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SEMPRA ENERGY

(SRE)
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SEMPRA ENERGY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/05/2021 | 03:38pm EDT
You should read the following discussion in conjunction with the Condensed
Consolidated Financial Statements and the Notes thereto in this report, and the
Consolidated Financial Statements and the Notes thereto, "Part I - Item 1A. Risk
Factors" and "Part II - Item 7. MD&A" in the Annual Report.


OVERVIEW

Sempra Energy is a California-based holding company with energy infrastructure
investments in North America. Our businesses invest in, develop and operate
energy infrastructure, and provide electric and gas services to customers
through regulated public utilities. As we discuss in Note 12 of the Notes to
Condensed Consolidated Financial Statements in this report and in "Part I - Item
1. Business" in the Annual Report, our business activities are organized under
five separately managed reportable segments.
Our former South American businesses and certain activities associated with
those businesses are presented as discontinued operations. Nominal activities
that are not classified as discontinued operations have been subsumed into
Parent and other. We completed the sales of these businesses in the second
quarter of 2020. Our discussions below exclude discontinued operations, unless
otherwise noted.
This report includes information for the following separate registrants:
?Sempra Energy and its consolidated entities;
?SDG&E; and
?SoCalGas.
References in this report to "we," "our," "us," "our company" and "Sempra Energy
Consolidated" are to Sempra Energy and its consolidated entities, collectively,
unless otherwise indicated by the context. We refer to SDG&E and SoCalGas
collectively as the California Utilities, which do not include the utilities in
our Sempra Texas Utilities or Sempra Mexico segments or the utilities in our
former South American businesses included in discontinued operations. All
references in this report 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 Financial Statements and related Notes of SDG&E; and
•the Condensed Financial Statements and related Notes of SoCalGas.
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RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
?Overall results of operations of Sempra Energy Consolidated;
?Segment results;
?Significant changes in revenues, costs and earnings; and
?Impact of foreign currency and inflation rates on our results of operations.

OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY CONSOLIDATED
In the three months ended March 31, 2021, we reported earnings of $874 million
and diluted EPS of $2.87 compared to earnings of $760 million and diluted EPS of
$2.53 for the same period in 2020. The change in diluted EPS in the three months
ended March 31, 2021 compared to the same period in 2020 included an increase of
$0.05 due to a decrease in weighted-average common shares outstanding. Our
earnings and diluted EPS were impacted by variances discussed in "Segment
Results" below.

SEGMENT RESULTS
This section presents earnings (losses) by Sempra Energy segment, as well as
Parent and other and discontinued operations, and a related discussion of the
changes in segment earnings (losses). 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.
SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT
(Dollars in millions)
                                                        Three months ended March 31,
                                                                                  2021       2020
SDG&E                                                                            $ 212      $ 262
SoCalGas                                                                           407        303
Sempra Texas Utilities                                                             135        105
Sempra Mexico                                                                       57        191
Sempra LNG                                                                         146         75
Parent and other(1)                                                                (83)      (248)
Discontinued operations                                                              -         72
Earnings attributable to common shares                                      

$ 874 $ 760

(1) Includes intercompany eliminations recorded in consolidation and certain corporate costs.

SDG&E

The decrease in earnings of $50 million (19%) in the three months ended March
31, 2021 compared to the same period in 2020 was primarily due to:
?$26 million lower electric transmission margin, including the following impacts
in 2020 from the March 2020 FERC-approved TO5 settlement proceeding:
•$18 million to conclude a rate base matter, and
•$9 million favorable impact from the retroactive application of the final T05
settlement for 2019; and
?$21 million lower CPUC base operating margin, net of operating expenses,
primarily due to favorable resolution of regulatory matters in 2020.
SoCalGas
The increase in earnings of $104 million (34%) in the three months ended March
31, 2021 compared to the same period in 2020 was primarily due to:
?$72 million charge in 2020 from impacts associated with the Aliso Canyon
natural gas storage facility litigation; and
?$35 million higher CPUC base operating margin, net of operating expenses.
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Sempra Texas Utilities
The increase in earnings of $30 million (29%) in the three months ended March
31, 2021 compared to the same period in 2020 was primarily due to higher equity
earnings from Oncor Holdings driven by:
?increased revenues from rate updates to reflect increases in invested capital;
and
?higher consumption due to weather; offset by
?increased operating costs and expenses attributable to invested capital.
Sempra Mexico
Because Ecogas, our natural gas distribution utility in Mexico, uses the local
currency as its functional currency, its revenues and expenses are translated
into U.S. dollars at average exchange rates for the period for consolidation in
Sempra Energy's results of operations. Prior year amounts used in the variances
discussed below are as adjusted for the difference in foreign currency
translation rates between years. We discuss these and other foreign currency
effects below in "Impact of Foreign Currency and Inflation Rates on Results of
Operations."
The decrease in earnings of $134 million in the three months ended March 31,
2021 compared to the same period in 2020 was primarily due to:
?$226 million unfavorable impact from foreign currency and inflation effects net
of foreign currency derivative effects comprised of a $12 million favorable
impact in 2021 compared to a $238 million favorable impact in 2020; offset by
?$34 million earnings attributable to NCI at IEnova in 2021 compared to $144
million earnings in 2020.
Sempra LNG
The increase in earnings of $71 million in the three months ended March 31, 2021
compared to the same period in 2020 was primarily due to:
?$62 million higher equity earnings from Cameron LNG JV primarily due to the
three-train liquefaction project achieving commercial operations in August 2020;
and
?$6 million higher earnings from marketing operations, primarily driven by
changes in natural gas prices.
Parent and Other
The decrease in losses of $165 million in the three months ended March 31, 2021
compared to the same period in 2020 was primarily due to:
?$100 million equity losses in 2020 from our investment in RBS Sempra
Commodities to settle pending tax matters and related legal costs;
?$2 million net investment gains in 2021 compared to $19 million net investment
losses in 2020 on dedicated assets in support of our employee nonqualified
benefit plan and deferred compensation obligations;
?$19 million lower net interest expense;
?$15 million lower operating costs retained at Parent and other; and
?$15 million lower preferred dividends from $26 million lower dividends due to
the mandatory conversion of all series A preferred stock in January 2021, offset
by $11 million higher dividends due to the issuance of series C preferred stock
in June 2020.
Discontinued Operations
Discontinued operations that were previously in our Sempra South American
Utilities segment include our former 100% interest in Chilquinta Energía in
Chile, our former 83.6% interest in Luz del Sur in Peru and our former interests
in two energy-services companies, Tecnored and Tecsur, 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. As we discuss in Note 5 of the Notes to Consolidated
Financial Statements in the Annual Report, we completed the sales of our South
American businesses in the second quarter of 2020.
The decrease in earnings from our discontinued operations of $72 million in the
three months ended March 31, 2021 compared to the same period in 2020 was
primarily due to:
?$70 million lower operational earnings mainly as a result of the sales of our
Peruvian and Chilean businesses; and
?$7 million income tax benefit in 2020 related to changes in outside basis
differences from earnings and foreign currency effects.

