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. 93 --------------------------------------------------------------------------------
OVERVIEW
Sempra Energy is aCalifornia -based holding company with energy infrastructure investments inNorth America . OnJuly 2, 2021 ,Sempra Energy began doing business as Sempra. 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; ?SDG&E; and ?SoCalGas. References in this report to "we," "our," "us," "our company" and "Sempra" are to Sempra and its consolidated entities, collectively, unless otherwise stated or indicated by the context. We refer to SDG&E and SoCalGas collectively as theCalifornia Utilities , which do not include the utilities in ourSempra 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; •the Condensed Financial Statements and related Notes of SDG&E; and •the Condensed Financial Statements and related Notes of SoCalGas. RESULTS OF OPERATIONS We discuss the following in Results of Operations: ?Overall results of operations of Sempra; ?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 In the three months endedSeptember 30, 2021 , we reported losses of$(648) million and diluted EPS of$(2.03) compared to earnings of$351 million and diluted EPS of$1.21 for the same period in 2020. In the nine months endedSeptember 30, 2021 , we reported earnings of$650 million and diluted EPS of$2.09 compared to earnings of$3,350 million and diluted EPS of$11.43 for the same period in 2020. The change in diluted EPS in the three months endedSeptember 30, 2021 compared to the same period in 2020 included a reduction in losses per share by$0.20 due to an increase in weighted-average common shares outstanding. The change in diluted EPS in the nine months endedSeptember 30, 2021 compared to the same period in 2020 included a reduction in earnings per share by$0.13 due to an increase in weighted-average common shares outstanding. Our (losses) earnings and diluted EPS were impacted by variances discussed in "Segment Results" below. 94 -------------------------------------------------------------------------------- SEGMENT RESULTS This section presents (losses) earnings by Sempra segment, as well as Parent and other and discontinued operations, and a related discussion of the changes in segment (losses) earnings. Throughout the MD&A, our reference to (losses) earnings represents (losses) earnings attributable to common shares. Variance amounts presented are the after-tax (losses) earnings impact (based on applicable statutory tax rates), unless otherwise noted, and before NCI, where applicable. SEMPRA (LOSSES) EARNINGS BY SEGMENT (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 SDG&E$ 205 $ 178 $ 603$ 633 SoCalGas (1,126) (24) (625) 425 Sempra Texas Utilities 206 209 479 458 Sempra Mexico 164 50 225 302 Sempra LNG 1 71 194 207 Parent and other(1) (98) (126) (226) (515) Discontinued operations - (7) - 1,840 (Losses) earnings attributable to common shares$ (648) $
351 $ 650
(1) Includes intercompany eliminations recorded in consolidation and certain corporate costs.
SDG&E
The increase in earnings of$27 million (15%) in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$29 million charge in 2020 for amounts expected to be refunded to customers and a fine related to the Energy Efficiency Program inquiry; and ?$27 million higher CPUC base operating margin, net of operating expenses; offset by ?$18 million higher income tax expense primarily from flow-through items, net of associated regulatory revenues; and ?$3 million lower AFUDC equity. The decrease in earnings of$30 million (5%) in the nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$62 million decrease due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account; ?$20 million lower electric transmission margin, including the following favorable impacts in 2020 from theMarch 2020 FERC -approved TO5 settlement proceeding: •$18 million to conclude a rate base matter, and •$9 million impact from the retroactive application of the final TO5 settlement for 2019; and ?$8 million higher income tax expense primarily from flow-through items, net of associated regulatory revenues; offset by ?$44 million charge in 2020 for amounts expected to be refunded to customers and a fine related to the Energy Efficiency Program inquiry; and ?$14 million higher CPUC base operating margin, net of operating expenses and favorable resolution of regulatory matters in 2020. SoCalGas The increase in losses of$1,102 million in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$1,110 million increase in charges from impacts associated with theAliso Canyon natural gas storage facility litigation and regulatory matters comprised of$1,132 million in 2021 compared to$22 million in 2020; offset by ?$8 million higher CPUC base operating margin, net of operating expenses, AFUDC equity and other items. 95 -------------------------------------------------------------------------------- Losses of$625 million in the nine months endedSeptember 30, 2021 compared to earnings of$425 million for the same period in 2020 was primarily due to: ?$1,038 million increase in charges from impacts associated with theAliso Canyon natural gas storage facility litigation and regulatory matters comprised of$1,132 million in 2021 compared to$94 million in 2020; and ?$64 million decrease due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account; offset by ?$30 million higher CPUC base operating margin, net of operating expenses; and ?$12 million higher income tax benefits from forecasted flow-through items.Sempra Texas Utilities The decrease in earnings of$3 million (1%) in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to lower equity earnings fromOncor Holdings driven by: ?increased operating costs and expenses attributable to invested capital; and ?lower revenues due to an annual energy efficiency program performance bonus recognized in 2020, but pending PUCT approval in 2021; offset by ?increased revenues from rate updates to reflect increases in invested capital and customer growth. The increase in earnings of$21 million (5%) in the nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to higher equity earnings fromOncor Holdings driven by: ?increased revenues from rate updates to reflect increases in invested capital and customer growth; offset by ?increased operating costs and expenses attributable to invested capital; and ?lower revenues due to an annual energy efficiency program performance bonus recognized in 2020, but pending PUCT approval in 2021. Sempra Mexico Because Ecogas, our natural gas distribution utility inMexico , uses the local currency as its functional currency, its revenues and expenses are translated intoU.S. dollars at average exchange rates for the period for consolidation in Sempra'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 increase in earnings of$114 million in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$62 million favorable impact from foreign currency and inflation effects net of foreign currency derivative effects comprised of a$29 million favorable impact in 2021 compared to a$33 million unfavorable impact in 2020; ?$6 million earnings attributable to NCI at IEnova in 2021 compared to$22 million earnings in 2020, including the effects of the increase in our ownership of IEnova; ?$14 million primarily due to the start of commercial operations of theVeracruz terminal in first quarter of 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, which we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements; offset by ?$6 million higher net interest expense. The decrease in earnings of$77 million (25%) in the nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$227 million unfavorable impact from foreign currency and inflation effects net of foreign currency derivative effects comprised of a$42 million unfavorable impact in 2021 compared to a$185 million favorable impact in 2020; ?$29 million income tax expense in 2021 primarily from outside basis differences in JV investments and the remeasurement of certain deferred income taxes; and ?$15 million higher net interest expense; offset by ?$50 million earnings attributable to NCI at IEnova in 2021 compared to$193 million earnings in 2020, including the effects of the increase in our ownership of IEnova; ?$16 million primarily due to the start of commercial operations of theVeracruz terminal in the first quarter of 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. 96 -------------------------------------------------------------------------------- Sempra LNG The decrease in earnings of$70 million in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$65 million lower earnings from marketing operations, primarily driven by changes in natural gas prices; and ?$11 million lower net interest income from lower intercompany balances with Parent and other; offset by ?$15 million higher equity earnings from Cameron LNG JV primarily due to the three-train liquefaction project achieving full commercial operations inAugust 2020 . The decrease in earnings of$13 million (6%) in the nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$122 million lower earnings from marketing operations due to losses in 2021 compared to gains in 2020, primarily driven by changes in natural gas prices; ?$8 million lower net interest income from lower intercompany balances with Parent and other; and ?$8 million of certain noncapitalizable expenses at ECA LNG Phase 1 in 2021, which reached a final investment decision inNovember 2020 ; offset by ?$115 million higher equity earnings from Cameron LNG JV primarily due to the three-train liquefaction project achieving full commercial operations inAugust 2020 ; and ?$22 million income tax benefit in 2021 from the remeasurement of certain deferred income taxes. Parent and Other The decrease in losses of$28 million (22%) in the three months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$37 million lower preferred dividends primarily as a result of$36 million lower dividends due to the mandatory conversion of all series A preferred stock and series B preferred stock inJanuary 2021 andJuly 2021 , respectively; and ?$15 million lower net interest expense; offset by ?$18 million income tax expense in 2021 compared to a$2 million income tax benefit in 2020 primarily due to a valuation allowance against certain tax credit carryforwards; and ?$10 million lower net investment gains on dedicated assets in support of our employee nonqualified benefit plan and deferred compensation obligations. The decrease in losses of$289 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily due to: ?