofSempra Energy's or any of its subsidiaries' credit ratings or rating outlooks may result in a requirement for collateral to be posted in the case of certain financing arrangements and may materially and adversely affect the market prices of their equity and debt securities, the rates at which borrowings are made and commercial paper is issued, and the various fees on their outstanding credit facilities. This could make it more costly forSempra Energy , SDG&E, SoCalGas andSempra Energy's other subsidiaries to issue debt securities, to borrow under credit facilities and to raise certain other types of financing.Sempra Energy has agreed that, if the credit rating of Oncor's senior secured debt by any of the three major rating agencies falls below BBB (or the equivalent), Oncor will suspend dividends and other distributions (except for contractual tax payments), unless otherwise allowed by the PUCT. Oncor's senior secured debt was rated A2, A+ and A at Moody's, S&P and Fitch, respectively, atMarch 31, 2020 . OnApril 15, 2020 , Moody's placedSempra Energy on review for downgrade. Loans to/from Affiliates AtMarch 31, 2020 ,Sempra Energy had$615 million in loans to unconsolidated affiliates and$263 million in loans from unconsolidated affiliates.California Utilities SDG&E's and SoCalGas' operations have historically provided relatively stable earnings and liquidity. Their future performance will depend primarily on the ratemaking and regulatory process, environmental regulations, economic conditions, actions by theCalifornia legislature and the changing energy marketplace, as well as the other matters described in this report. SDG&E and SoCalGas expect that the available unused credit from their credit facilities described above, cash flows from operations, and debt issuances will continue to be adequate to fund their respective current operations and planned capital expenditures.The California Utilities are continuing to monitor the impacts of the COVID-19 pandemic on cash flows and results of operations. Some of our customers will likely experience diminished ability to pay their electric or gas bills, leading to slower payments and higher levels of nonpayment than has been the case historically. These impacts could be significant and could require modifications to our financing plans.The California Utilities manage their capital structure and pay dividends when appropriate and as approved by their respective boards of directors. As we discuss in Note 4 of the Notes to Condensed Consolidated Financial Statements in this report and in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report, changes in balancing accounts for significant costs at SDG&E and SoCalGas, particularly a change between over- and undercollected status, including commodity and transportation balancing accounts, may have a significant impact on cash flows. These changes generally represent the difference between when costs are incurred and when they are ultimately recovered in rates through billings to customers. 92 --------------------------------------------------------------------------------
SDG&E
Wildfire Fund In 2019, SDG&E recorded aWildfire Fund asset for committed shareholder contributions to theWildfire Fund . We describe the Wildfire Legislation and related accounting treatment in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. SDG&E is exposed to the risk that the participatingCalifornia electric IOUs may incur third-party wildfire claims for which they will seek recovery from theWildfire Fund . In such a situation, SDG&E may recognize a reduction of itsWildfire Fund asset and record a charge against earnings in the period when there is a reduction of the available coverage due to recoverable claims from the IOUs. As a result, if anyCalifornia electric IOU's equipment is determined to be a cause of a fire, it could have a material adverse effect on SDG&E's andSempra Energy's financial condition and results of operations up to the carrying value of ourWildfire Fund asset. In addition, theWildfire Fund could be completely exhausted due to fires in the otherCalifornia electric IOUs' service territories, by fires in SDG&E's service territory or by a combination thereof. In the event that theWildfire Fund is materially diminished, exhausted or terminated, SDG&E will lose the protection afforded by theWildfire Fund , and as a consequence, a fire in SDG&E's service territory could cause a material adverse effect on SDG&E's andSempra Energy's cash flows, results of operations and financial condition. SoCalGas SoCalGas' performance will also depend on the resolution of legal, regulatory and other matters concerning the Leak at theAliso Canyon natural gas storage facility, which we discuss further in Note 11 of the Notes to Condensed Consolidated Financial Statements in this report, and in "Item 1A. Risk Factors" in the Annual Report. Aliso Canyon Natural Gas Storage Facility Gas Leak FromOctober 23, 