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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 for
Sempra Energy, SDG&E and SoCalGas.
Utilities Revenues and Cost of Sales
Our utilities revenues include natural gas revenues at our California 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' Gas Cost Incentive Mechanism
provides SoCalGas the opportunity to share in the savings and/or costs from
buying natural gas for its core customers at prices below or above monthly
market-based benchmarks. This mechanism permits full recovery of costs incurred
when average purchase costs are within a price range around the benchmark price.
Any higher costs incurred or savings realized outside this range are shared
between the core customers and SoCalGas. We provide further discussion in Note 3
of the Notes to Consolidated Financial Statements 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 California Utilities to recover certain program expenditures and other
costs authorized by 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, resulting in a significant portion of SoCalGas' earnings
being 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.
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The table below summarizes utilities revenues and cost of sales.
UTILITIES REVENUES AND COST OF SALES
(Dollars in millions)
                                                                         Three months ended March 31,
                                                                           2021                  2020
Natural gas revenues:
SoCalGas                                                             $        1,508          $   1,395
SDG&E                                                                           268                219
Sempra Mexico                                                                    27                 20
Eliminations and adjustments                                                    (26)               (17)
Total                                                                         1,777              1,617
Electric revenues:
SDG&E                                                                         1,069              1,050
Eliminations and adjustments                                                     (1)                (2)
Total                                                                         1,068              1,048
Total utilities revenues                                             $        2,845          $   2,665
Cost of natural gas(1):
SoCalGas                                                             $          273          $     278
SDG&E                                                                            82                 60
Sempra Mexico                                                                     6                  3
Eliminations and adjustments                                                    (12)                (4)
Total                                                                $          349          $     337
Cost of electric fuel and purchased power(1):
SDG&E                                                                $          241          $     231
Eliminations and adjustments                                                     (9)                (2)
Total                                                                $          232          $     229

(1) Excludes depreciation and amortization, which are presented separately on the Sempra Energy, SDG&E and SoCalGas Condensed Consolidated Statements of Operations.


Natural Gas Revenues and Cost of Natural Gas
The table below summarizes the average cost of natural gas sold by the
California Utilities and included in Cost of Natural Gas on the Condensed
Consolidated Statements of Operations. 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,
                                                                                2021                2020
SoCalGas                                                                    $     2.60          $     2.54
SDG&E                                                                             4.44                3.75


In the three months ended March 31, 2021, our natural gas revenues increased by
$160 million (10%) to $1.8 billion compared to the same period in 2020 primarily
due to:
?$113 million increase at SoCalGas, which included:
•$59 million higher CPUC-authorized revenues,
•$41 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M, and
•$11 million higher revenues from incremental and balanced capital projects; and
?$49 million increase at SDG&E, which included:
•$22 million increase in cost of natural gas sold, which we discuss below,
•$16 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M, and
•$10 million higher CPUC-authorized revenues.
In the three months ended March 31, 2021, our cost of natural gas increased by
$12 million (4%) to $349 million compared to the same period in 2020 primarily
due to:
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?$22 million increase at SDG&E due to $13 million higher average natural gas
prices and $9 million from higher volumes primarily driven by weather; offset by
?$5 million decrease at SoCalGas due to $11 million from lower volumes driven by
weather, offset by $6 million from higher average natural gas prices.
Electric Revenues and Cost of Electric Fuel and Purchased Power
In the three months ended March 31, 2021, our electric revenues, substantially
all of which are at SDG&E, increased by $20 million (2%) to $1.1 billion
compared to the same period in 2020 primarily due to:
?$54 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M;
?$10 million higher CPUC-authorized revenues; and
?$10 million higher cost of electric fuel and purchased power, which we discuss
below; offset by
?$35 million lower revenues from transmission operations, including the
following impacts in 2020 related to the March 2020 FERC-approved TO5 settlement
proceeding:
•$26 million to settle a rate base matter, and
•$12 million favorable impact from the retroactive application of the final TO5
settlement for 2019; and
?$22 million lower revenues due to favorable resolution of regulatory matters in
2020.
Our utility cost of electric fuel and purchased power, substantially all of
which is at SDG&E, increased by $3 million (1%) to $232 million in the three
months ended March 31, 2021 compared to the same period in 2020 primarily due to
an increase in market costs, offset by a decrease in demand from the adoption of
rooftop solar.
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,
                                                                       2021                   2020
REVENUES
Sempra Mexico                                                   $           340          $       289

Sempra LNG                                                                  196                  123
Parent and other(1)                                                        (122)                 (48)
Total revenues                                                  $           414          $       364
COST OF SALES(2)
Sempra Mexico                                                   $           119          $        69
Sempra LNG                                                                  101                   39
Parent and other(1)                                                        (111)                 (49)
Total cost of sales                                             $           109          $        59