$50 million equity earnings in 2021 compared to$100 million equity losses in 2020 related to our investment inRBS Sempra Commodities to settle pending VAT matters and related legal costs, which we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements; ?$69 million lower preferred dividends as a result of$88 million lower dividends due to the mandatory conversion of all series A preferred stock and series B preferred stock inJanuary 2021 andJuly 2021 , respectively, offset by$19 million higher dividends due to the issuance of series C preferred stock inJune 2020 ; ?$48 million lower net interest expense; ?$22 million lower operating costs retained at Parent and other; and ?$9 million higher net investment gains on dedicated assets in support of our employee nonqualified benefit plan and deferred compensation obligations; offset by ?$25 million higher income tax expense primarily due to: •$8 million higher income tax expense due to a valuation allowance against certain tax credit carryforwards, •$6 million higher consolidatedCalifornia state income tax expense associated with income from our investments in Sempra LNG entities, and •$5 million lower income tax benefit related to share-based compensation. Discontinued Operations Discontinued operations that were previously in ourSempra South American Utilities segment include our former 100% interest in Chilquinta Energía inChile , our former 83.6% interest in Luz del Sur inPeru and our former interests in two energy-services companies, Tecnored andTecsur , which provide electric construction and infrastructure services to Chilquinta Energía and Luz del Sur, respectively, as well as third parties. Discontinued operations also include activities, mainly income taxes related to the 97 -------------------------------------------------------------------------------- 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 Condensed Consolidated Financial Statements, we completed the sales of our South American businesses in the second quarter of 2020. OnApril 24, 2020 , we sold our equity interests in our Peruvian businesses, including our 83.6% interest in Luz del Sur and its interest inTecsur , for cash proceeds of$3,549 million , net of transaction costs and as adjusted for post-closing adjustments, and onJune 24, 2020 , we sold our equity interests in our Chilean businesses, including our 100% interest in Chilquinta Energía and Tecnored and our 50% interest in Eletrans, for cash proceeds of$2,216 million , net of transaction costs and as adjusted for post-closing adjustments. Losses from discontinued operations of$7 million in the three months endedSeptember 30, 2020 was due to a reduction to the gain on sale of our Chilean businesses as a result of post-closing adjustments. Earnings from discontinued operations of$1,840 million in the nine months endedSeptember 30, 2020 included: ?$1,499 million gain on the sale of our Peruvian businesses; ?$248 million gain on the sale of our Chilean businesses; ?$98 million operational earnings prior to the sale of our Peruvian and Chilean businesses; and ?$7 million income tax benefit related to changes in outside basis differences from earnings and foreign currency effects. 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 ourCalifornia Utilities and Sempra Mexico's Ecogas and electric revenues at SDG&E. Intercompany revenues included in the separate revenues of each utility are eliminated in Sempra's 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. 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. 98 --------------------------------------------------------------------------------
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
2021 2020 2021 2020 Natural gas revenues: SoCalGas$ 1,106 $ 842 $ 3,738 $ 3,247 SDG&E 157 134 585 498 Sempra Mexico 17 12 61 42 Eliminations and adjustments (25) (23) (74) (62) Total 1,255 965 4,310 3,725 Electric revenues: SDG&E 1,307 1,338 3,534 3,478 Eliminations and adjustments (2) (2) (5) (4) Total 1,305 1,336 3,529 3,474 Total utilities revenues$ 2,560 $ 2,301 $ 7,839 $ 7,199 Cost of natural gas(1): SoCalGas$ 240 $ 92 $ 736 $ 476 SDG&E 37 27 159 118 Sempra Mexico 13 2 25 8 Eliminations and adjustments (8) (7) (28) (20) Total$ 282 $ 114 $ 892 $ 582 Cost of electric fuel and purchased power(1): SDG&E$ 324 $ 430 $ 869 $ 921 Eliminations and adjustments (12) (1) (41) (3) Total$ 312 $ 429 $ 828 $ 918
(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 theCalifornia Utilities and included in cost of natural gas. The average cost of natural gas sold at each utility is impacted by market prices, as well as transportation, tariff and other charges.CALIFORNIA UTILITIES AVERAGE COST OF NATURAL GAS (Dollars per thousand cubic feet) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 SoCalGas $ 5.01$ 1.95 $ 3.46$ 2.21 SDG&E 5.40 3.79 4.62 3.56 In the three months endedSeptember 30, 2021 , our natural gas revenues increased by$290 million (30%) to$1.3 billion compared to the same period in 2020 primarily due to: ?$264 million increase at SoCalGas, which included: •$148 million increase in cost of natural gas sold, which we discuss below, •$33 million higher non-service component of net periodic benefit cost in 2021, which fully offsets in Other (Expense) Income, net, •$31 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M, •$26 million higher CPUC-authorized revenues, and •$20 million higher revenues from incremental and balanced capital projects; and ?$23 million increase at SDG&E, which included: •$10 million increase in cost of natural gas sold, which we discuss below, •$6 million higher revenues primarily associated with PSEP, and •$3 million higher CPUC-authorized revenues. 99 -------------------------------------------------------------------------------- In the three months endedSeptember 30, 2021 , our cost of natural gas increased by$168 million to$282 million compared to the same period in 2020 primarily due to: ?$148 million increase at SoCalGas primarily due to higher average natural gas prices; and ?$10 million increase at SDG&E primarily due to higher average natural gas prices. In the nine months endedSeptember 30, 2021 , our natural gas revenues increased by$585 million (16%) to$4.3 billion compared to the same period in 2020 primarily due to: ?$491 million increase at SoCalGas, which included: •$260 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, •$94 million higher CPUC-authorized revenues, •$62 million higher revenues from incremental and balanced capital projects, and •$26 million higher non-service component of net periodic benefit cost in 2021, which fully offsets in Other (Expense), Income, net, offset by •$84 million decrease due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account; and ?$87 million increase at SDG&E, which included: •$41 million increase in cost of natural gas sold, which we discuss below, •$17 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M, •$17 million higher CPUC-authorized revenues, and •$14 million higher revenues primarily associated with PSEP, offset by •$6 million decrease due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account. In the nine months endedSeptember 30, 2021 , our cost of natural gas increased by$310 million (53%) to$892 million compared to the same period in 2020 primarily due to: ?$260 million increase at SoCalGas primarily due to higher average natural gas prices; and ?$41 million increase at SDG&E primarily due to higher average natural gas prices. Electric Revenues and Cost ofElectric Fuel and Purchased Power In the three months endedSeptember 30, 2021 , our electric revenues, substantially all of which are at SDG&E, decreased by$31 million (2%), remaining at$1.3 billion compared to the same period in 2020 primarily due to: ?$106 million lower cost of electric fuel and purchased power, which we discuss below; and ?$12 million lower recovery of costs associated with refundable programs, which revenues are offset in O&M; offset by ?$36 million charge in 2020 for amounts expected to be refunded to customers related to the Energy Efficiency Program inquiry; ?$15 million higher revenues associated with SDG&E's wildfire mitigation plan; ?$13 million higher CPUC-authorized revenues; ?$9 million higher revenues associated with lower income tax benefits from flow-through items; ?$5 million higher revenue from transmission operations; and ?$5 million higher revenues associated with a new customer information system. Our utility cost of electric fuel and purchased power decreased by$117 million (27%) to$312 million in the three months endedSeptember 30, 2021 compared to the same period in 2020 due to: ?$106 million at SDG&E primarily due to higher purchased power costs caused by increased demand in 2020 and a decrease in residential demand in 2021 from an increase in rooftop solar adoption; and ?$11 million higher intercompany eliminations associated with sales between SDG&E and Sempra Mexico due to the acquisition of ESJ inMarch 2021 . In the nine months endedSeptember 30, 2021 , our electric revenues, substantially all of which are at SDG&E, increased by$55 million (2%), remaining at$3.5 billion compared to the same period in 2020 primarily due to: ?$78 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M; ?$51 million charge in 2020 for amounts expected to be refunded to customers related to the Energy Efficiency Program inquiry; 100 -------------------------------------------------------------------------------- ?$33 million higher CPUC-authorized revenues; ?$33 million higher revenues associated with SDG&E's wildfire mitigation plan; ?$15 million higher revenues associated with lower income tax benefits from flow-through items; and ?$8 million higher revenues associated with a new customer information system; offset by ?$77 million decrease due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account; ?$52 million lower cost of electric fuel and purchased power, which we discuss below; ?$22 million lower revenues due to favorable resolution of regulatory matters in 2020; and ?$13 million lower revenues from transmission operations, including the following favorable impacts in 2020 related to theMarch 2020 FERC -approved TO5 settlement proceeding: •$26 million to settle a rate base matter, and •$12 million impact from the retroactive application of the final TO5 settlement for 2019. Our utility cost of electric fuel and purchased power decreased by$90 million (10%) to$828 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020 due to: ?$52 million at SDG&E primarily due to higher purchased power costs caused by increased demand in 2020 and a decrease in residential demand in 2021 from an increase in rooftop solar adoption; and ?$38 million higher intercompany eliminations associated with sales between SDG&E and Sempra Mexico due to the acquisition of ESJ inMarch 2021 . 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, 2021 2020 2021 2020 REVENUES Sempra Mexico $ 580$ 339 $ 1,307$ 893 Sempra LNG 119 63 367 255 Parent and other(1) (246) (59) (500) (148) Total revenues $ 453$ 343 $ 1,174$ 1,000 COST OF SALES(2) Sempra Mexico $ 247$ 89 $ 488$ 202 Sempra LNG 207 62 419 145 Parent and other(1) (234) (61) (459) (147) Total cost of sales $ 220$ 90 $ 448$ 200