2015 , throughFebruary 11, 2016 , SoCalGas experienced a natural gas leak from one of the injection-and-withdrawal wells, SS25, at itsAliso Canyon natural gas storage facility located inLos Angeles County . InFebruary 2016 , CalGEM confirmed that the well was permanently sealed. Cost Estimates, Accounting Impact and Insurance. AtMarch 31, 2020 , SoCalGas estimates the costs related to the Leak are$1,408 million (the cost estimate). This cost estimate may increase significantly as more information becomes available. A substantial portion of the cost estimate has been paid, and$284 million is accrued as Reserve for Aliso Canyon Costs and$6 million is accrued in Deferred Credits and Other as ofMarch 31, 2020 on SoCalGas' andSempra Energy's Condensed Consolidated Balance Sheets. Except for the amounts paid or estimated to settle certain actions, the cost estimate does not include all litigation or regulatory costs to the extent it is not possible to predict at this time the outcome of these actions or reasonably estimate the costs to defend or resolve the actions or the amount of damages, restitution, or civil, administrative or criminal fines, sanctions, penalties or other costs or remedies that may be imposed or incurred. The cost estimate also does not include certain other costs incurred bySempra Energy associated with defending against shareholder derivative lawsuits and other potential costs that we currently do not anticipate incurring or that we cannot reasonably estimate. These costs not included in the cost estimate could be significant and could have a material adverse effect on SoCalGas' andSempra Energy's cash flows, financial condition and results of operations. We have received insurance payments for many of the costs included in the cost estimate, including temporary relocation and associated processing costs, control-of-well expenses, costs of the government-ordered response to the Leak, certain legal costs and lost gas. We intend to pursue the full extent of our insurance coverage for the costs we have incurred. Other than directors' and officers' liability insurance, after taking into consideration the additional accrual related to litigation matters described in Note 11 of the Notes to Condensed Consolidated Financial Statements, we have effectively exhausted all of our insurance in this matter, except as to certain defense costs we may incur in the future, including those related to the shareholder derivative lawsuits. We continue to pursue other sources of insurance coverage for costs related to this matter, but we may not be successful in obtaining additional insurance recovery for any of these costs. If we are not able to secure additional insurance recovery for all or a substantial portion of these costs, if any costs we have recorded as an insurance receivable are not collected, if there are delays in receiving insurance recoveries, or if the insurance recoveries are subject to income taxes while the associated costs are not tax deductible, such amounts, which could be significant, could have a material adverse effect on SoCalGas' andSempra Energy's cash flows, financial condition and results of operations. 93 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , we recorded the expected recovery of the cost estimate related to the Leak of$511 million as Insurance Receivable forAliso Canyon Costs on SoCalGas' andSempra Energy's Condensed Consolidated Balance Sheets. This amount is exclusive of insurance retentions and$766 million of insurance proceeds we received throughMarch 31, 2020 . If we were to conclude that this receivable or a portion of it is 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' andSempra Energy's cash flows, financial condition and results of operations. 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 is the largest SoCalGas storage facility and an important element of SoCalGas' delivery system. As a result of the Leak, SoCalGas suspended injection of natural gas into theAliso Canyon natural gas storage facility beginning inOctober 2015 and, following a comprehensive safety review and authorization by CalGEM and the CPUC's Executive Director, resumed limited injection operations inJuly 2017 . During the suspension period, SoCalGas advised the California ISO,California Energy Commission , CPUC andPipeline and Hazardous Materials Safety Administration of its concerns that the inability to inject natural gas into theAliso Canyon natural gas storage facility posed a risk to energy reliability inSouthern California . The CPUC has issued a series of directives to SoCalGas specifying the range of working gas to be maintained in theAliso Canyon natural gas storage facility as well as protocols for the withdrawal of gas, to help ensure safe and reliable natural gas service, while helping to maintain stable energy prices inSouthern California . Limited withdrawals of natural gas from the facility were made in 2018, 2019 and 2020 to