(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 March 31, 2021, revenues from our energy-related
businesses increased by $50 million (14%) to $414 million compared to the same
period in 2020 primarily due to:
?$73 million increase at Sempra LNG primarily due to:
•$61 million increase in revenues from LNG marketing operations primarily from
higher natural gas sales to Sempra Mexico mainly as a result of higher natural
gas prices, and from higher diversion revenues due to higher natural gas prices,
and
•$13 million increase from natural gas marketing operations primarily due to
changes in natural gas prices; and
?$51 million increase at Sempra Mexico primarily due to:
•$59 million from the marketing business primarily due to higher natural gas
prices, offset by
•$13 million lower revenues from TdM mainly due to unrealized losses on
commodity derivatives, offset by higher power prices; offset by
?$74 million decrease primarily from higher intercompany eliminations associated
with sales between Sempra LNG and Sempra Mexico.
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In the three months ended March 31, 2021, the cost of sales for our
energy-related businesses increased by $50 million to $109 million compared to
the same period in 2020 primarily due to:
?$62 million increase at Sempra LNG mainly from natural gas marketing activities
due to higher natural gas purchases; and
?$50 million increase at Sempra Mexico primarily due to higher natural gas
prices at the marketing business and TdM; offset by
?$62 million decrease primarily from higher intercompany eliminations associated
with sales between Sempra LNG and Sempra Mexico.
Operation and Maintenance
In the three months ended March 31, 2021, O&M increased by $150 million (18%) to
$1.0 billion compared to the same period in 2020 primarily due to:
?$80 million increase at SDG&E primarily due to:
•$70 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$10 million higher non-refundable operating costs;
?$60 million increase at SoCalGas primarily due to:
•$41 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$19 million higher non-refundable operating costs; and
?$15 million increase at Parent and other primarily from higher deferred
compensation expense.
Aliso Canyon Litigation and Regulatory Matters
In March 2020, SoCalGas recorded a charge of $100 million in Aliso Canyon
Litigation and Regulatory Matters related to settlement discussions in
connection with civil litigation associated with the Leak, which we describe in
Note 11 of the Notes to Condensed Consolidated Financial Statements.
Other Income (Expense), Net
As part of our central risk management function, we may 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 Income (Expense), Net,
as described below, and partially mitigate the transactional effects of foreign
currency and inflation included in Income Tax Expense for Sempra Mexico's
consolidated entities and in Equity Earnings for Sempra Mexico's equity method
investments. We also utilized foreign currency derivatives in 2020 to hedge
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sales of our operations in Peru and Chile, respectively. We discuss policies
governing our risk management in "Part II - Item 7A. Quantitative and
Qualitative Disclosures About Market Risk" in the Annual Report.
Other income, net, in the three months ended March 31, 2021 was $35 million
compared to other expense, net, of $254 million in the same period in 2020. The
change was primarily due to:
?$227 million lower net losses from impacts associated with interest rate and
foreign exchange instruments and foreign currency transactions primarily due to:
•$126 million lower foreign currency losses on a Mexican peso-denominated loan
to IMG JV, which is offset in Equity Earnings, and
•$101 million lower losses on foreign currency derivatives as a result of
fluctuation of the Mexican peso, offset by
•$11 million net gains in 2020 of foreign currency derivatives used to hedge
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sales of our businesses in Peru and Chile; and
?$9 million investment gains in 2021 compared to $37 million investment losses
in 2020 on dedicated assets in support of our executive retirement and deferred
compensation plans.
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Income Taxes
The table below shows the income tax expense (benefit) and ETRs for Sempra
Energy Consolidated, SDG&E and SoCalGas.
INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
                                                                       Three months ended
                                                                            March 31,
                                                                                 2021                2020
Sempra Energy Consolidated:
Income tax expense (benefit) from continuing operations                     

$ 158 $ (207)

Income from continuing operations before income taxes and equity earnings

                                                          $      768          $      397
Equity earnings (losses), before income tax(1)                                      135                 (43)
Pretax income                                                                $      903          $      354

Effective income tax rate                                                            18  %              (58) %
SDG&E:
Income tax expense                                                           $       45          $       58
Income before income taxes                                                   $      257          $      320
Effective income tax rate                                                            18  %               18  %
SoCalGas:
Income tax expense                                                           $       94          $       52
Income before income taxes                                                   $      501          $      355
Effective income tax rate                                                            19  %               15  %


(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
Sempra Energy's income tax expense in the three months ended March 31, 2021
compared to an income tax benefit in the same period in 2020 was due to higher
pretax income and the following items:
?$42 million income tax benefit in 2021 compared to $337 million income tax
benefit in 2020 from foreign currency and inflation effects and associated
derivatives; and
?$11 million lower income tax benefit in 2021 related to share-based
compensation.
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
SDG&E's income tax expense decreased in the three months ended March 31, 2021
compared to the same period in 2020 primarily due to lower pretax income.
SoCalGas
SoCalGas' income tax expense increased in the three months ended March 31, 2021
compared to the same period in 2020 primarily due to higher pretax income.
Equity Earnings
In the three months ended March 31, 2021, equity earnings increased by $55
million (21%) to $318 million compared to the same period in 2020 primarily due
to:
?$100 million equity losses at RBS Sempra Commodities in 2020, which represents
an estimate of our obligations to settle pending tax matters and related legal
costs at our equity method investment;
?$77 million higher equity earnings at Cameron LNG JV primarily due to the
three-train liquefaction project achieving commercial operations in August 2020;
and
?$30 million higher equity earnings at Oncor Holdings primarily due to higher
revenues from rate updates and higher consumption due to weather, offset by
increased operating costs and expenses attributable to invested capital; offset
by
?$153 million lower equity earnings at Sempra Mexico, which included:
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•$131 million lower equity earnings at IMG JV, primarily due to foreign currency
effects, including $126 million lower foreign currency gains in 2021 on IMG JV's
Mexican peso-denominated loans from its JV owners, which is fully offset in
Other Income (Expense), Net, and
•$18 million lower equity earnings at TAG JV primarily due to income tax
benefits in 2020.
Earnings Attributable to Noncontrolling Interests
In the three months ended March 31, 2021, earnings attributable to NCI decreased
by $118 million to $33 million compared to the same period in 2020 primarily due
to a decrease in earnings attributable to NCI at Sempra Mexico mainly from
foreign currency and inflation effects as a result of fluctuation of the Mexico
peso.

IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS
Because our natural gas distribution utility in Mexico, Ecogas, uses its local
currency as its functional currency, revenues and expenses are translated into
U.S. dollars at average exchange rates for the period for consolidation in
Sempra Energy's results of operations. Prior to the sales of our South American
businesses in 2020, our operations in South America used their local currency as
their functional currency. 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 "Part II - 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 in Sempra Energy's
comparative results of operations. In the three months ended March 31, 2021, the
change in our earnings as a result of foreign currency translation rates was not
material compared to the same period in 2020.
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 EFFECTS AND ASSOCIATED DERIVATIVES
(Dollars in millions)
                                                                                                  Transactional (losses) gains
                                                       Total reported amounts                     included in reported amounts
                                                                           

Three months ended March 31,

                                                       2021               2020                       2021                2020
Other income (expense), net                        $       35          $   (254)               $         (49)         $   (276)
Income tax (expense) benefit                             (158)              207                           42               337
Equity earnings                                           318               263                           19               181
Income from continuing operations, net of income
tax                                                       928               867                           12               242

Income from discontinued operations, net of income tax

                                                         -                80                            -                16
Earnings attributable to noncontrolling interests         (33)             (151)                          (9)             (108)
Earnings attributable to common shares                    874               760                            3               150




CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
Sempra Energy Consolidated
Impact of the COVID-19 Pandemic
Our businesses that invest in, develop and operate energy infrastructure and
provide electric and gas services to customers have been identified as critical
or essential services in the U.S. and Mexico and have continued to operate
throughout the COVID-19 pandemic. As our businesses continue to operate, our
priority is the safety of our employees, customers, partners and the communities
we serve. We and other companies, including our partners, are taking steps to
try to protect the health and well-being
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of our employees and other stakeholders. We continue to work closely with local,
state and federal authorities in an effort to provide essential services with
minimum interruption to customers and in accordance with applicable social
distancing and other orders.
For a further discussion of risks and uncertainties related to the COVID-19
pandemic, see "Part I - Item 1A. Risk Factors" and "Part II - Item 7. MD&A -
Capital Resources and Liquidity" in the Annual Report.
Sempra Infrastructure Partners
In April 2021, we entered into an agreement to sell a 20% equity interest in
Sempra Infrastructure Partners, which generally represents the combined
businesses of Sempra LNG and IEnova, for cash proceeds of $3.37 billion, subject
to adjustments. We expect to complete this transaction in mid-2021. We intend to
use the expected proceeds from the sale to fund capital investments to support
additional growth opportunities and strengthen our balance sheet by reducing
debt.
The completion of the sale of NCI in Sempra Infrastructure Partners will reduce
our ownership interest in Sempra Infrastructure Partners and require us to share
control over certain business decisions with our minority partner, which
introduces a number of risks similar to those associated with sharing business
control. Moreover, any decrease in our ownership of Sempra Infrastructure
Partners would also decrease our share of the cash flows, profits and other
benefits these businesses currently or may in the future produce, which could
materially adversely affect our results of operations, cash flows, financial
condition and/or prospects.
Our ability to complete this transaction is subject to a number of risks,
including, among others, the ability to obtain governmental, regulatory and
third-party approvals and satisfy other customary closing conditions. If we are
not able to obtain these approvals and satisfy all other closing conditions in a
timely manner or on satisfactory terms, then the proposed transaction may be
abandoned and/or our prospects could be materially adversely affected. This
transaction is subject to a number of risks and uncertainties that we discuss
further in "Part I - Item 1A. Risk Factors" in the Annual Report.
Liquidity
We expect to meet our cash requirements through cash flows from operations,
unrestricted cash and cash equivalents, borrowings under our credit facilities,
distributions from our equity method investments, issuances of debt, project
financing and partnering with NCI investors. 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
?fund capital contribution requirements
?repay long-term debt
?fund expenditures related to the natural gas leak at SoCalGas' Aliso Canyon
natural gas storage facility
Sempra Energy and the California Utilities currently have reasonable access to
the money markets and capital markets and are not currently constrained in their
ability to borrow money at reasonable rates from commercial banks, under
existing revolving credit facilities or through public offerings registered with
the SEC. However, our ability to access the money markets and capital markets or
obtain credit from commercial banks outside of our committed revolving credit
facilities could become materially constrained if changing economic conditions
and disruptions to the money markets and capital markets, due to the COVID-19
pandemic or otherwise, worsen. 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.
We have significant investments in several trusts to provide for future payments
of pensions and other postretirement benefits and nuclear decommissioning.
Changes in asset values, which are dependent on activity in the equity and fixed
income markets, have not materially and adversely affected the trust funds'
abilities to make required payments. However, changes in these or other factors
in future periods, such as changes to discount rates, assumed rates of return,
mortality tables and regulations, may impact funding requirements for pension
and other postretirement benefits plans. Funding requirements for SDG&E's NDT
could also be impacted by the timing and amount of SONGS decommissioning costs.
At the California Utilities, funding requirements are
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generally 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.
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. In addition, Sempra Mexico has committed
lines of credit that expire in 2021 and 2024 and uncommitted revolving credit
facilities that expire in 2023. The table below shows the amount of available
funds at March 31, 2021, including available unused credit on these primary U.S.
and foreign lines of credit.
AVAILABLE FUNDS AT MARCH 31, 2021
(Dollars in millions)
                                             Sempra Energy
                                              Consolidated       SDG&E      

SoCalGas

Unrestricted cash and cash equivalents(1) $ 725 $ 9 $ 203 Available unused credit(2)(3)

                        6,768       1,370      

750



(1)  Amounts at Sempra Energy Consolidated include $285 million held in non-U.S.
jurisdictions. We discuss repatriation in Note 8 of the Notes to Consolidated
Financial Statements in the Annual Report.
(2)  Available unused credit is the total available on Sempra Energy's, Sempra
Global's, SDG&E's, SoCalGas' and Sempra Mexico's credit facilities that we
discuss in Note 7 of the Notes to Condensed Consolidated Financial Statements.
(3)  Because our commercial paper programs are supported by these lines, we
reflect the amount of commercial paper outstanding as a reduction to the
available unused credit.