(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, 2021 , revenues from our energy-related businesses increased by$110 million (32%) to$453 million compared to the same period in 2020 primarily due to: ?$241 million increase at Sempra Mexico primarily due to: •$154 million increase from the marketing business primarily due to higher natural gas prices and volumes, •$45 million higher revenues from theVeracruz andMexico City terminals placed in service in March and July of 2021, respectively, including a$16 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, •$20 million higher revenues from TdM primarily due to unrealized gains on commodity derivatives in 2021 compared to unrealized losses in 2020 and higher volumes and power prices, and •$8 million increase from the renewables business primarily due to the acquisition of ESJ inMarch 2021 and renewable assets placed in service inDecember 2020 andMarch 2021 ; and ?$56 million increase at Sempra LNG primarily due to: •$122 million increase from LNG marketing operations primarily from higher natural gas and LNG cargo sales to Sempra Mexico mainly as a result of higher natural gas prices and volumes, offset by 101 -------------------------------------------------------------------------------- •$68 million decrease from natural gas marketing operations primarily due to higher losses in 2021 compared to 2020, mainly driven by changes in natural gas prices, offset by ?$187 million decrease primarily from higher intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico. In the three months endedSeptember 30, 2021 , the cost of sales for our energy-related businesses increased by$130 million to$220 million compared to the same period in 2020 primarily due to: ?$158 million increase at Sempra Mexico primarily due to higher natural gas prices and volumes at the marketing business and at TdM; and ?$145 million increase at Sempra LNG mainly from natural gas marketing activities due to higher natural gas purchases; offset by ?$173 million decrease primarily from higher intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico. In the nine months endedSeptember 30, 2021 , revenues from our energy-related businesses increased by$174 million (17%) to$1.2 billion compared to the same period in 2020 primarily due to: ?$414 million increase at Sempra Mexico primarily due to: •$277 million increase from the marketing business primarily due to higher natural gas prices and volumes, •$54 million higher revenues from theVeracruz andMexico City terminals placed in service in March and July of 2021, respectively, including a$16 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, •$31 million increase from the renewables business primarily due to the acquisition of ESJ inMarch 2021 and renewable assets placed in service inDecember 2020 andMarch 2021 , and •$29 million higher revenues from TdM mainly due to higher volumes and power prices, offset by unrealized losses on commodity derivatives in 2021 compared to unrealized gains in 2020; and ?$112 million increase at Sempra LNG primarily due to: •$232 million increase from LNG marketing operations primarily from higher natural gas and LNG cargo sales to Sempra Mexico mainly as a result of higher natural gas prices and volumes, offset by •$121 million decrease from natural gas marketing operations primarily due to losses in 2021 compared to gains in 2020, mainly driven by changes in natural gas prices; offset by ?$352 million decrease primarily from higher intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico. In the nine months endedSeptember 30, 2021 , the cost of sales for our energy-related businesses increased by$248 million to$448 million compared to the same period in 2020 primarily due to: ?$286 million increase at Sempra Mexico primarily due to higher natural gas prices and volumes at the marketing business and at TdM; and ?$274 million increase at Sempra LNG mainly from natural gas marketing activities primarily due to higher natural gas purchases; offset by ?$312 million decrease primarily from higher intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico. Operation and Maintenance In the three months endedSeptember 30, 2021 , O&M increased by$55 million (5%) to$1.1 billion compared to the same period in 2020 primarily due to: ?$52 million increase at SoCalGas primarily due to: •$31 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and •$21 million higher non-refundable operating costs; ?$16 million increase at Sempra Mexico primarily from the renewables business, including the acquisition of ESJ inMarch 2021 ; and ?$15 million increase at Sempra LNG primarily due to the timing of employee benefit expenses and certain non-capitalizable expenses at ECA LNG Phase 1 in 2021, which reached a final investment decision inNovember 2020 ; offset by ?$25 million decrease at SDG&E primarily due to: •$14 million lower non-refundable operating costs, and 102 -------------------------------------------------------------------------------- •$11 million lower expenses associated with refundable programs, which costs incurred are recovered in revenue. In the nine months endedSeptember 30, 2021 , O&M increased by$331 million (12%) to$3.1 billion compared to the same period in 2020 primarily due to: ?$175 million increase at SoCalGas primarily due to: •$116 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and •$59 million higher non-refundable operating costs; ?$102 million increase at SDG&E primarily due to: •$95 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue, and •$7 million higher non-refundable operating costs; ?$44 million increase at Sempra Mexico primarily from the renewables business, including the acquisition of ESJ inMarch 2021 , and expenses associated with the growth in the business; and ?$24 million increase at Sempra LNG primarily due to certain non-capitalizable expenses at ECA LNG Phase 1 in 2021, which reached a final investment decision inNovember 2020 , and expected credit losses associated with the guarantee related to Cameron LNG JV's SDSRA; offset by ?$18 million decrease at Parent and other primarily from lower retained operating costs offset by higher deferred compensation expense. Aliso Canyon Litigation and Regulatory Matters In the three months and nine months endedSeptember 30, 2021 , SoCalGas recorded a charge of$1,571 million related to agreements associated with civil litigation against SoCalGas and Sempra pertaining to the Leak, which we describe in Note 11 of the Notes to Condensed Consolidated Financial Statements. In the three months and nine months endedSeptember 30, 2020 , SoCalGas recorded charges of$27 million and$127 million , respectively, related to civil litigation and regulatory matters pertaining to the Leak. Other (Expense) Income, 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 (Expense) Income, 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 inPeru andChile , 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 expense, net, in the three months endedSeptember 30, 2021 was$55 million compared to other income, net, of$29 million in the same period in 2020. The change was primarily due to: ?$20 million net losses in 2021 from impacts associated with interest rate and foreign exchange instruments and foreign currency transactions compared to net gains of$34 million for the same period in 2020 primarily due to: •$18 million foreign currency losses in 2021 compared to$15 million foreign currency gains in 2020 on a Mexican peso-denominated loan to IMG JV, which is offset in Equity Earnings, and •$3 million losses in 2021 on foreign currency derivatives and cross-currency swaps compared to$19 million gains for the same period in 2020 as a result of fluctuation of the Mexican peso; ?$18 million higher non-service component of net periodic benefit cost in 2021; and ?$16 million lower investment gains in 2021 on dedicated assets in support of our executive retirement and deferred compensation plans; offset by ?$6 million fine at SDG&E in 2020 related to the Energy Efficiency Program inquiry. Other income, net, in the nine months endedSeptember 30, 2021 was$52 million compared to other expense, net, of$163 million in the same period in 2020. The change was primarily due to: ?$188 million lower net losses from impacts associated with interest rate and foreign exchange instruments and foreign currency transactions primarily due to: •$107 million lower foreign currency losses on a Mexican peso-denominated loan to IMG JV, which is offset in Equity Earnings, and 103 -------------------------------------------------------------------------------- •$101 million lower losses on foreign currency derivatives and cross-currency swaps as a result of fluctuation of the Mexican peso; offset by •$22 million lower net gains in 2021 on other foreign currency transactional effects; ?$19 million higher investment gains on dedicated assets in support of our executive retirement and deferred compensation plans; ?$7 million higher AFUDC equity at SoCalGas; and ?$6 million fine at SDG&E in 2020 related to the Energy Efficiency Program inquiry; offset by ?$8 million decrease in regulatory interest at theCalifornia Utilities due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account; and ?