augment natural gas supplies during critical demand periods. InFebruary 2017 , the CPUC opened a proceeding pursuant to SB 380 to determine the feasibility of minimizing or eliminating the use of theAliso Canyon natural gas storage facility. If theAliso Canyon natural gas storage facility were to be permanently closed, or if future cash flows from its operation 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. AtMarch 31, 2020 , theAliso Canyon natural gas storage facility had a net book value of$771 million . Any significant impairment of this asset, or higher operating costs and additional capital expenditures incurred by SoCalGas that may not be recoverable in customer rates, could have a material adverse effect on SoCalGas' andSempra Energy's results of operations, financial condition and cash flows.Sempra Texas Utilities Oncor's business is capital intensive, and it relies on external financing as a significant source of liquidity for its capital requirements. In the past, Oncor has financed a substantial portion of its cash needs from operations and with proceeds from indebtedness. In the event that Oncor fails to meet its capital requirements, we may be required to make additional capital contributions to Oncor, or if Oncor is unable to access sufficient capital to finance its ongoing needs, we may elect to make additional capital contributions to Oncor which could be substantial and which would reduce the cash available to us for other purposes, could increase our indebtedness and could ultimately materially adversely affect our results of operations, financial condition and prospects. In that regard, our commitments to the PUCT prohibit us from making loans to Oncor. As a result, if Oncor requires additional financing and cannot obtain it from other sources, we may elect to make a capital contribution to Oncor. Oncor's ability to pay dividends may be limited by factors such as its credit ratings, regulatory capital requirements, debt-to-equity ratio approved by the PUCT and other restrictions. In addition, Oncor will not pay dividends if a majority of Oncor's independent directors or any minority member director determines it is in the best interests of Oncor to retain such amounts to meet expected future requirements. 94 -------------------------------------------------------------------------------- Sempra Mexico Sempra Mexico is currently building or developing terminals for the receipt, storage, and delivery of liquid fuels in the new port ofVeracruz and vicinity ofMexico City ,Puebla ,Topolobampo ,Manzanillo , andEnsenada . Sempra Mexico is also developing new solar facilities in Juárez, Chihuahua, andBenjamin Hill, Sonora , through which it will supply renewable energy to several private companies. We expect the projects to commence commercial operations on various dates in 2020 and 2021, but these expected commencement dates could be delayed by worsening or extended disruptions of project construction or development caused by the COVID-19 pandemic. See "Item 1A. Risk Factors" below. We expect to fund these capital expenditures and investments, operations and dividends at IEnova with available funds, including credit facilities, and funds internally generated by the Sempra Mexico businesses, as well as funds from project financing, sales of securities, interim funding from the parent or affiliates, and partnering in JVs. Sempra Mexico is continuing to monitor the impacts of the COVID-19 pandemic on cash flows and results of operations. As we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements, IEnova received force majeure payments for theGuaymas -El Oro segment of theSonora pipeline fromAugust 2017 toAugust 2019 . Under an agreement between IEnova and the CFE, the CFE will resume making payments only when the damaged section of theGuaymas -El Oro segment of theSonora pipeline is repaired. If the pipeline is not repaired byMay 15, 2020 and the parties do not agree on a new service start date, IEnova retains the right to terminate the contract and seek to recover its reasonable and documented costs and lost profits. The parties are currently discussing a new service start date in the event the pipeline is not repaired byMay 15, 2020 , but there can be no assurance that the parties will have agreed on a new service start date if the pipeline is not repaired by that date. If IEnova is unable to make such repairs (which have not commenced) and resume operations in theGuaymas -El Oro segment of theSonora pipeline or if IEnova terminates the contract and is unable to obtain recovery, there may be a material adverse impact onSempra Energy's results of operations and cash flows and our ability to recover the carrying value of our investment. The ability to successfully complete major construction projects is subject to a number of risks and uncertainties. For a discussion of these risks and uncertainties, see "Item 1A. Risk Factors" in the Annual Report. Sempra