In anticipation of the closing of the sale of NCI in Sempra Infrastructure
Partners, we anticipate that the Sempra Global credit agreement will be assigned
to Sempra Energy and we are also planning to replace Sempra Global's commercial
paper program with financing arrangements at Sempra Energy. Sempra
Infrastructure Partners also may enter into its own revolving credit facility,
although such a credit facility and its timing remain uncertain.
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. Our California Utilities use short-term debt
primarily to meet working capital needs. Revolving lines of credit and
commercial paper were our primary sources of short-term debt funding in the
first three months of 2021.
We discuss our short-term debt activities in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
Long-Term Debt Activities
Issuances of and payments on long-term debt in the first three months of 2021
included the following:
LONG-TERM DEBT ISSUANCES AND PAYMENTS
(Dollars in millions)
Issuances:                                             Amount at issuance   

Maturity


Sempra LNG variable rate notes                        $               102   

2025


Payments:                                                   Payments        

Maturity

Sempra Energy variable rate notes                     $               850   

2021

SDG&E 1.914% amortizing first mortgage bonds                           18   

2021

SDG&E variable rate 364-day term loan                                 200   

2021

Sempra Mexico variable rate notes                                      11   

2021

Sempra Mexico variable and fixed rate bank loans                        5   

2021



We discuss our long-term debt activities in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
Credit Ratings
We provide additional information about the credit ratings of Sempra Energy,
SDG&E and SoCalGas in "Part I - Item 1A. Risk Factors" and "Part II - Item 2.
MD&A - Capital Resources and Liquidity" in the Annual Report.
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The credit ratings of Sempra Energy, SDG&E and SoCalGas remained at investment
grade levels in the first three months of 2021.
CREDIT RATINGS AT MARCH 31, 2021

                                       Sempra Energy                           SDG&E                             SoCalGas
Moody's                          Baa2 with a stable outlook           A3 with a stable outlook           A2 with a stable outlook
S&P                             BBB+ with a negative outlook        BBB+ with a negative outlook        A with a negative outlook
Fitch                            BBB+ with a stable outlook          BBB+ with a stable outlook          A with a stable outlook