$7 million higher non-service component of net periodic benefit cost in 2021. Income Taxes The table below shows the income tax (benefit) expense and ETRs for Sempra, SDG&E and SoCalGas. INCOME TAX (BENEFIT) EXPENSE AND EFFECTIVE INCOME TAX RATES (Dollars in millions) Three months ended September Nine months ended September 30, 30, 2021 2020 2021 2020 Sempra: Income tax (benefit) expense from continuing operations$ (342) $ 99 $ (45) $ 60 (Loss) income from continuing operations before income taxes and equity earnings$ (1,365) $ 201 $ (316) $ 1,061 Equity earnings, before income tax(1) 137 117 457 158 Pretax (loss) income$ (1,228) $ 318 $ 141 $ 1,219 Effective income tax rate 28 % 31 % (32) % 5 % SDG&E: Income tax expense$ 90 $ 33 $ 168 $ 161 Income before income taxes$ 295 $ 211 $ 771 $ 794 Effective income tax rate 31 % 16 % 22 % 20 % SoCalGas: Income tax (benefit) expense$ (437) $ (6) $ (335) $ 95 (Loss) income before income taxes$ (1,563) $ (30) $ (959) $ 521 Effective income tax rate 28 % 20 % 35 % 18 % (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 benefit in the three months endedSeptember 30, 2021 compared to an income tax expense in the same period in 2020 was primarily due to: ?$439 million income tax benefit in 2021 compared to$5 million income tax benefit in 2020 associated with theAliso Canyon natural gas storage facility litigation and regulatory matters; and ?$33 million income tax benefit in 2021 compared to$44 million income tax expense in 2020 from foreign currency and inflation effects and associated derivatives; offset by ?lower income tax benefits from flow-through items. Sempra's income tax benefit in the nine months endedSeptember 30, 2021 compared to an income tax expense in the same period in 2020 was primarily due to: ?$439 million income tax benefit in 2021 compared to$33 million income tax benefit in 2020 associated with theAliso Canyon natural gas storage facility litigation and regulatory matters; ?$22 million income tax benefit in 2021 from the remeasurement of certain deferred income taxes; and ?higher income tax benefits from flow-through items; offset by ?$8 million income tax expense in 2021 compared to$263 million income tax benefit in 2020 from foreign currency and inflation effects and associated derivatives; and 104 -------------------------------------------------------------------------------- ?$11 million lower income tax benefit 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 increased in the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to higher pretax income and lower income tax benefits from flow-through items. SDG&E's income tax expense increased in the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to lower income tax benefits from flow-through items. SoCalGas SoCalGas' income tax benefit increased in the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to$439 million income tax benefit in 2021 compared to$5 million income tax benefit in 2020 associated with theAliso Canyon natural gas storage facility litigation and regulatory matters. SoCalGas' income tax benefit in the nine months endedSeptember 30, 2021 compared to an income tax expense in the same period in 2020 was primarily due to$439 million income tax benefit in 2021 compared to$33 million income tax benefit in 2020 associated with theAliso Canyon natural gas storage facility litigation and regulatory matters. Equity Earnings In the three months endedSeptember 30, 2021 , equity earnings increased by$65 million (20%) to$391 million compared to the same period in 2020 primarily due to: ?$40 million higher equity earnings at IMG JV, primarily due to foreign currency effects, including$18 million foreign currency gains in 2021 compared to$15 million foreign currency losses in 2020 on IMG JV's Mexican peso-denominated loans from its JV owners, which is fully offset in Other (Expense) Income, Net; and ?$21 million higher equity earnings at Cameron LNG JV primarily due to the three-train liquefaction project achieving full commercial operations inAugust 2020 . In the nine months endedSeptember 30, 2021 , equity earnings increased by$200 million (24%) to$1.0 billion compared to the same period in 2020 primarily due to: ?$50 million equity earnings in 2021 compared to$100 million equity losses in 2020 related to our investment inRBS Sempra Commodities to settle pending VAT matters and related legal costs; ?$147 million higher equity earnings at Cameron LNG JV primarily due to the three-train liquefaction project achieving full commercial operations inAugust 2020 ; and ?$23 million higher equity earnings atOncor Holdings primarily due to higher revenues from rate updates to reflect increases in invested capital and customer growth, offset by increased operating costs and expenses attributable to invested capital, and lower revenues due to an annual energy efficiency program performance bonus recognized in 2020, but pending PUCT approval in 2021; offset by ?$122 million lower equity earnings at Sempra Mexico, which included: •$103 million lower equity earnings at IMG JV, primarily due to foreign currency effects, including$107 million lower foreign currency gains on IMG JV's Mexican peso-denominated loans from its JV owners, which is fully offset in Other (Expense) Income, Net, and •$15 million lower equity earnings at TAG JV primarily due to income tax expense in 2021 compared to a benefit in 2020. Earnings Attributable to Noncontrolling Interests In the three months endedSeptember 30, 2021 , earnings attributable to NCI decreased by$17 million to$5 million compared to the same period in 2020 primarily due to the increase in our ownership interest in IEnova as a result of the exchange offer and subsequent cash tender offer, which we discuss in Note 1 of the Notes to Condensed Consolidated Financial Statements, offset by an increase mainly from foreign currency effects as a result of fluctuation of the Mexican peso. In the nine months endedSeptember 30, 2021 , earnings attributable to NCI decreased by$153 million to$48 million compared to the same period in 2020 primarily due to lower earnings at Sempra Mexico and from the increase in our ownership interest in IEnova as a result of the exchange offer and subsequent cash tender offer. 105 -------------------------------------------------------------------------------- Preferred Dividends In the three months endedSeptember 30, 2021 , preferred dividends decreased by$37 million to$11 million compared to the same period in 2020 primarily due to the mandatory conversion of all series A preferred stock and series B preferred stock inJanuary 2021 andJuly 2021 , respectively. In the nine months endedSeptember 30, 2021 , preferred dividends decreased by$69 million to$52 million compared to the same period in 2020 primarily due to the mandatory conversion of all series A preferred stock and series B preferred stock inJanuary 2021 andJuly 2021 , respectively, offset by the issuance of series C preferred stock inJune 2020 . IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS Because our natural gas distribution utility inMexico , Ecogas, uses its local currency as its functional currency, revenues and expenses are translated intoU.S. dollars at average exchange rates for the period for consolidation in Sempra's results of operations. Prior to the sales of our South American businesses in 2020, our operations inSouth America used their local currency as their functional currency. We discuss further the impact of foreign currency and inflation rates on results of operations, including impacts on income taxes and related hedging activity, in "Part II - Item 7. MD&A - Impact of Foreign Currency and Inflation Rates on Results of Operations" in the Annual Report. Foreign Currency Translation Any difference in average exchange rates used for the translation of income statement activity from year to year can cause a variance in Sempra's comparative results of operations. In the three months and nine months endedSeptember 30, 2021 , the change in our earnings as a result of foreign currency translation rates was not material compared to the same period in 2020. Transactional Impacts Income statement activities at our foreign operations and their JVs are also impacted by transactional gains and losses, a summary of which is shown in the table below: TRANSACTIONAL (LOSSES) GAINS FROM FOREIGN CURRENCY AND INFLATION EFFECTS AND ASSOCIATED DERIVATIVES (Dollars in millions) Transactional (losses) gains Total reported amounts included in reported amounts
Three months ended
2021 2020 2021 2020 Other (expense) income, net$ (55) $ 29 $ (20)$ 34 Income tax benefit (expense) 342 (99) 33 (44) Equity earnings 391 326 16 (23) (Loss) income from continuing operations, net of income tax (632) 428 29 (33)
(Loss) income from discontinued operations, net of income tax
- (7) - - Earnings attributable to noncontrolling interests (5) (22) (1) 15 (Losses) earnings attributable to common shares (648) 351 28 (18)
Nine months ended
2021 2020 2021 2020 Other (expense) income, net$ 52 $ (163) $ (36)$ (224) Income tax benefit (expense) 45 (60) (8) 263 Equity earnings 1,022 822 - 141 (Loss) income from continuing operations, net of income tax 751 1,823 (44) 180
(Loss) income from discontinued operations, net of income tax
- 1,850 - 15 Earnings attributable to noncontrolling interests (48) (201) 3 (84) (Losses) earnings attributable to common shares 650 3,350 (41) 111
CAPITAL RESOURCES AND LIQUIDITY
106 --------------------------------------------------------------------------------
