SOUTHERN CALIFORNIA GAS COMPANY This combined MD&A for Sempra, SDG&E and SoCalGas should be read 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 is aCalifornia -based holding company with energy infrastructure investments inNorth America . Our businesses invest in, develop and operate energy infrastructure, and provide electric and gas services to customers through regulated public utilities. In the fourth quarter of 2021, we formedSempra Infrastructure , which resulted in a change to our reportable segments. Historical segment disclosures have been restated to conform with the current presentation of our four reportable segments, which 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. 87
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RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
?Overall results of operations of Sempra;
?Segment results;
?Significant changes in revenues, costs and earnings; and
?Impact of foreign currency and inflation rates on results of operations.
OVERALL RESULTS OF OPERATIONS OF SEMPRA
Sempra's overall results of operations for the three months ended (Q3) and nine
months ended (YTD)
OVERALL RESULTS OF OPERATIONS OF SEMPRA (Dollars and shares in millions, except per share amounts)
[[Image Removed: sre-20220930_g4.jpg]][[Image Removed: sre-20220930_g5.jpg]][[Image Removed: sre-20220930_g6.jpg]]
Our earnings (losses) and diluted EPS were impacted by variances discussed below in "Segment Results."
SEGMENT RESULTS
This section presents earnings (losses) by Sempra segment, as well as Parent and
other, and a related discussion of the changes in segment earnings (losses).
Throughout the MD&A, our reference to earnings (losses) represents earnings
(losses) attributable to common shares. Variance amounts presented are the
after-tax earnings (losses) impact (based on applicable statutory tax rates),
unless otherwise noted, and before NCI, where applicable.
SEMPRA EARNINGS (LOSSES) BY SEGMENT
(Dollars in millions)
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
SDG&E $ 271 $ 205 $ 681 $ 603
SoCalGas (82) (1,126) 339 (625)
Sempra Texas Utilities 256 206 604 479
Sempra Infrastructure 114 164 392 419
Parent and other(1) (74) (97) (360) (226)
Earnings (losses) attributable to common
shares $ 485 $
(648)
(1) Includes intercompany eliminations recorded in consolidation and certain corporate costs.
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SDG&E
The increase in earnings of
?
?
?
The increase in earnings of
?
?
?
?
?
SoCalGas
The decrease in losses of
?
?
?
Earnings of
?
?
?
?
The increase in earnings of
?higher revenues from higher customer consumption attributable to weather and customer growth and rate updates to reflect increases in invested capital; and
?higher revenues from an annual energy efficiency program performance bonus approved in the third quarter of 2022 compared to the fourth quarter of 2021; offset by
?higher depreciation, property taxes and interest expense attributable to invested capital; and
?higher operation and maintenance expense.
The increase in earnings of
?higher revenues from rate updates to reflect increases in invested capital and higher customer consumption attributable to weather and customer growth; and
?higher revenues from an annual energy efficiency program performance bonus approved in the third quarter of 2022 compared to the fourth quarter of 2021; offset by
?higher depreciation, property taxes and interest expense attributable to invested capital; and
?higher operation and maintenance expense.
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The decrease in earnings of
?$65 million earnings attributable to NCI in 2022 compared to$5 million in 2021 primarily due to the sale of a 20% NCI inSI Partners to KKR inOctober 2021 and the sale of a 10% NCI inSI Partners to ADIA inJune 2022 , offset by the increase in our ownership interest in IEnova; ?$27 million unfavorable impact from foreign currency and inflation effects on our monetary positions inMexico , net of foreign currency derivative effects, comprised of a$3 million favorable impact in 2022 compared to a$30 million favorable impact in 2021;
?
?
?
?
?
?
The decrease in earnings of
?$187 million earnings attributable to NCI in 2022 compared to$49 million in 2021 primarily due to the sale of a 20% NCI inSI Partners to KKR inOctober 2021 and the sale of a 10% NCI inSI Partners to ADIA inJune 2022 , offset by the increase in our ownership interest in IEnova; ?$65 million unfavorable impact from foreign currency and inflation effects on our monetary positions inMexico , net of foreign currency derivative effects, comprised of a$108 million unfavorable impact in 2022 compared to a$43 million unfavorable impact in 2021; and ?$11 million selling profit on a sales-type lease relating to the commencement of a rail facility lease at theVeracruz terminal in the third quarter of 2021; offset by
?
?
?
?
?$16 million higher earnings from the renewables business due toBorder Solar and the second phase of ESJ being placed in service inMarch 2021 andJanuary 2022 , respectively;
?
?
?$10 million higher earnings due to the start of commercial operations of theVeracruz andMexico City terminals in March and July of 2021, respectively, and remeasurement of operating leases.
Parent and Other
The decrease in losses of
?
?
?
?
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The increase in losses of
?
?
?
?
?
?
?
?
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, SDG&E and SoCalGas.
Utilities Revenues and Cost of Sales
Our utilities revenues include natural gas revenues at SoCalGas and SDG&E andSempra Infrastructure's Ecogas and electric revenues at SDG&E. Intercompany revenues included in the separate revenues of each utility are eliminated in Sempra's Condensed Consolidated Statements of Operations.
SoCalGas and SDG&E 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. 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.
?SoCalGas and SDG&E 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 the difference between customer billings and recorded or
CPUC-authorized amounts. 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.
SoCalGas' and SDG&E's 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 a 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 September
30, Nine months ended
2022 2021 2022 2021
Natural gas revenues:
SoCalGas $ 1,385 $ 1,106 $ 4,879 $ 3,738
SDG&E 209 157 741 585
Sempra Infrastructure 19 17 67 61
Eliminations and adjustments (26) (25) (76) (74)
Total 1,587 1,255 5,611 4,310
Electric revenues:
SDG&E 1,360 1,307 3,672 3,534
Eliminations and adjustments (3) (2) (9) (5)
Total 1,357 1,305 3,663 3,529
Total utilities revenues $ 2,944 $ 2,560 $ 9,274 $ 7,839
Cost of natural gas(1):
SoCalGas $ 441 $ 240 $ 1,577 $ 736
SDG&E 65 37 260 159
Sempra Infrastructure 7 13 21 25
Eliminations and adjustments (8) (8) (23) (28)
Total 505 282 1,835 892
Cost of electric fuel and purchased
power(1):
SDG&E 316 324 806 869
Eliminations and adjustments (9) (12) (43) (41)
Total 307 312 763 828
Total utilities cost of sales $ 812 $ 594 (1) Excludes depreciation and amortization, which are presented separately on the Sempra, 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 SempraCalifornia 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. SEMPRACALIFORNIA AVERAGE COST OF NATURAL GAS (Dollars per thousand cubic feet) Three months endedSeptember 30 ,
Nine months ended
2022 2021 2022 2021
SoCalGas $ 9.46 $ 5.01 $ 7.64 $ 3.46
SDG&E 10.20 5.40 7.74 4.62
In the three months ended
?
•$201 million increase in cost of natural gas sold, which we discuss below,
•$34 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M,
•$26 million higher CPUC-authorized revenues, and
•$17 million higher revenues from incremental and balanced capital projects; and
?
•$28 million increase in cost of natural gas sold, which we discuss below,
•$14 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M, and
•$7 million higher revenues from balanced capital projects.
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In the three months endedSeptember 30, 2022 , our cost of natural gas increased by$223 million to$505 million compared to the same period in 2021 primarily due to:
?
?
In the nine months ended
?