LNG Sempra LNG develops and builds natural gas liquefaction facilities and is pursuing the development of five strategically located LNG projects inNorth America with a long-term goal of enabling the delivery of natural gas to the largest world markets. We expect Sempra LNG to require funding for the development and expansion of its portfolio of projects, which may be financed through a combination of operating cash flows, funding from the parent, project financing and participating in JVs, including ECA LNG JV with IEnova. North American natural gas prices, when in decline, negatively affect profitability at Sempra LNG. Also, a reduction in projected global demand for LNG could result in increased competition among those developing projects in an environment of declining LNG demand, such as theSempra Energy -sponsored LNG export initiatives. Our LNG projects currently under development could be delayed by the worldwide economic slowdown as a result of the COVID-19 pandemic, by the current uncertainty in the global oil and gas markets as a result of the unprecedented decline in oil prices or by a combination of these factors. For a discussion of these risks and other risks involving changing commodity prices, see "Item 1A. Risk Factors" in the Annual Report and in "Item 1A. Risk Factors" below.Cameron LNG JV Three-Train Liquefaction Project (Phase 1) Sempra LNG, through its interest in Cameron LNG JV, is constructing a three-train natural gas liquefaction export facility with an expected export capability of 12 Mtpa of LNG. Construction on the three-train liquefaction project began in the second half of 2014 under an EPC contract with a JV betweenCB&I, LLC (as assignee ofCB&I Shaw Constructors, Inc. ), a wholly owned subsidiary of McDermott International, Inc., andChiyoda International Corporation , a wholly owned subsidiary of Chiyoda Corporation. The majority of the construction is project-financed at the JV, with most or all of the remainder of the capital requirements provided by the project partners, includingSempra Energy , through equity contributions under the project equity agreements. We expect that our remaining equity requirements to complete the project will be met by a combination of our share of cash generated from the first two liquefaction trains that have commenced operations and, if required, additional cash contributions.Sempra Energy signed guarantees for 50.2% of Cameron LNG JV's financing obligations for a maximum amount of up to$4.0 billion . The guarantees will terminate upon satisfaction of certain conditions, including all three trains achieving financial completion bySeptember 30, 2021 (with up to an additional 365-day extension beyond such date permitted in cases of force majeure). However, if Cameron LNG JV fails to satisfy the financial completion criteria, a demand could be made under the guarantee forSempra Energy's 50.2% share of Cameron LNG JV's obligations under the financing arrangements then due and payable, which could have a material adverse impact onSempra Energy's liquidity. 95 -------------------------------------------------------------------------------- Cameron LNG JV achieved commercial operations of Train 1 and Train 2 under its tolling agreements inAugust 2019 andFebruary 2020 , respectively. We expect Train 3 will commence commercial operations in the third quarter of 2020. However, the expected commencement of Train 3's commercial operations could be delayed by worsening or extended disruptions of project construction and commissioning caused by the COVID-19 pandemic. Large-scale construction projects such as the design, development and construction of the Cameron LNG JV liquefaction facility involve numerous risks and uncertainties, including among others, the potential for unforeseen engineering challenges, severe weather events, global pandemics, substantial construction delays and increased costs. In addition, once completed, the facility may be subject to design flaws, equipment failures and other operational issues, which could cause the facility to suspend operations or operate at a reduced capacity. Cameron LNG JV has a lump-sum, turnkey EPC contract, and if the contractor becomes unwilling or unable to perform according to the terms and timetable of the EPC contract, the project could face substantial construction delays and potentially significantly increased costs. InJanuary 2020 , McDermott International, Inc. filed for bankruptcy protection under Chapter 11 of theU.S. bankruptcy code. McDermott International, Inc. has stated that it expects all of its projects, including the three-train liquefaction project at Cameron LNG JV, to continue on an uninterrupted basis. However, we cannot be certain the Cameron LNG JV project will not be interrupted. If the contractor defaults under the EPC contract due to the bankruptcy of McDermott International, Inc. or for any other reason, such default could result in Cameron LNG JV's engagement of a substitute contractor. The inability to complete the project in a timely manner or within our current expectations, cost overruns, and the other risks described above could have a material adverse effect on our business, results of operations, cash flows, financial condition, credit ratings and/or prospects. For a discussion of our investment in Cameron LNG JV, JV financing,Sempra Energy guarantees, the risks discussed above and other risks relating to the development of the Cameron LNG JV liquefaction project that could adversely affect our future performance, see Note 6 of the Notes to Consolidated Financial Statements and "Item 1A. Risk Factors" in the Annual Report. 