A downgrade of Sempra Energy's or any of its subsidiaries' credit ratings or
rating outlooks may, depending on the severity, 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 for Sempra Energy, SDG&E, SoCalGas and Sempra 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, at
March 31, 2021.
Loans with Affiliates
At March 31, 2021, Sempra Energy had $676 million in loans due from
unconsolidated affiliates and $299 million in loans due to unconsolidated
affiliates.
California Utilities
SDG&E's and SoCalGas' operations have historically provided relatively stable
earnings and liquidity. Their future performance and liquidity will depend
primarily on the ratemaking and regulatory process, environmental regulations,
economic conditions, actions by the California legislature, litigation and the
changing energy marketplace, as well as 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 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, 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.
COVID-19 Pandemic Protections
The California Utilities are continuing to monitor the impacts of the COVID-19
pandemic on cash flows and results of operations. Some customers have
experienced and continue to experience a 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 become
significant and could require modifications to our financing plans.
The CPUC has required that all energy companies under its jurisdiction,
including the California Utilities, take action to implement several emergency
customer protection measures to support California customers affected by the
COVID-19 pandemic. The California Utilities have implemented certain measures to
assist customers in response to these requirements, including suspending service
disconnections due to nonpayment for residential, small business and
medium-large commercial and industrial customers (which represent the entire
customer population except for SoCalGas' noncore customers), waiving late
payment fees, and offering flexible payment plans to customers experiencing
difficulty paying their electric or gas bills. The customer protection measures
are in place through June 2021 and the CPUC may extend them further.
The CPUC authorized each of the California Utilities to track and request
recovery of incremental costs associated with complying with customer protection
measures implemented by the CPUC related to the COVID-19 pandemic, including
costs associated with suspending service disconnections and uncollectible
expenses that arise from these customers' failure to pay. Although we are
tracking these costs in various regulatory mechanisms, recovery is not assured.
The continuation of these
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circumstances could result in a further reduction in payments received from the
California Utilities' customers and a further increase in uncollectible
accounts, which could become material, and any inability or delay in recovering
all or a substantial portion of these costs could have a material adverse effect
on the cash flows, financial condition and results of operations of Sempra
Energy, SDG&E and SoCalGas. We discuss regulatory mechanisms in Note 4 of the
Notes to Condensed Consolidated Financial Statements.
Disconnection OIR
In June 2020, the CPUC issued a decision addressing service disconnections that,
among other things, allows each of the California Utilities to establish a
two-way balancing account to record the uncollectible expenses associated with
residential customers' inability to pay their electric or gas bills. This
decision also directs the California Utilities to establish an AMP that provides
successfully participating, income-qualified residential customers with relief
from outstanding utility bill amounts and became effective in February 2021. The
California Utilities have recorded increases in their allowances for
uncollectible accounts primarily related to expected forgiveness of outstanding
bill amounts for customers eligible under the AMP. The AMP could result in a
further reduction in payments received from the California Utilities' customers
and a further increase to uncollectible accounts, which could become material,
and any inability to recover these costs could have a material adverse effect on
the cash flows, financial condition and results of operations of Sempra Energy,
SDG&E and SoCalGas.
CCM
A CPUC cost of capital proceeding determines a utility's authorized capital
structure and authorized return on rate base and addresses the CCM. The CCM, if
triggered in 2021, would be effective January 1, 2022, and would automatically
update the California Utilities' authorized cost of debt based on actual costs
and update the California Utilities' authorized ROE. A trigger of the CCM that
requires a downward adjustment beginning January 1, 2022 could materially
adversely affect the results of operations and cash flows of Sempra Energy and,
depending on the CCM that is triggered, SDG&E and SoCalGas. We discuss the CCM
further in Note 4 of the Notes to Consolidated Financial Statements in the
Annual Report.
SDG&E
Wildfire Fund
The carrying value of SDG&E's Wildfire Fund asset totals $385 million at March
31, 2021. 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 participating California electric IOUs may
incur third-party wildfire costs for which they will seek recovery from the
Wildfire Fund. In such a situation, SDG&E may recognize a reduction of its
Wildfire 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
any of the participating IOUs. As a result, if any California electric IOU's
equipment is determined to be a cause of a fire, it could have a material
adverse effect on SDG&E's and Sempra Energy's financial condition and results of
operations up to the carrying value of our Wildfire Fund asset, with additional
potential material exposure if SDG&E's equipment is determined to be a cause of
a fire. In addition, the Wildfire Fund could be completely exhausted due to
fires in the other California electric IOUs' service territories, by fires in
SDG&E's service territory or by a combination thereof. In the event that the
Wildfire Fund is materially diminished, exhausted or terminated, SDG&E will lose
the protection afforded by the Wildfire Fund, and as a consequence, a fire in
SDG&E's service territory could cause a material adverse effect on SDG&E's and
Sempra Energy's cash flows, results of operations and financial condition.
Franchise Agreement
In December 2020, the City of San Diego and SDG&E agreed to extend the natural
gas and electric franchises to June 1, 2021. The extension is intended to
provide newly elected officials time to seek public input and additional
information. In March 2021, the City announced a new competitive bid process,
and in April 2021, SDG&E participated in the bid process. SDG&E and the City are
in negotiations to reach an agreement on which the City Council will vote.
SoCalGas
SoCalGas' future performance and liquidity will be impacted by the resolution of
legal, regulatory and other matters concerning the Leak, which we discuss below
and in Note 11 of the Notes to Condensed Consolidated Financial Statements in
this report and in "Part I - Item 1A. Risk Factors" in the Annual Report.
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Aliso Canyon Natural Gas Storage Facility Gas Leak
From October 23, 2015 through February 11, 2016, SoCalGas experienced a natural
gas leak from one of the injection-and-withdrawal wells, SS25, at its Aliso
Canyon natural gas storage facility located in Los Angeles County. In February
2016, CalGEM confirmed that the well was permanently sealed.
Cost Estimates, Accounting Impact and Insurance. At March 31, 2021, SoCalGas
estimates certain costs related to the Leak are $1,627 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
$437 million is accrued as Reserve for Aliso Canyon Costs on SoCalGas' and
Sempra Energy's Condensed Consolidated Balance Sheets.
Except for the amounts paid or estimated to settle certain actions, the cost
estimate does not include litigation, regulatory proceedings 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, civil or administrative 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 by Sempra 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' and Sempra
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. As of March 31, 2021, we recorded the expected
recovery of the cost estimate related to the Leak of $414 million as Insurance
Receivable for Aliso Canyon Costs on SoCalGas' and Sempra Energy's Condensed
Consolidated Balance Sheets. This amount is exclusive of insurance retentions
and $865 million of insurance proceeds we received through March 31, 2021. We
intend to pursue the full extent of our insurance coverage for the costs we have
incurred. Other than insurance for certain future defense costs we may incur as
well as directors' and officers' liability, we have exhausted all of our
insurance in this matter. 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, 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' and Sempra
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 consumer 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, the CPUC has issued a series of directives to
SoCalGas specifying the range of working gas to be maintained in the Aliso
Canyon natural gas storage facility as well as protocols for the withdrawal of
gas, to support safe and reliable natural gas service. In February 2017, the
CPUC opened a proceeding pursuant to the SB 380 OII 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,
including considering alternative means for meeting or avoiding the demand for
the facility's services if it were eliminated.