•$841 million increase in cost of natural gas sold, which we discuss below,
•$116 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M,
•$107 million higher CPUC-authorized revenues,
•$50 million higher revenues from incremental and balanced capital projects, and
•$25 million higher revenues associated with impacts resulting from changes in tax laws tracked in the income tax expense memorandum account; and
?
•$101 million increase in cost of natural gas sold, which we discuss below,
•$26 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M,
•$20 million higher revenues from balanced capital projects, and
•$7 million higher CPUC-authorized revenues.
In the nine months endedSeptember 30, 2022 , our cost of natural gas increased by$943 million to$1.8 billion compared to the same period in 2021 primarily due to:
?
?
Electric Revenues and Cost of
In the three months ended
?
?
?
?
?
Our utility cost of electric fuel and purchased power includes utility-owned generation, power purchased from third parties, and net power purchases and sales to the California ISO. In the three months endedSeptember 30, 2022 , the cost of electric fuel and purchased power decreased by$5 million (2%) to$307 million compared to the same period in 2021 primarily due to$8 million at SDG&E from higher sales to the California ISO due to higher market prices offset by higher purchased power from the California ISO due to higher market prices, net of lower customer demand due to departing load now served by CCAs, and higher utility-owned generation costs.
In the nine months ended
?
?
?
?
?
?
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In the nine months endedSeptember 30, 2022 , the cost of electric fuel and purchased power decreased by$65 million (8%) to$763 million compared to the same period in 2021 primarily due to$63 million at SDG&E from higher sales to the California ISO due to higher market prices offset by higher purchased power from the California ISO due to higher market prices, net of lower customer demand due to departing load now served by CCAs, and higher utility-owned generation costs.
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 September 30, Nine months ended September 30,
2022 2021 2022 2021
Revenues:
Sempra Infrastructure $ 678 $ 462 $ 1,743 $ 1,208
Parent and other(1) (5) (9) (33) (34)
Total revenues $ 673 $ 453 $ 1,710 $ 1,174
Cost of sales(2):
Sempra Infrastructure $ 340 $ 219 $ 764 $ 446
Parent and other(1) - 1 - 2
Total cost of sales $ 340 $ 220 $ 764 $ 448
(1) Includes eliminations of intercompany activity.
(2) Excludes depreciation and amortization, which are presented separately on Sempra's Condensed Consolidated Statements of Operations.
In the three months endedSeptember 30, 2022 , revenues from our energy-related businesses increased by$220 million (49%) to$673 million compared to the same period in 2021 primarily due to:
?
•$144 million from higher natural gas prices and lower unrealized losses on commodity derivatives offset by lower volumes, and
•$24 million from higher diversion fees due to higher natural gas prices;
?
?
?
?
In the three months endedSeptember 30, 2022 , the cost of sales for our energy-related businesses increased by$120 million to$340 million compared to the same period in 2021 primarily due to higher natural gas prices related to asset and supply optimization and higher prices at TdM. In the nine months endedSeptember 30, 2022 , revenues from our energy-related businesses increased by$536 million (46%) to$1.7 billion compared to the same period in 2021 primarily due to:
?
•$301 million from higher natural gas prices and lower unrealized losses on commodity derivatives offset by lower volumes, and
•$64 million from higher diversion fees due to higher natural gas prices;
?$65 million higher revenues from TdM mainly due to higher power prices offset by lower volumes from scheduled major maintenance completed inMarch 2022 , which resulted in increased plant reliability; ?$46 million higher revenues from the renewables business due toBorder Solar and the second phase of ESJ being placed in service inMarch 2021 andJanuary 2022 , respectively, the acquisition of ESJ inMarch 2021 and higher transmission rates;
?
?
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In the nine months endedSeptember 30, 2022 , the cost of sales for our energy-related businesses increased by$316 million to$764 million compared to the same period in 2021 primarily due to higher natural gas prices and higher LNG purchases related to asset and supply optimization and higher prices offset by lower volumes from scheduled major maintenance completed inMarch 2022 at TdM. Operation and Maintenance
In the three months ended
?
•$44 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and
•$6 million higher non-refundable operating costs;
?
•$34 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and
•$10 million higher non-refundable operating costs; and
?
•$16 million higher development costs and purchased services,
•$9 million at the transportation business due to higher pipeline and compressor station maintenance and higher administrative costs, and
•$6 million at the refined products terminals due to lower capitalized cost.
In the nine months ended
?
•$116 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and
•$56 million higher non-refundable operating costs;
?
•$93 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and
•$11 million higher non-refundable operating costs; and
?
•$22 million due to the start of commercial operations of the
•$22 million at the transportation business due to higher pipeline and compressor station maintenance and higher administrative costs,
•$21 million higher development costs and purchased services,
•$19 million from the renewables business primarily due to construction repairs and maintenance at Ventika, and
•$11 million higher operating costs at TdM from higher purchased materials and
services due to scheduled major maintenance completed in
•$14 million lower operating cost due to remeasurement of operating leases at the refined products terminals; offset by
?
Aliso Canyon Litigation and Regulatory Matters
In the three months and nine months endedSeptember 30, 2022 , SoCalGas recorded charges of$122 million and$259 million , respectively, relating to litigation and regulatory matters pertaining to the Leak. We describe these charges in Note 11 of the Notes to Condensed Consolidated Financial Statements. In the three months and nine months endedSeptember 30, 2021 , SoCalGas recorded a charge of$1,571 million relating to litigation pertaining to the Leak. 95
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Other (Expense) Income, Net
As part of our central risk management function, we may enter into foreign currency derivatives to hedgeSI Partners' 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 Expense forSI Partners' consolidated entities and in Equity Earnings forSI Partners' equity method investments. We discuss policies governing our risk management in "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report. In the three months endedSeptember 30, 2022 , other expense, net, decreased by$15 million (27%) to$40 million compared to the same period in 2021 primarily due to: ?$1 million net gains in 2022 from impacts associated with interest rate and foreign exchange instruments and foreign currency transactions compared to$20 million net losses in 2021, including:
•$18 million in foreign currency losses in 2021 on a Mexican peso-denominated loan to IMG, which is offset in Equity Earnings, and
•$3 million higher net gains in 2022 on other foreign currency transactional effects;
?
?
?
?
Other expense, net, in the nine months ended
?$60 million investment losses in 2022 compared to$28 million investment gains in 2021 on dedicated assets in support of our executive retirement and deferred compensation plans; and
?
?
•$3 million gains in 2022 on cross-currency swaps compared to$26 million losses in 2021 on foreign currency derivatives and cross-currency swaps as a result of fluctuation of the Mexican peso, and
•$2 million lower foreign currency losses on a Mexican peso-denominated loan to IMG, which is offset in Equity Earnings, offset by
•$7 million losses in 2022 compared to
?
?
Interest Expense In the three months endedSeptember 30, 2022 interest expense increased by$23 million (9%) to$282 million compared to the same period in 2021 primarily due to:
?
?
In the nine months endedSeptember 30, 2022 , interest expense increased by$20 million (3%) to$796 million compared to the same period in 2021 primarily due to:
?
?
?$10 million increase at Parent and other due to higher debt balances due to issuances inMarch 2022 andNovember 2021 , offset by the early redemption of debt securities inDecember 2021 ; offset by
?
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Income Taxes
The table below shows the income tax expense (benefit) and ETRs for Sempra, SDG&E and SoCalGas.
INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES (Dollars in millions)
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Sempra:
Income tax expense (benefit) $ 21 $ (342) $ 435 $ (45)
Income (loss) before income taxes and equity
earnings $ 165 $ (1,365) $ 1,194 $ (316)
Equity earnings, before income tax(1) 134 137 436 457
Pretax income (loss) $ 299 $ (1,228) $ 1,630 $ 141
Effective income tax rate 7 % 28 % 27 % (32) %
SDG&E:
Income tax expense $ 35 $ 90 $ 141 $ 168
Income before income taxes $ 306 $ 295 $ 822 $ 771
Effective income tax rate 11 % 31 % 17 % 22 %
SoCalGas:
Income tax (benefit) expense $ (28) $ (437) $ 75 $ (335)
(Loss) income before income taxes $ (110) $ (1,563) $ 415 $ (959)
Effective income tax rate 25 % 28 % 18 % 35 %
(1) We discuss how we recognize equity earnings in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report.
Sempra
Sempra's income tax expense in the three months ended
?
?
?
?
?
?higher income tax benefit from flow-through items.
Sempra's income tax expense in the nine months ended
?
?
?
?
?
?
?
?higher income tax benefit from flow-through items.
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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
In the three months endedSeptember 30, 2022 , SDG&E's income tax expense decreased by$55 million compared to the same period in 2021 primarily due to higher income tax benefits from flow-through items and$18 million higher income tax benefit from the resolution of prior year income tax items.
In the nine months ended
?higher income tax benefits from flow-through items; and
?
•higher income tax expense from higher pretax income.
SoCalGas
In the three months endedSeptember 30, 2022 , SoCalGas' income tax benefit decreased by$409 million compared to the same period in 2021 primarily due to a$21 million income tax benefit in 2022 compared to a$439 million income tax benefit in 2021 associated with charges relating to litigation and regulatory matters pertaining to the Leak. SoCalGas' income tax expense in the nine months endedSeptember 30, 2022 , compared to an income tax benefit in the same period in 2021 was primarily due to a$60 million income tax benefit in 2022 compared to a$439 million income tax benefit in 2021 associated with charges relating to litigation and regulatory matters pertaining to the Leak.
Equity Earnings
In the three months endedSeptember 30, 2022 , equity earnings increased by$26 million (7%) to$417 million compared to the same period in 2021 primarily due to: ?$50 million higher equity earnings atOncor Holdings due to higher revenues from higher customer consumption attributable to weather and customer growth, rate updates to reflect increases in invested capital, and from an annual energy efficiency program performance bonus approved in the third quarter of 2022 compared to the fourth quarter of 2021, offset by higher depreciation, property taxes and interest expense attributable to invested capital and higher operation and maintenance expense; offset by
?
In the nine months endedSeptember 30, 2022 , equity earnings increased by$96 million (9%) to$1.1 billion compared to the same period in 2021 primarily due to: ?$123 million higher equity earnings atOncor Holdings due to higher revenues from rate updates to reflect increases in invested capital, higher customer consumption attributable to weather and customer growth and from an annual energy efficiency program performance bonus approved in the third quarter of 2022 compared to the fourth quarter of 2021, offset by higher depreciation, property taxes and interest expense attributable to invested capital and higher operation and maintenance expense; and
?
?
?$7 million lower equity earnings at IMG due to higher income tax expense and foreign currency effects, including$2 million lower foreign currency gains on IMG's Mexican peso-denominated loans from its JV owners, which is fully offset in Other (Expense) Income, Net, offset by lower interest expense.
Earnings Attributable to Noncontrolling Interests
In the three months ended
?
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?
In the nine months ended
?
?
Preferred Dividends
In the nine months ended
IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS
Because our natural gas distribution utility inMexico , Ecogas, uses its local currency as its functional currency, revenues and expenses are translated intoU.S. dollars at average exchange rates for the period for consolidation in Sempra'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 "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's comparative results of operations. In the three months and nine months endedSeptember 30, 2022 , the change in our earnings as a result of foreign currency translation rates was negligible compared to the same period in 2021.
Transactional Impacts
Income statement activities at our
TRANSACTIONAL GAINS (LOSSES) FROM FOREIGN CURRENCY AND INFLATION EFFECTS AND ASSOCIATED DERIVATIVES (Dollars in millions)
Transactional gains (losses)
Total reported amounts included in reported amounts
Three months ended
2022 2021 2022 2021
Other (expense) income, net $ (40) $ (55) $ 1 $ (20)
Income tax (expense) benefit (21) 342 4 33
Equity earnings 417 391 (2) 16
Net income (loss) 561 (632) 3 29
Earnings attributable to noncontrolling interests (65) (5) (1) (1)
Earnings (losses) attributable to common shares 485 (648) 2 28
Nine months ended
2022 2021 2022 2021
Other (expense) income, net $ (3)
(435) 45 (80) (8)
Equity earnings 1,118 1,022 (14) -
Net income (loss) 1,877 751 (110) (44)
Earnings attributable to noncontrolling interests (187) (48) 21 3
Earnings (losses) attributable to common shares 1,656 650 (89) (41)
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CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
Sempra
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 theU.S. andMexico 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 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 orders.
For a further discussion of risks and uncertainties related to the COVID-19 pandemic, see "Part I - Item 1A. Risk Factors" in the Annual Report.
Inflation Reduction Act
The IRA was signed into law onAugust 16, 2022 . The IRA includes tax credits and other incentives for energy and climate initiatives and introduces a 15% corporate alternative minimum tax on adjusted financial statement income for tax years beginning afterDecember 31, 2022 . We will continue to assess the impacts of the IRA as theU.S. Department of the Treasury and theU.S. Internal Revenue Service issue guidance. We do not expect the IRA to have a material adverse impact on Sempra's, SDG&E's or SoCalGas' results of operations, financial condition and/or cash flows.
Liquidity
We expect to meet our cash requirements through cash flows from operations, unrestricted cash and cash equivalents, borrowings under or supported by our credit facilities, other incurrences of debt including issuing debt securities and obtaining term loans, distributions from our equity method investments, project financing and funding from minority interest owners. We believe that these cash flow sources, combined with available funds, will be adequate to fund our operations in both the short-term and long-term, including to: ?finance capital expenditures ?repay debt ?fund dividends ?meet liquidity requirements
?fund capital contribution requirements
?fund expenditures related to the Leak
?repurchase shares of our common stock
?fund new business or asset acquisitions or start-ups
Sempra, SDG&E and SoCalGas currently have reasonable access to the money markets and capital markets and are not currently constrained in their ability to borrow money at market rates from commercial banks, under existing revolving credit facilities, through public offerings registered with theSEC , or through private placements of debt supported by our revolving credit facilities in the case of commercial paper. 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 or disruptions to or volatility in the money markets and capital markets worsen. These sources of funding also have become less attractive due to the recent rise in both short-term and long-term interest rates. 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 and other material events, such as the settlement of material litigation. As ofOctober 31, 2022 , SoCalGas had paid$1.79 billion related to the settlement of the Individual Plaintiff Litigation, which we describe in Note 11 of the Notes to Condensed Consolidated Financial Statements. 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 100
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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 goal to maintain our investment-grade credit ratings.