96 -------------------------------------------------------------------------------- Proposed Cameron Liquefaction Expansion (Phase 2) Cameron LNG JV has received the major permits and FTA and non-FTA approvals necessary to expand the current configuration of the Cameron LNG JV liquefaction project beyond Phase 1. The permits obtained for Phase 2 include up to two additional liquefaction trains and up to two additional full containment LNG storage tanks (one of which was permitted with the original three-train project). Expansion of the Cameron LNG liquefaction facility beyond the first three trains is subject to certain restrictions and conditions under the JV project financing agreements, including among others, timing restrictions on expansion of the project unless appropriate prior consent is obtained from the project lenders. Under the Cameron LNG JV equity agreements, the expansion of the project requires the unanimous consent of all the partners, including with respect to the equity investment obligation of each partner. Discussions among all the Cameron LNG JV partners have been taking place regarding how an expansion may be structured and we expect that discussions will continue. There can be no assurance that the Cameron LNG JV members will unanimously agree on an expansion structure, which, if not accomplished in a timely manner, could materially and adversely impact the development of the expansion project. In light of this, we are unable to predict whether or when Cameron LNG JV might be able to move forward on expansion of the Cameron LNG liquefaction facility beyond the first three trains. InNovember 2018 ,Sempra Energy and TOTAL S.A. entered into an MOU that provides a framework for cooperation for the development of the potential Cameron LNG JV expansion project and the potential ECA LNG JV liquefaction-export project that we describe below in "ECA LNG JV Liquefaction Export Project ." The MOU contemplates TOTAL S.A. potentially contracting for up to approximately 9 Mtpa of LNG offtake across these two development projects and provides TOTAL S.A. the option to acquire an equity interest in the proposed ECA LNG JV project. In addition, inOctober 2019 ,Sempra Energy and Mitsui & Co., Ltd. entered into an MOU that provides a framework for potential offtake by Mitsui & Co., Ltd. from the potential Cameron LNG JV expansion project and the second phase of the potential ECA LNG JV project, as well as Mitsui & Co., Ltd.'s potential acquisition of an equity interest in the second phase of the potential ECA LNG JV project. InMay 2020 ,Sempra Energy and Mitsubishi Corporation entered into an MOU that provides a framework for development of and potential offtake by Mitsubishi Corporation from the potential Cameron LNG JV expansion project. The ultimate participation of and offtake by TOTAL S.A., Mitsui & Co., Ltd. and Mitsubishi Corporation remains subject to negotiation and finalization of definitive agreements, among other factors, and TOTAL S.A., Mitsui & Co., Ltd. and Mitsubishi Corporation have no commitment to participate in and offtake from the projects. The development of the potential Cameron LNG expansion project is subject to numerous other risks and uncertainties, including securing binding customer commitments; obtaining a number of permits and regulatory approvals; securing financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract, equity acquisition and governance agreements; reaching a final investment decision; and other factors associated with this potential investment. For a discussion of these risks, see "Item 1A. Risk Factors" in the Annual Report. 