If the Aliso 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. At March 31, 2021, the Aliso Canyon natural gas storage facility
had a net book value of $840 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' and Sempra Energy's results of operations, financial
condition and cash flows.
Sempra Texas Utilities
Oncor relies on external financing as a significant source of liquidity for its
capital requirements. In the event that Oncor fails to meet its capital
requirements or is unable to access sufficient capital to finance its ongoing
needs, we may elect to make additional capital contributions to Oncor (as our
commitments to the PUCT prohibit us from making loans 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, liquidity, financial condition and prospects. 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
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minority member director determines it is in the best interests of Oncor to
retain such amounts to meet expected future requirements.
Winter Weather Event
In February 2021, ERCOT required transmission companies, including Oncor, to
significantly reduce demand on the grid due to insufficient electricity
generation caused by extreme winter weather, resulting in power outages
throughout ERCOT. As a result of the winter weather event, in February and March
of 2021, the PUCT issued a moratorium on customer disconnections due to
nonpayment and a waiver of certain late payment fees, and it or other
governmental authorities or third parties, including Oncor's customers, have
taken or could take other measures to address financial challenges experienced
as a result of the event, which could adversely impact Oncor's collections and
cash flows and, in turn, could adversely impact Sempra Energy. Legislation has
been proposed in Texas that would impact the ERCOT market, and various
regulatory and governmental entities have commenced investigations or indicated
an intent to investigate the operation of the ERCOT grid during this extreme
winter weather event. Any significant changes relating to the ERCOT market that
impact transmission and distribution utilities as a result of such proceedings
or otherwise could materially adversely impact Oncor. If Oncor does not
successfully respond to these changes and any other legislative, regulatory, or
market or industry developments applicable to it, Oncor could suffer a
deterioration in its results of operations, financial condition, cash flows
and/or prospects, which could materially adversely affect Sempra Energy's
results of operations, financial condition, cash flows and/or prospects.
Sempra Mexico
Construction Projects
Sempra Mexico began commercial operations of its new marine terminal for the
receipt, storage and delivery of refined fuel products in the new port of
Veracruz on March 19, 2021. The terminal has a storage capacity of more than two
million barrels and its customer is Valero Energy Corporation. Sempra Mexico
also completed construction and began commercial operations of a new solar
facility (Border Solar) in Juárez, Chihuahua on March 25, 2021.
Sempra Mexico is currently constructing additional terminals for the receipt,
storage, and delivery of liquid fuels in the vicinity of Mexico City, Puebla and
Topolobampo. Sempra Mexico is also developing terminals for the receipt,
storage, and delivery of liquid fuels in the vicinity of Manzanillo, Guadalajara
and Ensenada. We expect to fund these capital expenditures, investments and
operations 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. We expect the projects under construction to
commence commercial operations on various dates in 2021. However, expected
commencement dates could be delayed by worsening or extended disruptions of
project construction or development caused by the COVID-19 pandemic or other
factors outside our control. Sempra Mexico is continuing to monitor the impacts
of the COVID-19 pandemic on cash flows and results of operations.
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 "Part I - Item 1A. Risk Factors" in the Annual Report.
Legal and Regulatory Matters
As we discuss in Note 11 of the Notes to Condensed Consolidated Financial
Statements, the Guaymas-El Oro segment of the Sonora pipeline has been
inoperable since August 2017. Under an agreement between IEnova and the CFE, the
CFE will resume making payments only when the damaged section of the Guaymas-El
Oro segment of the Sonora pipeline is repaired. If the pipeline is not repaired
by September 14, 2021 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. If IEnova is unable to make
such repairs (which have not commenced) and resume operations in the Guaymas-El
Oro segment of the Sonora pipeline or if IEnova terminates the contract and is
unable to obtain recovery, we may record an impairment of the carrying value of
our investment that could have a material adverse impact on Sempra Energy's
results of operations. At March 31, 2021, the Guaymas-El Oro segment of the
Sonora pipeline had a net book value of $442 million.
In May 2020, the two third-party capacity customers at the ECA Regas Facility,
Shell Mexico and Gazprom, asserted that a 2019 update of the general terms and
conditions for service at the facility, as approved by the CRE, resulted in a
breach of contract by IEnova and a force majeure event. Citing these
circumstances, the customers subsequently stopped making payments of amounts due
under their respective LNG storage and regasification agreements. IEnova has
rejected the customers' assertions and has drawn (and expects to continue to
draw) on the customers' letters of credit provided as payment security. The
parties engaged in discussions under the applicable contractual dispute
resolution procedures without coming to a mutually acceptable resolution. In
July 2020, Shell Mexico submitted a request for arbitration of the dispute and
although Gazprom has joined the proceeding,
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Gazprom has since replenished the amounts drawn on its letter of credit and has
resumed making regular monthly payments under its LNG storage and regasification
agreement and as a consequence IEnova is not currently drawing on its letter of
credit. IEnova intends to avail itself of its available claims, defenses, rights
and remedies in the arbitration proceeding, including seeking dismissal of the
customers' claims. In addition to the arbitration proceeding, Shell Mexico also
filed a constitutional challenge to the CRE's approval of the update to the
general terms and conditions. In October 2020, Shell Mexico's request to stay
the CRE's approval was denied and, subsequently, Shell Mexico filed an appeal of
that decision.
As we discuss in Note 11 of the Notes to Condensed Consolidated Financial
Statements, certain Mexican governmental agencies have issued orders and
regulations that would reduce or limit the renewable energy sector's
participation in the country's energy market. Those orders would, among other
things, create barriers for renewable energy facilities to enter the wholesale
electricity market, threaten the prospects for private-party renewable energy
generation in the country, limit the ability to dispatch renewable energy and to
receive or maintain operation permits, and increase costs of electricity for
legacy renewables and cogeneration energy contract holders. Most of these newly
enacted regulations and policies have been temporarily suspended through
litigation and judicial rulings obtained by businesses operating in the power
sector, including by IEnova. IEnova cannot predict whether it will ultimately be
successful in the ongoing litigation, or whether there will be new regulations
or policies or further amendments to existing regulations with a similar intent
or impact, which could have a material adverse impact on our results of
operations and cash flows, our ability to recover the carrying values of our
renewable energy investments in Mexico, and our prospects for developing new
renewable energy projects in the country.
Acquisition of ESJ
As we discuss in Note 5 of the Notes to Condensed Consolidated Financial
Statements, on March 19, 2021, IEnova increased its ownership interest in ESJ
from 50% to 100% by acquiring Saavi Energía's 50% equity interest in ESJ for a
purchase price of approximately $65 million (net of $14 million of acquired cash
and cash equivalents) plus the assumption of $277 million in debt (including $94
million owed from ESJ to IEnova that eliminates upon consolidation). ESJ owns a
fully operating wind power generation facility with a nameplate capacity of 155
MW that is fully contracted by SDG&E under a long-term PPA. ESJ is constructing
a second wind power generation facility with a nameplate capacity of 108 MW that
we expect will be completed in late 2021 or in the first quarter of 2022.
Exchange Offer
In April 2021, we launched an offer to acquire up to 100% of the publicly held
shares of IEnova in exchange for shares of our common stock at an exchange ratio
of 0.0323 shares of our common stock for each one IEnova ordinary share. We
expect to complete this transaction in the second quarter of 2021, subject to
customary closing conditions. This proposed transaction is subject to a number
of risks that we discuss in "Part I - Item 1A. Risk Factors" in the Annual
Report.
Sempra LNG
Sempra LNG is pursuing development of additional LNG export facilities on the
Gulf Coast and Pacific Coast of North America through its proposed Cameron LNG
JV Phase 2 liquefaction expansion project in Louisiana, ECA LNG liquefaction
export projects in Mexico, and Port Arthur LNG liquefaction export project in
Texas. 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.
Cameron LNG JV Liquefaction Expansion Project (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 for the Phase 2 project include up to two