Available Funds
Our committed lines of credit provide liquidity and support commercial paper. AtSeptember 30, 2022 , Sempra, SDG&E and SoCalGas each had five-year credit agreements set to expire in 2024,SI Partners has a three-year credit agreement expiring in 2024 and IEnova has committed lines of credit that expire in 2023 and 2024. In addition, IEnova and ECA LNG Phase 1 have uncommitted revolving credit facilities that expire in 2023. AVAILABLE FUNDS ATSEPTEMBER 30, 2022 (Dollars in millions) Sempra SDG&E
SoCalGas
Unrestricted cash and cash equivalents(1)
8,905 1,500 323
(1) Amounts at Sempra include
(2) Available unused credit is the total available on committed and uncommitted lines of credit that we discuss in Note 7 of the Notes to Condensed Consolidated Financial Statements. 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. InOctober 2022 , Sempra, SDG&E and SoCalGas each entered into a separate five-year credit facilities, all expiring inOctober 2027 . The credit facilities permit borrowings of up to$4.0 billion by Sempra,$1.5 billion by SDG&E and$1.2 billion by SoCalGas. The credit facilities replace Sempra's$3.19 billion credit facility and$1.25 billion credit facility, SDG&E's$1.5 billion credit facility and SoCalGas'$750 million credit facility, which were set to expire in 2024. 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. SDG&E and SoCalGas use short-term debt primarily to meet working capital needs or to help fund event-specific costs, such as payments made by SoCalGas relating to litigation and regulatory matters pertaining to the Leak. Commercial paper, lines of credit and term loans were our primary sources of short-term debt funding in the first nine months of 2022.
We discuss our short-term debt activities in Note 7 of the Notes to Condensed Consolidated Financial Statements and below in "Sources and Uses of Cash."
Long-Term Debt Activities
Significant issuances of and payments on long-term debt in the first nine months of 2022 included the following:
LONG-TERM DEBT ISSUANCES AND PAYMENTS
(Dollars in millions)
Amount at
Issuances: issuance Maturity
Sempra 3.30% fixed rate notes $ 750 2025
Sempra 3.70% fixed rate notes 500 2029
SDG&E variable rate term loan 400 2024
SDG&E 3.00% first mortgage bonds 500 2032
SDG&E 3.70% first mortgage bonds 500 2052
SoCalGas 2.95% fixed rate notes 700 2027
Sempra Infrastructure variable rate notes 178 2025
Sempra Infrastructure 3.25% fixed rate notes 400 2032
Payments: Payments Maturity
SDG&E 1.914% amortizing first mortgage bonds 17 2022
162 2022-2026
Sempra Infrastructure variable rate notes 64 2025
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InSeptember 2022 ,Sempra Infrastructure used proceeds from borrowings against IEnova's committed and uncommitted lines of credit to fully repay$141 million of outstanding principal plus accrued and unpaid interest on the IEnova Pipelines variable-rate loans prior to scheduled maturity dates through 2026, and recognized approximately$2 million ($1 million after tax and NCI) in charges associated with the write-off of acquisition-related fair value adjustments offset by a hedge termination benefit.
We discuss our long-term debt activities, including the use of proceeds on long-term debt issuances, in Note 7 of the Notes to Condensed Consolidated Financial Statements.
Credit Ratings
We provide additional information about the credit ratings of Sempra, 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.
The credit ratings of Sempra, SDG&E and SoCalGas remained at investment grade levels in the first nine months of 2022.
CREDIT RATINGS AT
Sempra 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 stable 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's or any of its subsidiaries' credit ratings or rating
outlooks may, depending on the severity, result in the imposition of financial
and/or other burdensome covenants and 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,
SDG&E, SoCalGas and Sempra's other subsidiaries to issue debt securities, to
borrow under credit facilities and to raise certain other types of financing.
Sempra 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 September 30,
2022 .
Loans with Affiliates
At
Sempra California
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 theCalifornia 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, which also supports their commercial paper programs, cash flows from operations, and other incurrences of debt including issuing debt securities and obtaining term loans will continue to be adequate to fund their respective current operations and planned capital expenditures. Additionally, as we discuss below, Sempra elected to make equity contributions to SoCalGas of$800 million inSeptember 2021 ,$150 million inJune 2022 and$500 million inAugust 2022 . These voluntary equity contributions were intended to assist SoCalGas in maintaining its approved capital structure. SDG&E and SoCalGas manage their capital structures 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 or refunded in rates through billings to customers. 102
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COVID-19 Pandemic Protections
SDG&E and SoCalGas 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.
In connection with the COVID-19 pandemic and at the direction of the CPUC, SDG&E and SoCalGas implemented a number of measures to assist customers, including automatically enrolling residential and small business customers with past-due balances in long-term repayment plans. In 2021, SDG&E and SoCalGas applied, on behalf of their customers, for financial assistance from theCalifornia Department of Community Services and Development under the California Arrearage Payment Program, which provided funds of$63 million and$79 million for SDG&E and SoCalGas, respectively. In the first quarter of 2022, SDG&E and SoCalGas received and applied the amounts directly to eligible customer accounts to reduce past due balances. InJune 2022 , AB 205 was approved establishing, among other things, the 2022 California Arrearage Payment Program. SDG&E and SoCalGas have applied for funding from this program on behalf of their residential customers with past due balances and, if approved, may receive up to$51 million and$59 million , respectively, of such funding in the first quarter of 2023. SDG&E
Authorized Cost of Capital, Subject to the CCM
As we discuss in Note 4 of the Notes to Condensed Consolidated Financial Statements, inDecember 2019 , the CPUC approved the cost of capital for SDG&E and SoCalGas that became effective onJanuary 1, 2020 and will remain in effect throughDecember 31, 2022 , subject to the CCM. For the measurement period that endedSeptember 30, 2021 , the CCM would trigger for SDG&E if the CPUC determines that the CCM should be implemented because the average Moody's Baa- utility bond index betweenOctober 1, 2020 andSeptember 30, 2021 was 1.17% below SDG&E's CCM benchmark rate of 4.498%. InAugust 2021 , SDG&E filed an application with the CPUC to update its cost of capital due to the ongoing effects of the COVID-19 pandemic rather than have the CCM apply. InDecember 2021 , the CPUC established a proceeding to determine if SDG&E's cost of capital was impacted by an extraordinary event such that the CCM should not apply.
In
We further discuss the CCM in "Part I - Item 1A. Risk Factors" in the Annual Report.
Wildfire Fund The carrying value ofSDG&E's Wildfire Fund asset totals$339 million atSeptember 30, 2022 . We describe the Wildfire Legislation and related accounting treatment and SDG&E's commitment to make annual shareholder contributions to theWildfire Fund through 2028 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 costs for which they will seek recovery from theWildfire Fund with respect to wildfires that have occurred since enactment of the Wildfire Legislation inJuly 2019 . In such a situation, SDG&E may recognize a reduction of itsWildfire Fund asset and record an impairment charge against earnings when there is a reduction of the available coverage due to recoverable claims from any of the participating IOUs. PG&E has indicated that it will seek reimbursement from theWildfire Fund for losses associated with the Dixie Fire, which burned fromJuly 2021 throughOctober 2021 and was reported to be the largest single wildfire (measured by acres burned) inCalifornia history. 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 and Sempra's financial condition and results of operations up to the carrying value of ourWildfire Fund asset, with additional potential material exposure if SDG&E's equipment is determined to be a cause of a fire. 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 have a material adverse effect on SDG&E's and Sempra's results of operations, financial condition, cash flows and/or prospects.
Wildfire Cost Recovery Mechanism
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InJuly 2021 , SDG&E filed a request with the CPUC to establish an interim cost recovery mechanism that would recover in rates 50% of its wildfire mitigation plan costs. The proposed recovery would be incremental to wildfire costs currently authorized in its GRC and would be subject to reasonableness review. InMay 2022 , the CPUC issued a final decision denying SDG&E's request and directing SDG&E to file for the review and recovery of its wildfire mitigation plan costs through its next GRC or a separate application. SDG&E expects to submit separate requests in its GRC for review and recovery of its wildfire mitigation plan costs in mid-2023 for costs incurred from 2019 through 2022 and in mid-2024 for costs incurred in 2023.