97 --------------------------------------------------------------------------------ECA LNG JV Liquefaction Export Project Through a JV agreement, Sempra LNG and IEnova are developing a proposed natural gas liquefaction project at IEnova's existing ECA LNG Regasification facility. The proposed liquefaction facility project, which is planned for development in two phases (a mid-scale project referred to as ECA LNG JV Phase 1 and a large-scale project referred to as ECA LNG JV Phase 2), is being developed to provide buyers with direct access to west coast LNG supplies. The ECA LNG Regasification facility currently has profitable long-term regasification contracts for 100% of the regasification facility's capacity through 2028, making the decisions on whether and how to pursue the ECA LNG JV Phase 2 liquefaction project dependent in part on whether the investment in a large-scale liquefaction facility would, over the long term, be more beneficial financially than continuing to supply regasification services under our existing contracts. We do not believe that the development of ECA LNG JV Phase 1 will disrupt operations at the ECA LNG Regasification facility. InMarch 2019 , ECA LNG JV received two authorizations from theDOE to exportU.S. -produced natural gas toMexico and to re-export LNG to non-FTA countries from its ECA LNG JV Phase 1 project, a one-train natural gas liquefaction export facility with a nameplate capacity of 3.25 Mtpa and initial offtake capacity of approximately 2.5 Mtpa, and its ECA LNG JV Phase 2 project, each of which is in development. OnFebruary 27, 2020 , we entered into an EPC contract with TechnipFMC for the engineering, procurement and construction of ECA LNG JV Phase 1. We have no obligation to move forward on the EPC contract, and we may release TechnipFMC to perform portions of the work pursuant to limited notices to proceed. We plan to fully release TechnipFMC to perform all of the work to construct ECA LNG JV Phase 1 only after we reach a final investment decision with respect to the project and after certain other conditions are met. The total price of the EPC contract for ECA LNG JV Phase 1 is estimated at approximately$1.5 billion . We estimate that capital expenditures for ECA LNG JV Phase 1 will approximate$1.9 billion , including capitalized interest and project contingency. The actual cost of the EPC contract and the actual amount of these capital expenditures may differ, perhaps substantially, from our estimates. InNovember 2018 , Sempra LNG and IEnova signed Heads of Agreements with affiliates of TOTAL S.A., Mitsui & Co., Ltd. and Tokyo Gas Co., Ltd. for ECA LNG JV Phase 1 in respect of LNG sales of approximately 2.5 Mtpa in the aggregate. InApril 2020 , ECA LNG JV executed definitive 20-year LNG sale and purchase agreements with Mitsui & Co., Ltd. and an affiliate of TOTAL S.A. for approximately 0.8 Mtpa of LNG and 1.7 Mtpa of LNG, respectively. Each agreement remains subject to certain customary conditions of effectiveness, including our final investment decision for the project. We continue to work towards reaching a final investment decision for ECA LNG JV Phase 1 in the second quarter of 2020. However, this project is contingent on the receipt of an export permit from the Mexican government. The closure of non-essential activities inMexico in response to the COVID-19 pandemic has added to the uncertainty of the timing of the receipt of this permit and could delay our final investment decision beyond the second quarter of 2020. The development of both the ECA LNG JV Phase 1 and ECA LNG JV Phase 2 projects is subject to numerous risks and uncertainties, including obtaining binding customer commitments for Phase 2; the receipt of a number of permits and regulatory approvals; obtaining financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract for Phase 2, equity acquisition and governance agreements, LNG sales agreements and gas supply and transportation agreements; reaching a final investment decision; and other factors associated with this potential investment. In addition, as we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements, an unfavorable decision on certain property disputes and permit challenges could materially and adversely affect the development of these projects. For a discussion of these risks, see "Item 1A. Risk Factors" in the Annual Report. 98 --------------------------------------------------------------------------------Port Arthur LNG Liquefaction Project Sempra LNG is developing a proposed natural gas liquefaction project on a greenfield site that it owns in the vicinity ofPort Arthur, Texas , located along theSabine -Neches waterway. Sempra LNG received authorizations from theDOE inAugust 2015 andMay 2019 that collectively permit the LNG to be produced from the proposed Port Arthur LNG project to be exported to all current and future FTA and non-FTA countries. InApril 2019 , theFERC approved the siting, construction and operation of the proposed Port Arthur LNG liquefaction facility, along with certain natural gas pipelines, including the Louisiana Connector Pipeline, that could be used to supply feed gas to the liquefaction facility, assuming the project is completed. OnFebruary 28, 2020 , we entered into an EPC contract with Bechtel for the proposed Port Arthur LNG liquefaction project. The EPC contract contemplates the construction of two liquefaction trains with a nameplate capacity of approximately 13.5 Mtpa, two LNG storage tanks, a marine berth and associated loading facilities and related infrastructure necessary