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. 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 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, including potential vaccination mandates. 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 As we discuss in Note 1 of the Notes to Condensed Consolidated Financial Statements, onOctober 1, 2021 , we completed the sale of a 20% equity interest inSempra Infrastructure Partners , which generally represents the combined businesses of Sempra LNG and IEnova, to KKR for cash proceeds of$3.37 billion , subject to post-closing adjustments. OnOctober 1, 2021 ,Sempra Infrastructure Partners paid$149 million to KKR for reimbursement of certain expenses that KKR incurred in connection with closing the transaction. We intend to use the proceeds from the sale to fund capital investments in support of additional growth opportunities and strengthen our balance sheet by reducing debt, which we discuss below in "Long-Term Debt Activities." We have also entered into an accommodation and support agreement under which KKR has the ability to borrow from Sempra up to$300 million plus reimbursement of certain fees related to such borrowing, which we fully funded onNovember 1, 2021 . This loan is due to be repaid in full no later thanOctober 1, 2029 and bears compound interest at 5% per annum. The completion of the sale of NCI inSempra Infrastructure Partners reduced our ownership interest inSempra Infrastructure Partners and requires 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, the decrease in our ownership ofSempra Infrastructure Partners will 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. We discuss these risks and uncertainties 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 funding from minority interest owners. 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 atSoCalGas' Aliso Canyon natural gas storage facility Sempra and theCalifornia 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 theSEC . 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 and 107 -------------------------------------------------------------------------------- other material events, such as significant outflows resulting from the agreements expected to resolve certain material litigation related to the Leak. 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 asset values 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 theCalifornia Utilities , funding requirements are 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, 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 2023 and 2024 and uncommitted revolving credit facilities that expire in 2022 and 2023.Sempra Infrastructure Partners intends to enter into its own revolving credit facility, although such a credit facility and its timing remain uncertain. The table below shows the amount of available funds atSeptember 30, 2021 , including available unused credit on these primaryU.S. and foreign lines of credit. AVAILABLE FUNDS ATSEPTEMBER 30, 2021 (Dollars in millions) Sempra SDG&E
SoCalGas
Unrestricted cash and cash equivalents(1)
6,312 1,500 750 (1) Amounts at Sempra include$138 million held in non-U.S. jurisdictions. We discuss repatriation in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. (2) Available unused credit is the total available on Sempra's, SDG&E's, SoCalGas', Sempra Mexico's and Sempra LNG's credit facilities that we discuss in Note 7 of the Notes to Condensed Consolidated Financial Statements. (3) Because our commercial paper programs are supported by these lines, we reflect the amount of commercial paper outstanding as a reduction to the available unused credit. Short-Term Borrowings We use short-term debt primarily to meet liquidity requirements, fund shareholder dividends, and temporarily finance capital expenditures, acquisitions or start-ups. OurCalifornia Utilities use short-term debt primarily to meet working capital needs. Revolving lines of credit, commercial paper and a term loan were our primary sources of short-term debt funding in the first nine months of 2021. We discuss our short-term debt activities in Note 7 of the Notes to Condensed Consolidated Financial Statements and below in "Sources and Uses of Cash." Long-Term Debt Activities Issuances of and payments on long-term debt in the first nine months of 2021 included the following: 108 -------------------------------------------------------------------------------- LONG-TERM DEBT ISSUANCES AND PAYMENTS (Dollars in millions) Amount at Issuances: issuance Maturity SDG&E 2.95% green first mortgage bonds$ 750 2051 Sempra LNG variable rate notes 274 2025 Payments: Payments Maturity Sempra variable rate notes$ 850 2021 SDG&E 3% first mortgage bonds 350 2021 SDG&E 1.914% amortizing first mortgage bonds 36 2021 SDG&E variable rate 364-day term loan 200 2021 Sempra Mexico amortizing variable rate notes 33 2021 Sempra Mexico amortizing variable and fixed rate loans 29 2021 InOctober 2021 , Sempra Mexico used proceeds from borrowings against its committed and uncommitted lines of credit to fully repay$175 million of outstanding principal plus accrued and unpaid interest on the ESJ fixed- and variable-rate loan prior to its scheduled maturity in 2033, and$375 million of outstanding principal plus accrued and unpaid interest on the Ventika fixed- and variable-rate loans prior to scheduled maturity dates through 2032, and recognized approximately$50 million ($30 million after tax and NCI) in charges associated with hedge termination costs and a write-off of unamortized debt issuance costs. OnNovember 1, 2021 , Sempra issued notices to redeem, at respective make-whole redemption prices, an aggregate principal amount of$2.35 billion of senior unsecured notes prior to scheduled maturities in 2022 through 2025. Upon redemption, which is scheduled to occur inDecember 2021 , we expect to recognize approximately$128 million ($93 million after tax) in charges associated with the make-whole premiums from the early redemptions and write-off of unamortized discount and debt issuance costs. 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, 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 2021. CREDIT RATINGS ATSEPTEMBER 30, 2021 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 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, atSeptember 30, 2021 . Loans with Affiliates AtSeptember 30, 2021 , Sempra had$686 million in loans due from unconsolidated affiliates and$328 million in loans due to unconsolidated affiliates. 109 --------------------------------------------------------------------------------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 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, cash flows from operations, and debt issuances will continue to be adequate to fund their respective current operations and planned capital expenditures. Additionally, Sempra has elected to make equity contributions to SoCalGas, which began inSeptember 2021 , that are sufficient to maintain SoCalGas' approved capital structure in connection with the accruals related to the Leak.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 ProtectionsThe 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. In connection with the COVID-19 pandemic, theCalifornia Utilities implemented certain measures to assist customers, including suspending service disconnections due to nonpayment for all customers (except for SoCalGas' noncore customers), waiving late payment fees, and offering flexible payment plans. Such measures ended onJune 30, 2021 , except for the suspension of service disconnections that ended onSeptember 30, 2021 . At the CPUC's direction, theCalifornia Utilities have started to automatically enroll residential and small business customers with past-due balances in long-term repayment plans. The CPUC is continuing to consider the impacts of any state or federal relief programs on customer arrearages and if further debt relief is warranted. The CPUC authorized each of theCalifornia Utilities to track and request recovery of incremental costs associated with complying with residential 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 customers' failure to pay.The California Utilities expect to pursue recovery of small and medium-large commercial and industrial customers' tracked costs in rates in a future CPUC proceeding, which recovery is not assured. Uncollectible expenses related to residential customers are recorded in a two-way balancing account as we discuss below. The continuation of these circumstances could result in a further reduction in payments received from theCalifornia 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, SDG&E and SoCalGas. We discuss regulatory mechanisms in Note 4 of the Notes to Condensed Consolidated Financial Statements. Disconnection OIR InJune 2020 , the CPUC issued a decision addressing residential service disconnections that, among other things, allows each of theCalifornia 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 theCalifornia Utilities to establish an AMP that provides successfully participating, income-qualified residential customers with relief from outstanding utility bill amounts and became effective inFebruary 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 theCalifornia 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, SDG&E and SoCalGas. CCM A CPUC cost of capital proceeding determines a utility's authorized capital structure and authorized return on rate base. InDecember 2019 , the CPUC approved the cost of capital and rate structures for SDG&E and SoCalGas that became effective on 110 --------------------------------------------------------------------------------January 1, 2020 and will remain in effect throughDecember 31, 2022 , subject to the CCM. The CCM considers changes in interest rates based on the applicable utility bond index published by Moody's (the CCM benchmark rate) for each 12-month period endingSeptember 30 (the measurement period). The CCM benchmark rate is the basis of comparison to determine if the CCM is triggered, which occurs if the change in the applicable Moody's utility bond index relative to the CCM benchmark rate is larger than plus or minus 1.000% at the end of the measurement period. The index applicable to SDG&E and SoCalGas is based on each utility's credit rating. SDG&E's CCM benchmark rate is 4.498% based on Moody's Baa- utility bond index, and SoCalGas' CCM benchmark rate is 4.029% based on Moody's A- utility bond index. Alternatively, under the CCM, each of theCalifornia Utilities is permitted to file a cost of capital application in an interim year in which an extraordinary or catastrophic event materially impacts its cost of capital. InAugust 2021 , SDG&E filed an application with the CPUC to update its cost of capital effectiveJanuary 1, 2022 due to the ongoing effects of the COVID-19 pandemic. In this application, SDG&E proposed to adjust its authorized capital structure by increasing its common equity ratio from 52% to 54%. SDG&E also proposed to increase its authorized ROE from 10.20% to 10.55% and decrease its authorized cost of debt from 4.59% to 3.84%. As a result, SDG&E's proposed return on rate base would decrease from 7.55% to 7.46% if such application is approved by the CPUC as filed. SDG&E filed a joint motion with PG&E and Edison to consolidate all three utilities' cost of capital applications given the overlapping issues of law and fact, which joint motion was granted inOctober 2021 . For the measurement period endedSeptember 30, 2021 , the CCM would trigger for SDG&E 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%. However, SDG&E's application to update its cost of capital effectiveJanuary 1, 2022 , if accepted by the CPUC, would supersede the CCM from applying. If such application is not accepted, the CCM would be effectiveJanuary 1, 2022 and would automatically adjust SDG&E's authorized ROE from 10.20% to 9.62% and adjust its authorized cost of debt to reflect the then current embedded cost and projected interest rate. SDG&E has requested that a final CPUC decision on its interim cost of capital application be issued in the first half of 2022. For the measurement period endedSeptember 30, 2021 , the CCM was not triggered for SoCalGas. SoCalGas expects to file its next cost of capital application inApril 2022 for aJanuary 1, 2023 effective date. SDG&E Wildfire Fund The carrying value ofSDG&E's Wildfire Fund asset totals$371 million atSeptember 30, 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 participatingCalifornia electric IOUs may incur third-party wildfire costs for which they will seek recovery from theWildfire Fund , including 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 a charge against earnings when there is a reduction of the available coverage due to recoverable claims from any of the participating IOUs. AtSeptember 30, 2021 , PG&E recorded a receivable from theWildfire Fund indicating that it may seek reimbursement in the future from theWildfire Fund for losses associated with the Dixie Fire. 