Off-Balance Sheet Arrangements
SDG&E has entered into PPAs and tolling agreements that are variable interests in unconsolidated entities. We discuss variable interests in Note 1 of the Notes to Condensed Consolidated Financial Statements.
SoCalGas
SoCalGas' future performance and liquidity may be impacted by the resolution of legal, regulatory and other matters pertaining to 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.
Aliso Canyon Natural Gas Storage Facility Gas Leak
From
Cost Estimate, Insurance and Accounting and Other Impacts. AtSeptember 30, 2022 , SoCalGas estimates certain costs related to the Leak are$3,485 million (the cost estimate), including$1,279 million of costs recoverable from insurance, all of which had been received by SoCalGas as ofOctober 31, 2022 . Other than insurance for directors' and officers' liability, we have exhausted all of our available insurance for this matter. AtSeptember 30, 2022 ,$145 million of the cost estimate is accrued in Reserve for Aliso Canyon Costs and$4 million of the cost estimate is accrued in Deferred Credits and Other on SoCalGas' and Sempra's Condensed Consolidated Balance Sheets. Sempra elected to make equity contributions to SoCalGas of$800 million inSeptember 2021 ,$150 million inJune 2022 and$500 million inAugust 2022 . These voluntary equity contributions were intended to assist SoCalGas in maintaining its approved capital structure. As ofOctober 31, 2022 , SoCalGas had paid$1.79 billion related to the settlement of the Individual Plaintiff Litigation. SoCalGas funded the settlement payment using a combination of equity contributions from Sempra, short-term debt and cash on hand. Except for the amounts paid or estimated to settle certain legal and regulatory matters, the cost estimate does not include any amounts necessary to resolve the matters that we describe in "Litigation - Unresolved" and "Regulatory Proceedings - Unresolved" in Note 11 of the Notes to Condensed Consolidated Financial Statements, threatened litigation, other potential litigation or other costs, in each case to the extent it is not possible to predict at this time the outcome of these actions or reasonably estimate the possible costs or a range of possible costs for damages, restitution, civil or administrative fines or penalties, defense, settlement or other costs or remedies that may be imposed or incurred. Further, we are not able to reasonably estimate the possible loss or a range of possible losses in excess of the amounts accrued. The costs or losses not included in the cost estimate could be significant. An adverse outcome with respect to (i) any lawsuits by the Remaining Individual Plaintiffs, (ii) the unresolved shareholder derivative actions, (iii) threatened or other potential litigation related to the Leak, (iv) the Leak OII if approval of the negotiated settlement is not subsequently obtained, or (v) the unresolved proceeding pursuant to the SB 380 OII that we discuss below, could have a material adverse effect on SoCalGas' and Sempra's results of operations, financial condition, cash flows and/or prospects. 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 component 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 theAliso Canyon natural gas storage facility as well as protocols for the withdrawal of gas, to support safe and reliable natural gas service. InFebruary 2017 , the CPUC opened a proceeding pursuant to the SB 380 OII to determine the feasibility of minimizing or eliminating the use of theAliso 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. AtSeptember 30, 2022 , theAliso Canyon natural gas storage facility had a net book value of$923 million . 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, we may record an impairment of the facility, which could be material, incur materially higher than 104
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expected operating costs and/or be required to make material additional capital expenditures (any or all of which may not be recoverable in rates), and natural gas reliability and electric generation could be jeopardized.
Franchise Agreement
InDecember 2021 , theLos Angeles City Council awarded SoCalGas a new, 21-year natural gas franchise following an invitation for bids, which was approved and signed by theCity of Los Angeles mayor inJanuary 2022 . The 21-year term consists of an initial 13-year term from the effective date, followed by an 8-year term that theCity of Los Angeles has the option to terminate. Among other conditions, the new franchise agreement was subject to CPUC approval of the rates and surcharges therein for it to become effective, which SoCalGas received inMarch 2022 . Consistent with its terms, the new agreement went into effect onMay 1, 2022 , until which time SoCalGas continued to serve customers located in theCity of Los Angeles in accordance with the agreement that expired onDecember 31, 2021 , by operation of law.
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 reduce the cash available to us for other purposes, increase our indebtedness and ultimately materially adversely affect our results of operations, financial condition, cash flows and/or prospects. Oncor's ability to make distributions may be limited by factors such as its credit ratings, regulatory capital requirements, increases in its capital plan, debt-to-equity ratio approved by the PUCT and other restrictions and considerations. In addition, Oncor will not make distributions 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.
Off-Balance Sheet Arrangement
Our investment in
Sempra Infrastructure expects to fund capital expenditures, investments and operations in part with available funds, including credit facilities, and cash flows from operations of theSempra Infrastructure businesses. We expectSempra Infrastructure will require additional funding for the development and expansion of its portfolio of projects, which may be financed through a combination of funding from the parent and minority interest owners, bank financing, issuances of debt, project financing and partnering in JVs. OnJune 1, 2022 , we completed the sale of a 10% NCI inSI Partners to ADIA for cash proceeds of$1.7 billion . We used a portion of the proceeds from the sale to ADIA to repay commercial paper borrowings used to repurchase$750 million in shares of our common stock ($300 million of which was completed in the fourth quarter of 2021,$200 million of which was completed in the first quarter of 2022 and$250 million of which was completed in the second quarter of 2022), and we used the remaining proceeds to help fund capital expenditures atSempra California and Sempra Texas Utilities and to further strengthen our balance sheet. Following the closing of the ADIA transaction, Sempra, KKR and ADIA directly or indirectly own a 70%, 20%, and 10% interest, respectively, inSI Partners . The sale of NCI inSI Partners to ADIA has reduced our ownership interest inSI Partners and requires us to involve a new minority partner in making certain business decisions. Moreover, the decrease in our ownership ofSI Partners also decreases our share of the cash flows, profits and other benefits these businesses currently or may in the future produce.
In the nine months ended
LNG and Net-Zero Solutions
In 2022 to date,
?PGNiG for a 20-year term for 2 Mtpa of LNG from the proposed Cameron LNG JV liquefaction expansion project (Cameron LNG JV Phase 2 project) and 1 Mtpa from the proposed PA LNG Phase 1 project. ?INEOS Energy Trading Ltd. , a subsidiary ofINEOS Ltd. , for a 20-year term for approximately 1.4 Mtpa of LNG from the proposed PA LNG Phase 1 project or the proposed Cameron LNG JV Phase 2 project, with amounts to be allocated between the two projects atSempra Infrastructure's election. 105
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?
?ConocoPhillips for a 20-year term for 5 Mtpa of LNG from the proposed PA LNG Phase 1 project. The HOA is further discussed below.
The ultimate participation in and offtake from the proposed projects remain subject to negotiation and finalization of definitive agreements, among other factors, and the HOAs do not commit any party to enter into definitive agreements with respect to any of the applicable proposed projects.