to provide liquefaction services. We have no obligation to move forward on the EPC contract, and we may release Bechtel to perform portions of the work pursuant to limited notices to proceed. We plan to fully release Bechtel to perform all of the work to construct the Port Arthur LNG liquefaction project only after we reach a final investment decision with respect to the project and after certain other conditions are met, including obtaining project financing. If we issue the full notice to proceed byJuly 15, 2020 , the price under the fixed-price EPC contract is estimated to be approximately$8.9 billion . This does not include costs associated with changes to the project's scope or the occurrence of certain events that would entitle Bechtel to relief under the contract, including customary events for similar agreements of this type such as force majeure events, certain changes in law, the discovery of certain differing site conditions, and certain delays to the work that we may cause. If we issue the full notice to proceed afterJuly 15, 2020 , the price will be subject to price escalations. If the full notice to proceed is not issued byOctober 15, 2020 , then the EPC contract, including the price, will be subject to renegotiation. Any changes to the EPC contract will require the agreement of both parties, which cannot be assured. InDecember 2018 , Polish Oil & Gas Company (PGNiG) and Port Arthur LNG entered into a definitive 20-year agreement for the sale and purchase of 2 Mtpa of LNG per year from the Port Arthur LNG liquefaction project. Under the agreement, LNG purchases by PGNiG from Port Arthur LNG will be made on a free-on-board basis, with PGNiG responsible for shipping the LNG from thePort Arthur facility to the final destination. Port Arthur LNG will manage the gas pipeline transportation, liquefaction processing and cargo loading. The agreement is subject to certain conditions precedent, including Port Arthur LNG making a positive final investment decision within certain agreed timelines. The failure of these conditions precedent to be satisfied or waived within the agreed timelines could result in the termination of the agreement. InMay 2019 ,Aramco Services Company and Sempra LNG signed a Heads of Agreement for the negotiation and finalization of a definitive 20-year LNG sale and purchase agreement for 5 Mtpa of LNG offtake. The Heads of Agreement also includes the negotiation and finalization of a 25% equity investment in the project. InJanuary 2020 ,Aramco Services Company and Sempra LNG signed an Interim Project Participation Agreement, which sets forth certain mechanisms for the parties to work towards receipt of corporate approvals to enter into and proceed with the transaction, execution of the transaction agreements and the fulfillment or waiver of the conditions precedent contemplated by these agreements, making a final investment decision and other pre-final investment decision activities. The Heads of Agreement and Interim Project Participation Agreement do not obligate the parties to ultimately execute any agreements or participate in the project. InFebruary 2020 , Sempra LNG filed aFERC application for the siting, construction and operation of a second phase at the proposed Port Arthur LNG facility, including the potential addition of two liquefaction trains. InNovember 2019 , Port Arthur LNG commenced the relocation and upgrade of approximately three miles of highway where the Port Arthur LNG liquefaction project would be located. We continue to work on completing all necessary milestones so that we are prepared to make a final investment decision for the proposed Port Arthur LNG liquefaction project when appropriate. The impact of the COVID-19 pandemic on the global economy and the current uncertainty in the financial and energy markets has delayed the expected timing of our final investment decision from 2020 to 2021. Development of the Port Arthur LNG liquefaction project is subject to a number of risks and uncertainties, including obtaining additional customer commitments; completing the required commercial agreements, such as equity acquisitions and governance agreements, LNG sales agreements and gas supply and transportation agreements; completing construction contracts; securing all necessary permits and approvals; obtaining financing and incentives; reaching a final investment decision; and other factors associated with the potential investment. For a discussion of these risks, see "Item 1A. Risk Factors" in the Annual Report. 