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 cash flows, results of operations and financial condition. Wildfire Cost Recovery Mechanism 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 regulatory account balance as ofJanuary 1 of each year. Such potential recovery would be incremental to wildfire costs authorized in its GRC and would be subject to reasonableness review. We expect the CPUC to issue a final decision in the first half of 2022. 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. 111 -------------------------------------------------------------------------------- Aliso Canyon Natural Gas Storage Facility Gas Leak FromOctober 23, 2015 throughFebruary 11, 2016 , SoCalGas experienced a natural gas leak from one of the injection-and-withdrawal wells, SS25, at itsAliso Canyon natural gas storage facility located inLos Angeles County . Cost Estimate, Accounting Impact and Insurance. AtSeptember 30, 2021 , SoCalGas estimates certain costs related to the Leak are$3,199 million (the cost estimate). This cost estimate may increase significantly as more information becomes available. A portion of the cost estimate has been paid, and$1,976 million is accrued as Reserve for Aliso Canyon Costs atSeptember 30, 2021 on SoCalGas' and Sempra's Condensed Consolidated Balance Sheets. Sempra has elected to make equity contributions to SoCalGas that are sufficient to maintain SoCalGas' approved capital structure in connection with the accruals related to these agreements, and Sempra does not expect to issue common equity in relation to these agreements. In connection with this election, inSeptember 2021 , Sempra made an initial equity contribution of$800 million to SoCalGas. Except for the amounts paid or estimated to settle certain legal and regulatory matters, the cost estimate does not include the matters that we describe in "Civil Litigation - Unresolved Litigation" and "Regulatory Proceedings" in Note 11 of the Notes to Condensed Consolidated Financial Statements 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. The cost estimate also does not include certain other costs incurred by Sempra associated with defending against shareholder derivative lawsuits and other potential costs that we currently do not anticipate incurring or that we cannot reasonably estimate. Further, we are not able to reasonably estimate the possible loss or a range of possible losses in excess of the amounts accrued. These costs or losses not included in the cost estimate could be significant and could have a material adverse effect on SoCalGas' and Sempra's cash flows, financial condition and results of operations. We have received insurance payments for many of the categories of 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 ofSeptember 30, 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's Condensed Consolidated Balance Sheets. This amount is exclusive of insurance retentions and$865 million of insurance proceeds we received throughSeptember 30, 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's cash flows, financial condition, results of operations 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 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 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, 2021 , theAliso Canyon natural gas storage facility had a net book value of$863 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, incur higher than expected operating costs and/or be required to make additional capital expenditures (any or all of which may not be recoverable in rates), and natural gas reliability and electric generation could be jeopardized. Any such outcome could have a material adverse effect on SoCalGas' and Sempra's results of operations, financial condition, cash flows and/or prospects. Labor Relations Field, technical and most clerical employees at SoCalGas are represented by theUtility Workers Union of America or theInternational Chemical Workers Union Council . The collective bargaining agreement for these employees covering wages, hours, working conditions, and medical and other benefit plans expired onSeptember 30, 2021 . OnOctober 1, 2021 , SoCalGas and 112 -------------------------------------------------------------------------------- representatives of the unions reached a tentative agreement for a new collective bargaining agreement to be in effect through 2024. To allow time for ratification of the new collective bargaining agreement by the employees, it was also agreed that the terms and conditions of the existing agreement would be extended through the date the new collective bargaining agreement is ratified. We expect the new collective bargaining agreement to be ratified inNovember 2021 . Franchise Agreement SoCalGas' natural gas franchise agreement with theCity of Los Angeles is due to expireDecember 31, 2021 . SoCalGas expects that it will participate in the competitive bid process for a new franchise agreement, consistent with the terms of the City Charter.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 minority member director determines it is in the best interests of Oncor to retain such amounts to meet expected future requirements. Winter Weather Event InFebruary 2021 ,ERCOT required electric distribution companies, including Oncor, to significantly reduce demand on the grid because electricity generation was insufficient to meet demand due to extreme winter weather. As a result of the load shedding events and state-wide power outages, the PUCT, 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.The Texas Legislature has passed, and the Governor ofTexas has signed, various legislation affecting theERCOT market, which addresses matters including certain weatherization requirements and fines of up to$1 million per day for failures to comply with such requirements, enablingERCOT to finance certain amounts owed byERCOT market participants relating to the winter weather event, creation of theTexas Energy Reliability Council , identification of gas facilities that are critical to electric-generator fuel supplies, coordination between the gas and electric industries, and changes in the composition of the PUCT and theERCOT board of directors. In addition, various regulatory and governmental entities have also commenced investigations or indicated an intent to investigate the operation of theERCOT grid during this extreme winter weather event and potential future actions to improve grid reliability. Any significant changes relating to theERCOT 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's results of operations, financial condition, cash flows and/or prospects. Sempra Mexico Construction Projects Sempra Mexico began commercial operations of its new terminals for the receipt, storage and delivery of refined fuel products in the new port ofVeracruz onMarch 19, 2021 and inMexico City onJuly 2, 2021 . The two terminals have a combined storage capacity of more than 2.6 million barrels. The storage capacity for both terminals is contracted with Valero Energy Corporation. Sempra Mexico also completed construction and began commercial operations of a new solar facility (Border Solar ) in Juárez, Chihuahua onMarch 25, 2021 . Sempra Mexico is currently constructing additional terminals for the receipt, storage, and delivery of liquid fuels in the vicinity ofPuebla andTopolobampo . We expect thePuebla project to commence commercial operations in 2021 and theTopolobampo project to commence commercial operations in the first half of 2022. However, expected commencement dates could be delayed by worsening or extended disruptions of project construction 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. 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 113 -------------------------------------------------------------------------------- securities, interim funding from the parent or affiliates, and partnering in JVs. Sempra Mexico is also developing terminals for the receipt, storage, and delivery of liquid fuels in the vicinity ofManzanillo ,Guadalajara 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, including IEnova'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 in IEnova's custody. Although IEnova filed an amparo lawsuit against the closure and has submitted proof of the legal origin of the products to the prosecutor's office, we are unable to predict when the investigation will be completed and whether the facility will be able to resume normal operations. If the terminal were to be shut down or commissioning operations significantly curtailed for an extended period of time, Sempra's results of operations, financial condition, cash flows and/or prospects could be materially adversely affected. 