Cameron LNG JV Liquefaction Expansion Project . Cameron LNG JV is developing a proposed expansion project that would add one liquefaction train with an expected maximum production capacity of approximately 6.75 Mtpa and would increase the production capacity of the existing three trains by up to approximately 1 Mtpa through debottlenecking activities. The Cameron LNG JV site can accommodate additional trains beyond the proposed Cameron LNG JV Phase 2 project. Cameron LNG JV previously received major permits and FTA and non-FTA approvals associated with the potential expansion that included up to two additional liquefaction trains and up to two additional full containment LNG storage tanks. InJanuary 2022 , Cameron LNG JV filed an amendment, subject to approval by theFERC , to modify the permits to allow the use of electric drives, instead of gas turbine drives, which would reduce overall emissions. The amendment, if approved, would also change the design from a two-train gas turbine expansion to a one-train electric drive expansion along with other design enhancements that, together, are expected to result in a more cost-effective and efficient facility, while also reducing overall greenhouse gas emissions.Sempra Infrastructure and the other Cameron LNG JV partners, namely affiliates of TotalEnergies SE, Mitsui & Co., Ltd. andJapan LNG Investment, LLC , a company jointly owned by Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha, have entered into an HOA for the potential development of the Cameron LNG JV Phase 2 project. The HOA provides a commercial framework for the proposed project, including the contemplated allocation toSempra Infrastructure of 50.2% of the fourth train production capacity and 25% of the debottlenecking capacity from the project under tolling agreements. The HOA contemplates the remaining capacity to be allocated equally to the existing Cameron LNG JV Phase 1 customers.Sempra Infrastructure plans to sell the LNG corresponding to its allocated capacity from the proposed Cameron LNG JV Phase 2 project under long-term SPAs prior to making a final investment decision. The HOA is a non-binding arrangement. The ultimate participation in and offtake bySempra Infrastructure , TotalEnergies SE, Mitsui & Co., Ltd. andJapan LNG Investment, LLC remain subject to negotiation and finalization of definitive agreements, among other factors, and the HOA does not commit any party to enter into definitive agreements with respect to the proposed Cameron LNG JV Phase 2 project.Sempra Infrastructure , the other Cameron LNG JV partners, and Cameron LNG JV have entered into a Phase 2 Project Development Agreement under whichSempra Infrastructure , subject to certain conditions and ongoing approvals by the Cameron LNG JV board, will manage and lead the Cameron LNG JV Phase 2 project development work up to a final investment decision by Cameron LNG JV. Cameron LNG JV, upon the unanimous approval of the Cameron LNG JV board, awarded two FEED contracts, one to Bechtel and the other to a joint venture betweenJGC America Inc. andZachry Industrial Inc. At the conclusion of the resulting competitive FEED process, we expect to select one contractor to be the EPC contractor for the proposed Cameron LNG JV Phase 2 project. In connection with the execution of the Phase 2 Project Development Agreement and the award of the FEED contracts, the Cameron LNG JV board unanimously approved an expansion development budget to fund, subject to the terms of the Phase 2 Project Development Agreement, development work necessary to prepare for a potential final investment decision. 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, scope restrictions on expansion of the project unless appropriate prior consent is obtained from the existing 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. Working under the framework established in the Phase 2 Project Development Agreement,Sempra Infrastructure is targeting completing the FEED work in the summer of 2023 and expects to be in a position to make a final investment decision shortly thereafter. The timing of when or if Cameron LNG JV will receive approval from theFERC to amend its permits and from the existing project lenders to conduct the expansion under its financing agreements is uncertain, and there is no assurance thatSempra Infrastructure will complete the necessary development work or that the Cameron LNG JV members will unanimously agree in a timely manner or at all on making a final investment decision, which, if not accomplished, would materially and adversely impact the development of the Cameron LNG JV Phase 2 project. 106
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The development of the proposed Cameron LNG JV Phase 2 project is subject to numerous other risks and uncertainties, including securing binding customer commitments; reaching unanimous agreement with our partners to proceed; obtaining and maintaining a number of permits and regulatory approvals, including approval from theFERC for amendments to existing permits; securing certain consents under the existing financing agreements and securing sufficient new financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract and definitive Cameron LNG JV tolling 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 Infrastructure is developing two separate natural gas liquefaction export projects at its 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. InMarch 2019 , ECA LNG 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 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 under development. InApril 2020 , ECA LNG Phase 1 executed definitive 20-year SPAs with Mitsui & Co., Ltd. for approximately 0.8 Mtpa of LNG and with an affiliate of TotalEnergies SE for approximately 1.7 Mtpa of LNG. InDecember 2020 , an affiliate of TotalEnergies SE acquired a 16.6% ownership interest in ECA LNG Phase 1, withSempra Infrastructure retaining an 83.4% ownership interest. Our MOUs and/or HOAs with Mitsui & Co., Ltd., TotalEnergies SE, and ConocoPhillips, which we describe below, provide a framework for their potential offtake of LNG from, and potential acquisition of an equity interest in, ECA LNG Phase 2. InFebruary 2020 , we entered into an EPC contract with Technip Energies for the ECA LNG Phase 1 project. Since reaching a positive final investment decision with respect to the project inNovember 2020 , Technip Energies has been working 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 substantially from our estimates. We anticipate ECA LNG Phase 1 to begin producing LNG in time to commence commercial operations, which we expect to occur in the middle of 2025. ECA LNG Phase 1 has a five-year loan agreement with a syndicate of seven external lenders that matures inDecember 2025 for an aggregate principal amount of up to$1.3 billion , of which$455 million was outstanding atSeptember 30, 2022 . 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. We do not expect the construction or operation of the ECA LNG Phase 1 project to disrupt operations at the ECA Regas Facility, and have planned measures to limit disruption of operations should any arise. However, construction of the proposed 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, when 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. 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; the impact of recent and proposed changes to the law inMexico ; and other factors associated with the project and its construction. For the ECA LNG Phase 2 project, 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; the impact of recent and proposed changes to the law inMexico ; 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 could materially adversely affect the development and construction of these projects and Sempra's results of operations, financial condition, cash flows and/or 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. 107
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Port Arthur LNG Liquefaction Export Project .Sempra Infrastructure is developing a proposed natural gas liquefaction export project, to be developed in two phases, on a greenfield site that it owns in the vicinity ofPort Arthur, Texas , located along theSabine -Neches waterway.Sempra Infrastructure received authorizations from theDOE inAugust 2015 andMay 2019 that collectively permit the LNG to be produced from the proposed PA LNG Phase 1 project to be exported to all current and future FTA and non-FTA countries. InFebruary 2020 ,Sempra Infrastructure filed an application with theDOE to permit LNG produced from the proposed PA LNG Phase 2 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 PA LNG Phase 1 project facilities, 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 if and when the project is completed. InFebruary 2020 ,Sempra Infrastructure filed an application, subject to approval by theFERC , for the siting, construction and operation of the proposed PA LNG Phase 2 project, including the potential addition of up to two liquefaction trains. InFebruary 2020 , we entered into an EPC contract with Bechtel for the proposed PA LNG Phase 1 project. The EPC contract contemplates the construction of two liquefaction trains capable of producing, under optimal conditions, up to 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 under the EPC contract, and we may release Bechtel to perform portions of the work pursuant to limited notices to proceed. InOctober 2022 , we amended and restated the EPC contract to reflect an estimated price of approximately$10.5 billion , subject to adjustments. The contract price is valid untilMay 8, 2023 , subject to certain conditions, including timely issuances of limited notices to proceed. While the agreement contemplates issuance of the full notice to proceed byFebruary 8, 2023 , the agreement also includes mechanisms that allow us