99 -------------------------------------------------------------------------------- Discontinued Operations As we discuss in Note 5 of the Notes to Condensed Consolidated Financial Statements, inJanuary 2019 , our board of directors approved a plan to sell our South American businesses. OnApril 24, 2020 , we completed the sale of our equity interests in our Peruvian businesses for an aggregate base purchase price of$3.59 billion , subject to post-closing adjustments. InOctober 2019 , we entered into an agreement to sell our equity interests in our Chilean businesses for an aggregate base purchase price of$2.23 billion , subject to customary adjustments for working capital and changes in net indebtedness and other adjustments. We expect the sale to close in the second quarter of 2020, subject to satisfaction of conditions to closing. Our utilities inSouth America have historically provided relatively stable earnings and liquidity. We intend to use the proceeds from the sales to focus on capital investment inNorth America to support additional growth opportunities and strengthen our balance sheet by reducing debt. We expect the cash provided by earnings from our capital investment will exceed the absence of cash flows from these discontinued operations. However, there can be no assurance that we will derive these anticipated benefits. Further, there can be no assurance that we will be able to redeploy the capital that we obtain from such sales, if completed, in a way that would result in cash flows or earnings exceeding those historically generated by these businesses. SOURCES AND USES OF CASH The following tables include only significant changes in cash flow activities for each of our registrants. CASH FLOWS FROM OPERATING ACTIVITIES (Dollars in millions) Sempra Energy Three months ended March 31, Consolidated SDG&E SoCalGas 2020$ 1,318 $ 498 $ 757 2019 951 443 376 Change $ 367$ 55 $ 381 Net increase in Reserve for Aliso Canyon Costs primarily due to$276 higher accruals and$98 lower payments $ 375$ 375 Higher net income, adjusted for noncash items included in earnings 169$ 109 121 Change in long-term GHG obligations 49 42 Higher distributions of earnings from Oncor Holdings 19
Net increase in Insurance Receivable for Aliso
Canyon Costs primarily due to
(156 ) (156 )
Deferred revenue due to the TCJA at the
(43 ) (20 ) (23 ) Change in intercompany activities with discontinued operations (31 ) Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets) (46 ) 47 Other 10 12 (25 ) Change in net cash flows from discontinued operations (25 ) $ 367$ 55 $ 381 100
-------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES (Dollars in millions) Sempra Energy Three months ended March 31, Consolidated SDG&E SoCalGas 2020$ (1,181 ) $ (402 ) $ (388 ) 2019 (610 ) (356 ) (324 ) Change $ (571 )$ (46 ) $ (64 )
Net proceeds from the
(227 )$ (46 ) $ (64 ) Other (27 ) Change in net cash flows from discontinued operations 5 $ (571 )$ (46 ) $ (64 ) CASH FLOWS FROM FINANCING ACTIVITIES (Dollars in millions) Sempra Energy Three months ended March 31, Consolidated SDG&E SoCalGas 2020$ 2,114 $ 97 $ 10 2019 (381 ) (75 ) (67 ) Change$ 2,495 $ 172 $ 77
Increase (decrease) in short-term debt, net
1,048 400 649 Higher issuances of commercial paper and other short-term debt with maturities greater than 90 days 267 Higher payments on long-term debt and finance leases (503 ) Higher payments for commercial paper and other short-term debt with maturities greater than 90 days (93 ) Higher common dividends paid (200 ) Other (10 ) (1 ) (8 ) Change in net cash flows from discontinued operations mainly due to a net increase in short-term debt 156$ 2,495 $ 172 $ 77 Capital Expenditures and Investments and Acquisitions EXPENDITURES FOR PP&E AND INVESTMENTS AND ACQUISITIONS (Dollars in millions) Three months ended March 31, 2020 2019 SDG&E$ 402 $ 356 SoCalGas 388 324 Sempra Texas Utilities 86 56 Sempra Mexico 170 85 Sempra LNG 47 56 Parent and other 3 - Total$ 1,096 $ 877 101
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The amounts and timing of capital expenditures and certain investments are generally subject to approvals by various regulatory and other governmental and environmental bodies, including the CPUC, theFERC and the PUCT. Excluding discontinued operations, in 2020, we expect to make capital expenditures and investments of approximately$5.7 billion , a decrease from the$5.9 billion summarized in "Item 7. MD&A - Capital Resources and Liquidity" in the Annual Report. The decrease is primarily attributable to Phase 1 of the ECA LNG JV liquefaction export project at Sempra LNG. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We view certain accounting policies as critical because their application is the most relevant, judgmental, and/or material to our financial position and results of operations, and/or because they require the use of material judgments and estimates. We discuss these accounting policies in "Item 7. MD&A" in the Annual Report. We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes. NEW ACCOUNTING STANDARDS We discuss the relevant pronouncements that have recently been issued or become effective and have had or may have an impact on our financial statements and/or disclosures in Note 2 of the Notes to Condensed Consolidated Financial Statements.
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