additional liquefaction trains and up to two additional full containment LNG
storage tanks.
Sempra Energy has entered MOUs with TOTAL SE, Mitsui & Co., Ltd. and Mitsubishi
Corporation that provide a framework for cooperation for the development of and
100% of the offtake from the potential Cameron LNG JV Phase 2 project. The
ultimate participation of and offtake by TOTAL SE, Mitsui & Co., Ltd. and
Mitsubishi Corporation remains subject to negotiation and finalization of
definitive agreements, among other factors, and TOTAL SE, Mitsui & Co., Ltd. and
Mitsubishi Corporation have no commitment to participate in or enter into
offtake agreements with the Phase 2 project until such definitive agreements are
established.
Expansion of the Cameron LNG JV 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 Phase 1
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
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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 is no assurance that the Cameron
LNG JV members will unanimously agree in a timely manner or at all on an
expansion structure, which, if not accomplished, would materially and adversely
impact the development of the Phase 2 expansion project. In light of this and
other considerations, we are unable to predict whether or when Cameron LNG JV
might be able to move forward on the Phase 2 expansion of the Cameron LNG JV
liquefaction facility beyond the first three trains.
The development of the potential Cameron LNG JV Phase 2 expansion project is
subject to numerous other risks and uncertainties, including securing binding
customer commitments; reaching unanimous agreement with our partners to proceed;
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 positive final investment decision; and other factors associated with this
potential investment. For a discussion of these risks, see "Part I - Item 1A.
Risk Factors" in the Annual Report.
ECA LNG Liquefaction Export Projects
Sempra LNG and IEnova are developing two natural gas liquefaction export
projects at IEnova's existing ECA Regas Facility. The liquefaction export
projects, which are planned for development in two phases (a mid-scale project
by ECA LNG Phase 1 that is under construction and a proposed large-scale project
by ECA LNG Phase 2), are being developed to provide buyers with direct access to
North American west coast LNG supplies. We do not expect the construction of the
ECA LNG Phase 1 project to disrupt operations at the ECA Regas Facility.
However, construction of the ECA LNG Phase 2 project would conflict with the
current operations at the ECA Regas Facility, which currently has 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
Phase 2 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 have planned measures to limit disruption of operations at the ECA Regas
Facility with the construction of the ECA LNG Phase 1 project.
In March 2019, ECA LNG received two authorizations from the DOE to export
U.S.-produced natural gas to Mexico and to re-export LNG to non-FTA countries
from its ECA LNG Phase 1 project, which is a one-train natural gas liquefaction
facility with a nameplate capacity of 3.25 Mtpa and initial offtake capacity of
approximately 2.5 Mtpa that is under construction, and its proposed ECA LNG
Phase 2 project that is in development.
In April 2020, ECA LNG Phase 1 executed definitive 20-year LNG sale and purchase
agreements with Mitsui & Co., Ltd. for approximately 0.8 Mtpa of LNG and with an
affiliate of TOTAL SE for approximately 1.7 Mtpa of LNG. In December 2020, an
affiliate of TOTAL SE acquired a 16.6% ownership interest in ECA LNG Phase 1,
with Sempra LNG and IEnova each retaining a 41.7% ownership interest. Our MOU
with Mitsui & Co., Ltd. provides a framework for Mitsui & Co., Ltd.'s potential
offtake of LNG from, and potential acquisition of an equity interest in, ECA LNG
Phase 2.
In February 2020, we entered into an EPC contract with Technip Energies for the
engineering, procurement and construction of the ECA LNG Phase 1 project. Since
reaching a positive final investment decision with respect to the project in
November 2020, we released Technip Energies to commence work to construct the
ECA LNG Phase 1 project. The total price of the EPC contract is estimated at
approximately $1.5 billion. We estimate that capital expenditures will
approximate $2.0 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.
In December 2020, ECA LNG Phase 1 entered into a five-year loan agreement for an
aggregate principal amount of up to $1.6 billion, of which $119 million was
outstanding at March 31, 2021. Proceeds from the loan are being used to finance
the cost of construction of the ECA LNG Phase 1 project. We discuss the details
of this loan in Note 7 of the Notes to Condensed Consolidated Financial
Statements in this report and in Note 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
The construction of the ECA LNG Phase 1 project and the development of the
potential ECA LNG Phase 2 project are subject to numerous risks and
uncertainties. For Phase 1, these include maintaining permits and regulatory
approvals; construction delays; securing and maintaining commercial
arrangements, such as gas supply and transportation agreements; and other
factors associated with the project and its construction. For Phase 2, these
include obtaining binding customer commitments; the receipt of a number of
permits and regulatory approvals; obtaining financing; negotiating and
completing suitable commercial agreements, including a definitive EPC contract,
equity acquisition and governance agreements, LNG sales agreements and gas
supply and transportation agreements; reaching a positive 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 or
permit challenges, or an extended dispute with existing customers at the ECA
                                       93
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Regas Facility, could materially adversely affect the development of these
projects and Sempra Energy's financial condition, results of operations, cash
flows and prospects, including the impairment of all or a substantial portion of
the capital costs invested in the projects to date. For a discussion of these
risks, see "Part I - Item 1A. Risk Factors" in the Annual Report.
Port Arthur LNG Liquefaction Export Project
Sempra LNG is developing a proposed natural gas liquefaction export project on a
greenfield site that it owns in the vicinity of Port Arthur, Texas, located
along the Sabine-Neches waterway. Sempra LNG received authorizations from the
DOE in August 2015 and May 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.
In April 2019, the FERC approved the siting, construction and operation of the
proposed Port Arthur LNG liquefaction facility, along with certain natural gas
pipelines, including the Louisiana Connector and Texas Connector Pipelines, that
could be used to supply feed gas to the liquefaction facility, assuming the
project is completed. In February 2020, Sempra LNG filed a FERC 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.
In February 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 have the option to fully release Bechtel to perform all of the work
to construct the Port Arthur LNG liquefaction export project only after we reach
a positive final investment decision with respect to the project and after
certain other conditions are met, including obtaining project financing. In
December 2020, we amended and restated the EPC contract to reflect an estimated
price of approximately $8.7 billion, depending on the timing of a full notice to
proceed, which, if not issued by July 15, 2021, will require renegotiation of
the EPC contract. Any changes to the EPC contract will require the agreement of
both parties, which cannot be assured.
In December 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 export 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 the Port
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.
In May 2019, Aramco Services Company and Sempra LNG signed a Heads of Agreement
for the negotiation of a definitive 20-year LNG sale and purchase agreement for
5 Mtpa of LNG offtake from the Port Arthur LNG liquefaction export project. The
Heads of Agreement also includes the negotiation of a potential 25% equity
investment in the project. In January 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.
In November 2019, Port Arthur LNG commenced the relocation and upgrade of
approximately three miles of highway where the Port Arthur LNG liquefaction
export project would be located.
We continue to progress development of the proposed Port Arthur LNG liquefaction
export project. Given the impact of the COVID-19 pandemic on the global economy
and remaining uncertainties in the energy markets, we are working with our
partners and customers to evaluate the timing of a final investment decision. At
this time, we do not expect to make a final investment decision in 2021.
Development of the Port Arthur LNG liquefaction export 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
positive final investment decision; and other factors associated with the
potential investment. An unfavorable outcome with respect to any of these
factors could have a material adverse effect on Sempra Energy's financial
condition, results of operations and prospects, including the impairment of
                                       94

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all or a substantial portion of the capital costs invested in the project to
date. For a discussion of these risks, see "Part I - Item 1A. Risk Factors" in
the Annual Report.

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