to delay issuance of the full notice to proceed until up toMay 8, 2023 , subject to certain conditions including a price escalation of up to a maximum of$149 million .Sempra Infrastructure and Bechtel must mutually agree to an adjustment to the contract price if the full notice to proceed is issued afterMay 8, 2023 . Any agreement on such an amendment to the EPC contract by both parties or on favorable terms toSempra Infrastructure cannot be assured. Either party may terminate the EPC contract if the full notice to proceed is not issued byMay 8, 2024 . InJuly 2022 ,Sempra Infrastructure and ConocoPhillips entered into a non-binding HOA to developSempra Infrastructure's proposed PA LNG Phase 1 project and jointly participate in other related energy infrastructure inSoutheast Texas and thePacific Coast ofMexico , including ECA LNG Phase 2. In addition to potential offtake of 5 Mtpa of LNG from the proposed PA LNG Phase 1 project, the HOA also contemplates a 30% equity investment in the proposed PA LNG Phase 1 project by ConocoPhillips and the potential for ConocoPhillips to supply additional natural gas to the proposed facility. We are progressing the development of the proposed PA LNG Phase 1 project, and are targeting a final investment decision in the first quarter of 2023 taking into account market demands given the current geopolitical environment, executing definitive agreements for LNG offtake and equity investments, and obtaining financing. We also continue to evaluate overall opportunities to develop the entirety of thePort Arthur site as well as potential design changes that could reduce overall emissions, including a facility design utilizing electric drives, renewable power sourcing and other technological solutions, which may apply to any future expansions. Development of the Port Arthur LNG liquefaction export project is subject to a number of risks and uncertainties, including obtaining binding customer commitments; identifying suitable project and equity partners; completing the required commercial agreements, such as equity acquisition and governance agreements, LNG sales agreements and gas supply and transportation agreements; securing and maintaining all necessary permits and approvals, including approval from theFERC ; obtaining financing and incentives, such as obtaining property tax abatement; 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's results of operations, financial condition, cash flows and/or prospects, including the impairment of 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.Vista Pacifico LNG Liquefaction Export Project .Sempra Infrastructure is developing Vista Pacifico LNG, a potential natural gas liquefaction, storage, and mid-scale export facility proposed to be located in the vicinity ofTopolobampo inSinaloa, Mexico , under an MOU with the CFE, which was subsequently updated inJuly 2022 , that contemplates the negotiation of definitive agreements that would cover development of Vista Pacifico LNG, as well as a separate natural gas regasification project inLa Paz Baja California Sur , and the potential re-routing of a portion of theGuaymas -El Oro segment of theSonora pipeline and resumption of its operations through mutual agreements between the CFE and theYaqui tribe. The proposed LNG export terminal would be supplied withU.S. natural gas and would use excess natural gas and pipeline capacity on existing pipelines inMexico with the intent of helping to meet growing demand for natural gas and LNG in the Mexican and Pacific markets. InNovember 2020 ,Sempra Infrastructure filed an application with theDOE to permit the export of natural gas toMexico and for LNG 108
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produced from the proposed Vista Pacifico LNG facility to be re-exported to all current and future FTA and non-FTA countries. InApril 2021 , theDOE granted Vista Pacifico's LNG export authorization application for FTA countries. InMarch 2022 , TotalEnergies SE andSempra Infrastructure entered into an MOU that contemplates TotalEnergies SE potentially contracting approximately one-third of the long-term export production of the proposed Vista Pacifico LNG project and potentially participating as a minority partner in the project.
The MOUs related to the proposed Vista Pacifico LNG project are non-binding arrangements. The ultimate participation in and offtake from the proposed project remain subject to negotiation and finalization of definitive agreements, among other factors, and the MOUs do not commit any party to enter into definitive agreements with respect to the project.
The development of the potential Vista Pacifico LNG project (as well as the other projects subject to the MOU with the CFE discussed above) is subject to numerous risks and uncertainties, including securing binding customer commitments; obtaining and maintaining a number of permits and regulatory approvals; securing financing; identifying suitable project partners; negotiating and completing suitable commercial agreements, including definitive EPC contracts, equity acquisition and governance agreements, LNG sales agreements and gas supply and transportation agreements; reaching a positive final investment decision; the impact of recent and proposed changes to the law inMexico ; 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.Hackberry Carbon Sequestration Project .Sempra Infrastructure is developing the potential Hackberry Carbon Sequestration project nearHackberry, Louisiana . This proposed project under development is designed to permanently sequester carbon dioxide from the Cameron LNG JV facilities. In the third quarter of 2021,Sempra Infrastructure filed an application with theU.S. Environmental Protection Agency for a Class VI carbon injection well to advance this project. InMay 2022 ,Sempra Infrastructure , TotalEnergies SE, Mitsui & Co., Ltd. and Mitsubishi Corporation signed a Participation Agreement for the development of the proposed Hackberry Carbon Sequestration project. The Participation Agreement contemplates that the combined Cameron LNG JV Phase 1 and proposed Cameron LNG JV Phase 2 projects would potentially serve as the anchor source for the capture and sequestration of carbon dioxide by the proposed project. It also provides the basis for the parties to enter into a JV withSempra Infrastructure for the Hackberry Carbon Sequestration project. The development of the potential Hackberry Carbon Sequestration project is subject to numerous risks and uncertainties, including obtaining required consents from the Cameron LNG JV partners, securing binding customer commitments; identifying suitable project partners; obtaining and maintaining a number of permits and regulatory approvals; securing financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract, and 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. Off-Balance Sheet Arrangements. Our investment in Cameron LNG JV is a variable interest in an unconsolidated entity. We discuss variable interests in Note 1 of the Notes to Condensed Consolidated Financial Statements. InJune 2021 , Sempra provided a promissory note, which constitutes a guarantee, for the benefit of Cameron LNG JV with a maximum exposure to loss of$165 million . The guarantee will terminate upon full repayment of Cameron LNG JV's debt, scheduled to occur in 2039, or replenishment of the amount withdrawn bySempra Infrastructure from the SDSRA. We discuss this guarantee in Note 6 of the Notes to Condensed Consolidated Financial Statements. InJuly 2020 , Sempra entered into a Support Agreement, which contains a guarantee and represents a variable interest, for the benefit of CFIN with a maximum exposure to loss of$979 million . The guarantee will terminate upon full repayment of the guaranteed debt by 2039, including repayment following an event in which the guaranteed debt is put to Sempra. We discuss this guarantee in Notes 1, 6 and 9 of the Notes to Condensed Consolidated Financial Statements.
Energy Networks
Construction Projects.Sempra Infrastructure completed construction of additional terminals for the receipt, storage, and delivery of liquid fuels in the vicinity ofPuebla andTopolobampo .Sempra Infrastructure is also developing terminals for the receipt, storage, and delivery of liquid fuels in the vicinity ofManzanillo andEnsenada . As part of an industrywide audit and investigative process initiated by the CRE to enforce fuel procurement laws, federal prosecutors conducted inspections at several refined products terminals, includingSempra Infrastructure's refined products terminal inPuebla , to confirm that the gasoline and/or diesel in storage were legally imported. During the inspection of thePuebla terminal inSeptember 2021 , a federal prosecutor took samples from all the train and storage tanks in the terminal and ordered that the facility be temporarily shut down during the pendency of the analysis of the samples and investigation, while leaving the terminal inSempra Infrastructure's custody. InNovember 2021 , the CRE notifiedSempra Infrastructure that it had started a 109
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process to revokeSempra Infrastructure's storage permit at thePuebla terminal. InDecember 2021 ,Sempra Infrastructure filed its response to the CRE. InMay 2022 , the CRE provided a final resolution that stopped the permit revocation process. InAugust 2022 , the federal prosecutor concluded the investigation and lifted the order that had temporarily shut down the facility. Commissioning activities were restarted, and commercial operations commenced inOctober 2022 . Construction of theTopolobampo terminal was completed inMay 2022 , at which time commissioning activities commenced. We expect theTopolobampo terminal will commence commercial operations in the first quarter of 2023, subject to the receipt of pending permits.
