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INVESTMENTS IN UNCONSOLIDATED ENTITIES
3 Months Ended
Sep. 30, 2011
Notes to Consolidated Financial Statements [Abstract] 
Investments in Unconsolidated Entities

NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

As we discuss in Note 3, Sempra Pipelines & Storage's interests in Chilquinta Energía and Luz del Sur are no longer recorded as equity method investments, but are consolidated effective April 6, 2011. We provide additional information concerning all of our equity method investments in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

 

RBS SEMPRA COMMODITIES

RBS Sempra Commodities LLP (RBS Sempra Commodities) is a United Kingdom limited liability partnership that owned and operated commodities-marketing businesses. We account for our investment in RBS Sempra Commodities under the equity method, and report our share of partnership earnings in Parent and Other.

We and our partner in the joint venture, The Royal Bank of Scotland (RBS), sold substantially all of the partnership's businesses and assets in four separate transactions completed in July, November and December of 2010 and February of 2011. We expect our share of remaining proceeds to approximate $322 million, the amount of our investment in RBS Sempra Commodities as of September 30, 2011. This amount reflects the impairment discussed below.

On April 15, 2011, we and RBS entered into a letter agreement (Letter Agreement) which amended certain provisions of the agreements that formed RBS Sempra Commodities. The Letter Agreement addresses the wind-down of the partnership and the distribution of the partnership's remaining assets. In accordance with the Letter Agreement, we received distributions of $329 million on April 15, 2011 and $98 million on August 9, 2011. These distributions included sales proceeds and our portion of 2010 distributable income totaling $455 million, less amounts to settle certain liabilities that we owed to RBS of $28 million. The Letter Agreement affirms that RBS Sempra Commodities will consider additional distributions of capital after taking into account various factors including available cash, the need for prudent reserves, potential payouts to the purchasers of the partnership's businesses, and any accrued or projected future operating losses or other wind-down expenses of the partnership. Cash availability is impacted by the transfer of trading accounts to one of the buyers in the sales transactions, JP Morgan, as well as collection of related accounts receivable and net margin. The transfer of accounts to JP Morgan and collection of net margin are substantially complete and the collection of accounts receivable continues as planned. Future distributions will generally be made 51 percent to RBS, and 49 percent to us. The Letter Agreement also allows RBS Sempra Commodities to make capital calls to us, subject to certain limits, if necessary to support the remaining operations, for other liabilities or for other payments owed in connection with the sales transactions (subject to additional limitations). We do not anticipate any such capital calls.

In connection with the Letter Agreement described above, we also released RBS from its indemnification obligations with respect to the items for which JP Morgan has agreed to indemnify us.

Pretax equity losses from RBS Sempra Commodities were $16 million and $24 million for the three months and nine months ended September 30, 2011, respectively. Pretax equity losses from RBS Sempra Commodities were $281 million and $290 million for the three months and nine months ended September 30, 2010, respectively. Included in the equity losses is an impairment charge of $16 million in 2011 and $305 million in 2010. As discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report, projected cash distributions from RBS Sempra Commodities, including proceeds from the sale of the partnership's businesses, are net of expected transition costs and are not expected to fully recover the goodwill included in the carrying value of our investment in the partnership. Accordingly, we recorded a pretax noncash charge of $305 million ($139 million after-tax) in the third quarter of 2010 to reduce our investment in RBS Sempra Commodities. In addition, we recorded a pretax noncash charge of $16 million ($10 million after-tax) for the three months and nine months ended September 30, 2011 to further reduce our investment, primarily to reflect additional amounts incurred to conclude the sales of the partnership's businesses. These charges are included in Equity Losses, Before Income Tax, on our Condensed Consolidated Statements of Operations. In 2011 and 2010, the fair value of our investment in RBS Sempra Commodities was significantly impacted by unobservable inputs (i.e. Level 3 inputs) as defined by the accounting guidance for fair value measurements. The inputs included estimated future cash distributions expected from the partnership, excluding the impact of costs anticipated for transactions that had not closed at the time of fair value measurement.

We further discuss the RBS Sempra Commodities sales transactions and other matters concerning the partnership in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

 

Sempra pipelines & storage

In a proceeding related to our political risk insurance policy, we negotiated a $48 million settlement that was collected in September 2010. The proceeds from the settlement are included in Other Income, Net, on our Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2010. This proceeding related to our investments in Argentina, as we discuss in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra generation

Sempra Generation and BP Wind Energy currently hold 50-percent ownership interests in Fowler Ridge 2 Wind Farm LLC (Fowler Ridge 2), a joint venture which operates a 200-megawatt (MW) wind farm project located in Benton County, Indiana. In August 2010, Sempra Generation received a $180 million return of capital from Fowler Ridge 2. We discuss this further in Note 6 below and provide additional information in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.