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 EnergíaCosta Azul . IEnova has been engaged in a long-running land dispute relating to property adjacent to its ECA Regas Facility that allegedly overlaps with land owned by the ECA Regas Facility (the facility, however, is not situated on the land that is the subject of this dispute). In addition, four cases involving two adjacent areas of real property on which part of the ECA Regas Facility is situated, each brought by a single plaintiff or her descendants, remain pending against the facility. Certain of these land disputes involve land on which portions of the ECA LNG liquefaction facilities, including ECA LNG Phase 1 currently under construction, are proposed to be situated or on which portions of the ECA Regas Facility that would be necessary for the operation of the proposed ECA LNG liquefaction facilities are situated. Several administrative challenges are pending before Mexico's Secretariat of Environment and Natural Resources (the Mexican environmental protection agency) and Federal Tax and Administrative Courts, seeking revocation of the environmental impact authorization issued to the ECA Regas Facility in 2003. These cases generally allege that the conditions and mitigation measures in the environmental impact authorization are inadequate and challenge findings that the activities of the terminal are consistent with regional development guidelines. In 2018 and 2021, three related claimants filed separate challenges in the federal district court inEnsenada, Baja California in relation to the environmental and social impact permits issued by each of ASEA and SENER to ECA LNG authorizing natural gas liquefaction activities at the ECA Regas Facility. InMay 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 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. InJuly 2020 ,Shell Mexico submitted a request for arbitration of the dispute and although Gazprom has joined the proceeding, 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. As a consequence, IEnova is not currently drawing on Gazprom's letter of credit but expects to continue to draw onShell Mexico's 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 and an additional constitutional claim against the issuance of the liquefaction permit.Shell Mexico's request to stay the CRE's approval of the general terms and conditions was denied inOctober 2020 and upheld on appeal. A decision on the merits is pending. The claim regarding the liquefaction permit issuance was denied inMarch 2021 and upheld on appeal. A hearing on the merits of the arbitration case was held inOctober 2021 . We discuss these matters in further detail in Note 11 of the Notes to Condensed Consolidated Financial Statements. One or more unfavorable final decisions on these disputes or 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, cash flows, financial condition, results of operations and/or prospects. Sonora Pipeline. As we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements, theGuaymas -El Oro segment of theSonora pipeline has been inoperable sinceAugust 2017 . Under an agreement between IEnova and the CFE, the CFE will resume making payments only when the damaged section of theGuaymas -El Oro segment of theSonora pipeline is 114 -------------------------------------------------------------------------------- repaired. If the pipeline is not repaired byMarch 14, 2022 , 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. AtSeptember 30, 2021 , Sempra Mexico had$436 million in PP&E, net, related to theGuaymas -El Oro segment of theSonora pipeline, which could be subject to impairment if IEnova is unable to make such repairs (which have not commenced) or re-route the pipeline (which has not been agreed to by the parties) and resume operations in theGuaymas -El Oro segment of theSonora pipeline or if IEnova terminates the contract and is unable to obtain recovery, which in each case could have a material adverse effect on Sempra's business, results of operations, financial condition, cash flows and/or prospects. InJune 2014 , IEnova and a landowner agreed to enter into a voluntary right-of-way easement agreement for the construction and operation of a seven-mile section of the 314-mileSasabe -Puerto Libertad -Guaymas segment of theSonora natural gas pipeline on the landowner's property. However, in 2015, the landowner filed a complaint demanding the easement agreement be nullified. InSeptember 2021 , a definitive and non-appealable judgment was issued declaring the easement agreement nullified and ordering the removal of the pipeline from the landowner's property. IEnova intends to file a special judicial action whereby it will ask a civil court to acknowledge the existence of the easement and to determine the consideration the landowner should receive in exchange for the easement. The failure to stay this judgment pending the resolution of IEnova's planned special judicial action or prevail in preserving the easement in the special judicial action could require us to modify the route of the pipeline and could require a temporary shutdown of this portion of the pipeline, which 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. As we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements, the Mexican government and certain Mexican governmental agencies have amended existing laws and rules, updated transmission rates, and issued orders, decrees and regulations that could materially impact IEnova's participation in the country's energy market. Those actions 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. In addition, those actions (i) require that only state-owned companies may import and export hydrocarbons, refined products, petrochemicals, and biofuels through channels other than those authorized, which could adversely affect new projects that have not obtained such authorizations and projects under construction, in development or in operation, and (ii) grant SENER and the CRE additional powers to suspend and revoke permits related to the midstream and downstream sectors. Some of these newly enacted amendments, orders, rules, decrees and regulations have been challenged or temporarily suspended through litigation and judicial rulings obtained by businesses operating in the power sector, including by IEnova. As we discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements, inSeptember 2021 , the President of Mexico presented a constitutional reform initiative that introduces significant changes to the legal and economic principles underlying the country's energy reform of 2013, generating imminent risks for private investments in this sector. Electricity generation permits and contracts for the sale of electricity to the CFE, including permits at all of IEnova's operational power generation facilities, would be canceled. The public electricity supply service would be provided exclusively by the CFE, which may acquire up to 46% of required energy from the private sector. Only certain private power plants would be permitted to continue generating electricity and compete to offer the CFE the lowest production costs. If the ongoing litigation to enjoin enforcement or suspend or overturn these newly enacted laws and regulations fails, if the proposed constitutional reform is passed in its current form, or if other amendments to existing laws or regulations are adopted or enacted that curb private-party involvement in the energy sector inMexico , this could impact our ability to operate our facilities at existing levels or at all, result in increased costs for IEnova and its customers, adversely affect our ability to develop new projects, and 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, financial condition, results of operations, cash flows and/or prospects. Acquisition of ESJ As we discuss in Note 5 of the Notes to Condensed Consolidated Financial Statements, inMarch 2021 , IEnova increased its ownership interest in ESJ from 50% to 100% by acquiring Saavi Energía's 50% equity interest in ESJ. 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 the first quarter of 2022. IEnova Exchange Offer and Cash Tender Offer InMay 2021 , we acquired 381,015,194 publicly owned shares of IEnova in exchange for 12,306,777 newly issued shares of our common stock upon completion of our exchange offer launched in theU.S. and Mexico, which increased our ownership interest 115 -------------------------------------------------------------------------------- in IEnova from 70.2% to 96.4%. InSeptember 2021 , we completed a cash tender offer and acquired 51,014,545 publicly owned shares of IEnova for4.0 billion Mexican pesos (approximately$202 million inU.S. dollars) in cash, which increased our ownership interest in IEnova from 96.4% to 99.9%. We describe these transactions in Note 1 of the Notes to Condensed Consolidated Financial Statements. In addition to being traded on theNew York Stock Exchange , Sempra's common stock is also listed on theMexican Stock Exchange under the ticker symbol SRE.MX. IEnova's shares were delisted from theMexican Stock Exchange effectiveOctober 15, 2021 . In connection with the delisting, we are maintaining a trust for the purpose of purchasing the 1,212,981 remaining publicly owned IEnova shares for78.97 Mexican pesos per share, the same price per share that was offered in our cash tender offer. The trust will be in place through the earlier ofApril 14, 2022 or the date on which we acquire all remaining publicly owned IEnova shares. Sempra LNG Sempra LNG is pursuing development of additional LNG export facilities on theGulf Coast andPacific Coast of North America through its proposed Cameron LNG JV Phase 2 liquefaction expansion project inLouisiana , ECA LNG liquefaction export projects inMexico , and Port Arthur LNG liquefaction export project inTexas . Sempra LNG will 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 and minority interest owners, bank financing, project financing, accessing the capital markets 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 currently include up to two additional liquefaction trains and up to two additional full containment LNG storage tanks. However, Cameron LNG JV plans to file 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. We expect the proposed expansion project will initially have one train with offtake capacity of over 6 Mtpa, with the ability to increase capacity with debottlenecking, and the site can accommodate additional trains beyond Phase 2. Sempra has entered into 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 obligation of each partner. Discussions among all the Cameron LNG JV partners have been taking place regarding how an expansion may be structured, including a facility design utilizing electric drives, and we expect that discussions will continue. Although we are working towards making a final investment decision around the end of 2022, the timing of when or if Cameron LNG JV will receive approval to amend the permits is uncertain, and 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 project. The development of the potential 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; 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. 