Expected commencement dates could be delayed by worsening or extended
disruptions of project construction caused by factors outside our control,
including the COVID-19 pandemic.
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.
Construction Projects. ESJ completed construction and began commercial operations of a second, 108-MW wind power generation facility onJanuary 15, 2022 . This second wind power generation facility is fully contracted by SDG&E under a long-term PPA expiring in 2042. InMarch 2022 , TotalEnergies SE andSempra Infrastructure entered into a non-binding MOU that provides a framework for cooperation in the development of North American renewable energy projects. The MOU includes the potential acquisition by TotalEnergies SE of a targeted 30% equity interest in certain renewable and energy storage development projects that are under development bySempra Infrastructure inNorthern Mexico . The ultimate participation of TotalEnergies SE remains subject to negotiation and finalization of definitive agreements, among other factors, and TotalEnergies SE andSempra Infrastructure have no commitment to participate in any or all these projects unless such definitive agreements are established.
Acquisition of ESJ. As we discuss in Note 5 of the Notes to Condensed
Consolidated Financial Statements, in
Legal and Regulatory Matters
See Note 11 of the Notes to Condensed Consolidated Financial Statements for
discussions of the following legal and regulatory matters affecting our
operations in
EnergíaCosta Azul ? Land Disputes
? Environmental and Social Impact Permits
One or more unfavorable final decisions on these land disputes or environmental and social impact permit challenges could materially adversely affect our existing natural gas regasification operations and proposed natural gas liquefaction projects at the site of the ECA Regas Facility and have a material adverse effect on Sempra's business, results of operations, financial condition, cash flows and/or prospects. Sonora Pipeline ? Guaymas-El Oro Segment Our investment in theGuaymas -El Oro segment of theSonora pipeline could be subject to impairment ifSempra Infrastructure is unable to make certain repairs (which have not commenced) or re-route a portion of the pipeline (which has not been agreed to by the parties, but is subject to negotiation pursuant to a non-binding MOU and a Shareholders' Agreement that remains subject to regulatory and corporate authorizations) and resume operations or ifSempra Infrastructure terminates the contract and is unable to obtain recovery. Any such occurrence could have a material adverse effect on Sempra's business, results of operations, financial condition, cash flows and/or prospects.
Regulatory and Other Actions by the Mexican Government
? Offtakers of Legacy Generation Permits ? Amendments toMexico's Electricity Industry Law ? Amendments toMexico's Hydrocarbons Law 110
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Sempra Infrastructure and other parties affected by these resolutions, orders, decrees, regulations and proposed amendments to Mexican law have challenged them by filing amparo and other claims, some of which have been granted injunctive relief. The court-ordered injunctions or suspensions provide temporary relief untilMexico's federal district court orSupreme Court ultimately resolves the amparo and other claims. An unfavorable decision on one or more of these amparo or other challenges, the potential for extended disputes, or the possibility of future reforms to the energy industry through further amendments to Mexican laws or rules may impact our ability to operate our facilities at existing levels or at all, may result in increased costs forSempra Infrastructure and its customers, may adversely affect our ability to develop new projects, may result in decreased revenues and cash flows, and may negatively impact our ability to recover the carrying values of our investments inMexico , any of which may have a material adverse effect on our business, results of operations, financial condition, cash flows and/or prospects.
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) Nine months ended September 30, Sempra SDG&E SoCalGas 2022$ 1,455 $ 1,368 $ (762) 2021 2,981 1,024 1,037 Change$ (1,526) $ 344 $ (1,799)
Net decrease in Reserve for Aliso Canyon Costs, current
and noncurrent, due to
$ (3,360) $ (3,360)
Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets)
(453) $ 67 (520)
Change in income taxes receivable/payable, net (224) 12 35
Lower distributions received from Cameron LNG JV (108)
Increase in purchases of GHG allowances (92) (31) (45)
Change in inventory (55) (109)
Change in customer deposits 73 28 37
Funds fully drawn against Gazprom's letters of credit, net of amounts applied
89
Change in net margin posted 99
Higher GHG emission obligations 110 15 97
Change in accounts payable 150 162
Change in accounts receivable 296 (32) 170
Higher proceeds received from Insurance Receivable for
319 319
Higher net income, adjusted for noncash items included in
earnings 1,658 131 1,544
Other (28) (8) 33
$ (1,526) $ 344 $ (1,799)
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CASH FLOWS FROM INVESTING ACTIVITIES (Dollars in millions) Nine months ended September 30, Sempra SDG&E SoCalGas 2022$ (3,183) $ (1,643) $ (1,394) 2021 (3,456) (1,553) (1,417) Change$ 273 $ (90) $ 23 Repayment of note receivable from IMG$ 626 Decrease (increase) in capital expenditures 66
65
Contributions to Cameron LNG JV in 2022 (19)
Higher contributions to Oncor Holdings (105)
Distributions from Oncor Holdings in 2021 (361)
Other 1 1
$ 273 $ (90) $ 23
CASH FLOWS FROM FINANCING ACTIVITIES
(Dollars in millions)
Nine months ended September 30, Sempra SDG&E SoCalGas
2022 $ 1,936 $ 469 $ 2,172
2021 397 506 602
Change $ 1,539 $ (37) $ 1,570
Higher issuances of long-term debt $ 2,893 $ 650 $ 697
Higher (lower) issuances of short-term debt with
maturities greater than 90 days 1,826 (375) 800
Proceeds from sale of NCI to ADIA in 2022, net of
1,719
Lower payments on long-term debt and finance leases 1,245 565
Lower purchases of noncontrolling interests 221 Lower preferred dividends paid 55 Lower equity contributions from Sempra Energy (150) (Higher) lower common dividends paid (89) (100) 75
Distributions to
(146)
Higher repurchases of common stock (439)
Higher payments for commercial paper and other
short-term debt with maturities greater than 90 days (2,295) (375)
Change in borrowings and repayments of short-term debt,
net (3,437) (401) 155
Other (14) (1) (7)
$ 1,539 $ (37) $ 1,570
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Capital Expenditures, Investments and Acquisitions
EXPENDITURES FOR PP&E, INVESTMENTS AND ACQUISITIONS
(Dollars in millions)
Nine months ended September 30,
2022 2021
SDG&E $ 1,651 $ 1,560
SoCalGas 1,394 1,417
Sempra Texas Utilities 256 151
Sempra Infrastructure 508 687
Parent and other 6 7
Total $ 3,815 $ 3,822
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, the FERC and the PUCT, and various
other factors described in this MD&A and in "Part I - Item 1A. Risk Factors" in
the Annual Report. In 2022, we expect to make capital expenditures and
investments of approximately $5.7 billion (which excludes capital expenditures
that will be funded by unconsolidated entities) a decrease from the $6.2 billion
projected in "Part II - Item 7. MD&A - Capital Resources and Liquidity" in the
Annual Report. The decrease is primarily attributable to a delay in certain
capital expenditures of approximately $400 million at SDG&E and $100 million at
SoCalGas.
CRITICAL ACCOUNTING ESTIMATES
Management views certain accounting estimates 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 critical accounting estimates in
"Part II - Item 7. MD&A" in the Annual Report.
NEW ACCOUNTING STANDARDS
We discuss the recent accounting pronouncements that have had or may have a significant effect on our financial statements and/or disclosures in Note 2 of the Notes to Condensed Consolidated Financial Statements.
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