116 -------------------------------------------------------------------------------- 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 or operation of the ECA LNG Phase 1 project to disrupt operations at the ECA Regas Facility. 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 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. InMarch 2019 , ECA LNG received two authorizations from theDOE to exportU.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. InApril 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. InDecember 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. InFebruary 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 inNovember 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. We expect ECA LNG Phase 1 to begin producing LNG by the end of 2024. InDecember 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$291 million was outstanding atSeptember 30, 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; the impact of recent and proposed changes to the law inMexico ; 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; 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, an unfavorable judgment that does not allow IEnova to secure new or renew existing LDA authorizations, or an extended dispute with existing customers at the ECA Regas Facility, could materially adversely affect the development and construction of these projects and Sempra'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 ofPort Arthur, Texas , located along theSabine -Neches waterway. Sempra LNG received authorizations from theDOE inAugust 2015 andMay 2019 that collectively permit the LNG to be produced from the proposed Port Arthur LNG project to be exported to all current and future FTA and non-FTA countries. 117 -------------------------------------------------------------------------------- InApril 2019 , theFERC approved the siting, construction and operation of the proposed Port Arthur LNG liquefaction facility, along with certain natural gas pipelines, including the Louisiana Connector and Texas Connector Pipelines, that could be used to supply feed gas to the liquefaction facility, assuming the project is completed. InFebruary 2020 , Sempra LNG filed aFERC application for the siting, construction and operation of a second phase at the proposed Port Arthur LNG facility, including the potential addition of two liquefaction trains. InFebruary 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. InDecember 2020 , we amended and restated the EPC contract to reflect an estimated price of approximately$8.7 billion . Since we did not issue a full notice to proceed byJuly 15, 2021 , agreement by both parties on an amendment to the EPC contract is necessary. Such amendment may adjust the EPC contract price and the EPC schedule and could potentially include other changes to the work and terms and conditions of the EPC contract prior to Port Arthur LNG having the right to issue a full notice to proceed thereunder. Any agreement on such an amendment by both parties or on favorable terms to Sempra cannot be assured. InDecember 2018 , Polish Oil & Gas Company (PGNiG) and Port Arthur LNG entered into a definitive 20-year agreement for the sale and purchase of 2 Mtpa of LNG per year from the Port Arthur LNG liquefaction export project. InJuly 2021 , the agreement was terminated and PGNiG and Sempra LNG entered into an MOU to collaborate to transition the 2 Mtpa to Sempra LNG's portfolio of projects. InMay 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 included the negotiation of a potential 25% equity investment in the project. InJanuary 2020 ,Aramco Services Company and Sempra LNG signed an Interim Project Participation Agreement related to the proposed project. InJune 2021 ,Aramco Services Company and Sempra LNG agreed to allow the Heads of Agreement and Interim Project Participation Agreement to expire. InNovember 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 work to progress development of the proposed Port Arthur LNG liquefaction export project and are evaluating design changes that could reduce overall emissions, including electric drives, renewable power sourcing and other technological solutions. Given uncertainties in the energy markets, including real-time developments of new technologies that could impact the design, scale and structure of the project, we continue to evaluate the timing of a final investment decision; however, we will not 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 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 and maintaining 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's financial condition, results of operations and 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. SOURCES AND USES OF CASH The following tables include only significant changes in cash flow activities for each of our registrants. 118 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES (Dollars in millions) Nine months ended September 30, Sempra SDG&E SoCalGas 2021$ 2,981 $ 1,024 $ 1,037 2020 1,629 983 1,388 Change$ 1,352 $ 41 $ (351)
Net increase in Reserve for Aliso Canyon Costs primarily due
to
$ 1,266 $ 1,266 Higher dividends received from Cameron LNG JV
287
Net decrease in Insurance Receivable for
196 196
Release of a regulatory liability related to 2016-2018 income tax expense forecasting differences in 2020
175$ 86 89 Change in income taxes receivable/payable, net 166 (134) (170) Decrease in prepaid insurance 42 39 3 Change in accounts payable 86 (32) 24 Increase in greenhouse gas allowance purchases (123) (133) Change in accounts receivable (183) 29 (96)
Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets)
(189) (80) (109)
Change in net margin posted at Sempra LNG's marketing operations
(364)
(Lower) higher net income (loss), adjusted for noncash items included in earnings
(1,103) 114 (1,427) Other 45 19 6 Cash used in discontinued operations in 2020 primarily due to$1,161 income taxes paid related to the sale of our South American businesses 1,051$ 1,352 $ 41 $ (351) CASH FLOWS FROM INVESTING ACTIVITIES (Dollars in millions) Nine months ended September 30, Sempra SDG&E SoCalGas 2021$ (3,456) $ (1,553) $ (1,417) 2020 2,415 (1,315) (1,345) Change$ (5,871) $ (238) $ (72) Distribution from Cameron LNG JV in 2020$ (753) Increase in capital expenditures (293)
(65) Lower contributions toOncor Holdings 58 Distribution fromOncor Holdings in 2021 361 Other 7
(1)
Cash provided by discontinued operations in 2020
primarily due to
(5,186)$ (5,871) $ (238) $ (72) 119
-------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES (Dollars in millions) Nine months ended September 30, Sempra SDG&E SoCalGas 2021$ 397 $ 506 $ 602 2020 (710) 1,055 251 Change$ 1,107 $ (549) $ 351
Change in borrowings and repayments of short-term debt, net
$ 3,870
2,277 Repurchase of common stock under ASR program in 2020 500 Lower repurchases of common stock 26 Lower advances from unconsolidated affiliates (24) Higher purchases of NCI (43) (Higher) lower common dividends paid (109) 200 (25) Higher payments on long-term debt and finance leases (205)
(354)
Net proceeds from issuance of series C preferred stock in 2020
(890) (Lower) higher issuances of short-term debt with maturities greater than 90 days (1,296)
375
Lower issuances of long-term debt (2,646) (853) (949) Equity contribution from Sempra 800 Other 48 3 8 Cash provided by discontinued operations in 2020 primarily from a$250 intercompany loan and$165 net increase in short term debt (401)$ 1,107 $ (549) $ 351 Capital Expenditures, Investments and Acquisitions EXPENDITURES FOR PP&E, INVESTMENTS AND ACQUISITIONS (Dollars in millions) Nine months ended September 30, 2021 2020 SDG&E $ 1,560$ 1,323 SoCalGas 1,417 1,345 Sempra Texas Utilities 151 225 Sempra Mexico 325 443 Sempra LNG 362 200 Parent and other 7 6 Total $ 3,822$ 3,542 The amounts and timing of capital expenditures and certain investments are generally subject to approvals by various regulatory and other governmental and environmental bodies, including the CPUC, theFERC and the PUCT, and various other factors described in this MD&A and in "Part I - Item 1A. Risk Factors" in the Annual Report. In 2021, we expect to make capital expenditures and investments of approximately$6.1 billion , an increase from the$5.8 billion projected in "Part II - Item 7. MD&A - Capital Resources and Liquidity" in the Annual Report. The increase is primarily attributable to an increase in expected contributions to our investment inOncor Holdings and pipeline expansion projects at Sempra Mexico, offset by a delay of capital expenditures related to ECA LNG Phase 1 at Sempra LNG. COMMITMENTS We discuss significant changes to contractual commitments in the first nine months of 2021, none of which were outside the ordinary course of our business, in Notes 7 and 11 of the Notes to Condensed Consolidated Financial Statements. OFF-BALANCE SHEET ARRANGEMENTS 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, 120
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scheduled to occur in 2039, or replenishment of the amount withdrawn by Sempra LNG from the SDSRA. We discuss this guarantee in Note 6 of the Notes to Condensed Consolidated Financial Statements. InMarch 2021 , Cameron LNG JV reached financial completion of the three-train liquefaction project and Sempra's guarantees for a maximum aggregate amount of$4.0 billion were terminated. 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. Our investments inOncor Holdings and Cameron LNG JV and our Support Agreement for the benefit of CFIN are variable interests. Sempra's other businesses may also enter into arrangements that could include variable interests. We discuss variable interests in Note 1 of the Notes to Condensed Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We view certain accounting policies as critical because their application is the most relevant, judgmental, and/or material to our financial position and results of operations, and/or because they require the use of material judgments and estimates. We discuss these accounting policies in "Part II - Item 7. MD&A" in the Annual Report. We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes. NEW ACCOUNTING STANDARDS We discuss the relevant pronouncements that have recently been issued or become effective and have had or may have an impact on our financial statements and/or disclosures in Note 2 of the Notes to Condensed Consolidated Financial Statements.
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