RECENT INVESTMENT ACTIVITY

6 Months Ended

Jun. 30, 2016

NOTE 3. ACQUISITION AND DIVESTITURE ACTIVITY

We consolidate assets and liabilities acquired as of the purchase date and include earnings from acquisitions in consolidated earnings after the purchase date.

ACQUISITIONS

Sempra Renewables

In July 2016, Sempra Renewables invested $22 million to acquire a 100-percent interest in the Apple Blossom Wind project, a 100-megawatt (MW) wind farm currently under development in Huron County, Michigan. The wind farm has a 15-year power purchase agreement with Consumers Energy that will commence upon commercial operation, expected in late 2017.

In March 2015, Sempra Renewables invested $8 million to acquire a 100-percent interest in the Black Oak Getty Wind project, a 78-MW wind farm currently under construction in Stearns County, Minnesota. The wind farm has a 20-year power purchase agreement with Minnesota Municipal Power Agency that will commence upon commercial operation, expected in late 2016.

PENDING ACQUISITION

Sempra Mexico

IEnova and Petróleos Mexicanos (or PEMEX, the Mexican state-owned oil company) are 50-50 partners in the joint venture Gasoductos de Chihuahua S. de R.L. de C.V. (GdC). GdC develops and operates energy infrastructure in Mexico. On July 31, 2015, IEnova entered into an agreement to purchase PEMEX’s 50-percent interest in GdC. The assets involved in the acquisition included three natural gas pipelines, an ethane pipeline, and a liquid petroleum gas pipeline and associated storage terminal.

In December 2015, Mexico’s Comisión Federal de Competencia Económica (COFECE or Mexican Competition Commission) objected to the transaction based upon previous antitrust rulings on PEMEX’s indirect ownership of two of the assets, the TDF S. de R.L. de C.V. liquid petroleum gas pipeline (TDF Pipeline) and the San Fernando natural gas pipeline (San Fernando Pipeline), included in the acquisition as proposed. COFECE specified that these assets must be offered by PEMEX in a competitive bidding process as a prerequisite for approval of any transaction involving these two assets. COFECE’s decision did not object to IEnova’s acquisition of the assets on a market concentration basis.

In July 2016, IEnova announced that the parties reached an agreement to restructure the transaction to allow PEMEX to satisfy the conditions imposed by the COFECE to hold the TDF Pipeline and San Fernando Pipeline for sale in an open bidding process. The open bidding process was held in July 2016 and ended with no bidders participating. Subject to final approval by the COFECE, IEnova expects to acquire GdC’s assets consistent with the original agreement, including the TDF and San Fernando pipelines, for a purchase price of approximately $1.1 billion. Also consistent with the original agreement, we expect the transaction to exclude the Los Ramones Norte pipeline that is owned under a separate joint venture with GdC, PEMEX, BlackRock and First Reserve, keeping IEnova’s interest in the pipeline at the current 25 percent. We expect the transaction to close in the third quarter of 2016. The transaction remains subject to the satisfactory completion of the Mexican antitrust review and customary closing conditions, and may require further approvals from other Mexican authorities.

IEnova currently accounts for its 50-percent interest in GdC as an equity method investment. At closing, GdC will become a wholly owned, consolidated subsidiary of IEnova. We anticipate that we will recognize a noncash gain associated with the remeasurement of our equity interest in GdC upon consummation of the transaction; however, as the assets to be included in the transaction are not yet confirmed and the valuation of such assets is not finalized, we are unable to reasonably estimate the gain at this time.

Sempra Energy has committed to provide interim financing to close the transaction. We expect to ultimately finance the acquisition with a combination of debt and equity at IEnova based on market conditions.

ASSETS HELD FOR SALE

We classify assets as held for sale when management approves and commits to a formal plan to actively market an asset for sale and we expect the sale to close within the next 12 months. Upon classifying an asset as held for sale, we record the asset at the lower of its carrying value or its estimated fair value reduced for selling costs.

The following table summarizes the carrying amounts of the major classes of assets and related liabilities held for sale at June 30, 2016, and we discuss each group of assets below.

ASSETS HELD FOR SALE AT JUNE 30, 2016
(Dollars in millions)
	Termoeléctrica de Mexicali		EnergySouth Inc.
	Termoeléctrica de Mexicali		EnergySouth Inc.
Cash and cash equivalents	$	1	$	1
Inventories		8		3
Other current assets		21		13
Regulatory assets		―		12
Goodwill		―		72
Other assets		17		53
Property, plant and equipment, net		250		203
Total assets held for sale	$	297	$	357

Accounts payable	$	1	$	9
Other current liabilities		6		12
Long-term debt		―		67
Deferred income taxes		13		38
Regulatory liabilities		―		22
Asset retirement obligations		4		12
Other liabilities		19		19
Total liabilities held for sale	$	43	$	179

Sempra Mexico

Termoeléctrica de Mexicali

In February 2016, management approved a plan to market and sell Sempra Mexico’s Termoeléctrica de Mexicali (TdM), a 625-MW natural gas-fired power plant located in Mexicali, Baja California, Mexico. As a result, we stopped depreciating the plant and classified it as held for sale.

In connection with classifying TdM as held for sale, we recognized expense of $3 million ($2 million after noncontrolling interests) and $32 million ($26 million after noncontrolling interests) in the three months and six months ended June 30, 2016, respectively, in Income Tax Expense on Sempra Energy’s Condensed Consolidated Statements of Operations for a deferred Mexican income tax liability related to the excess of carrying value over the tax basis. As the Mexican income tax on this basis difference is based on current carrying value, foreign exchange rates and inflation, such amount could change in future periods until the date of sale.

We considered the estimated fair value of the plant, less costs to sell, and determined that no adjustment to carrying value was required. In estimating fair value, we used both a market approach and discounted cash flow valuation techniques. In the event that the estimated sales price, less transaction costs, is less than the carrying value, or updated market information indicates fair value may be less than carrying value, we would recognize a loss in our results of operations at that time. We expect to complete the sale in the second half of 2016.

Sempra Natural Gas

EnergySouth Inc.

In April 2016, Sempra Natural Gas signed a definitive agreement to sell 100 percent of the outstanding equity of EnergySouth Inc. (EnergySouth), the parent company of Mobile Gas and Willmut Gas. We expect to receive cash proceeds of approximately $323 million, subject to normal adjustments at closing, and the buyer will assume existing debt of approximately $67 million. Litigation at Mobile Gas, discussed in Note 11, will be retained by Mobile Gas at the close of the transaction. The transaction is subject to customary regulatory approvals. In addition, the State of Missouri Public Service Commission (MPSC) in July 2016 opened an investigation into whether the transaction will have any effect on Missouri ratepayers and is subject to MPSC’s jurisdiction. We expect the sale to close in 2016.

DIVESTITURES

Sempra Natural Gas

Investment in Rockies Express Pipeline LLC

In March 2016, Sempra Natural Gas entered into an agreement to sell its 25-percent interest in Rockies Express Pipeline LLC (Rockies Express) to a subsidiary of Tallgrass Development, LP for cash consideration of $440 million, subject to adjustment at closing. The transaction closed in May 2016 for total cash proceeds of $443 million.

At the date of the agreement, the carrying value of Sempra Natural Gas’ investment in Rockies Express was $484 million. Sempra Natural Gas measured the fair value of its equity method investment at $440 million, and recognized a $44 million ($27 million after-tax) impairment in Equity Earnings (Losses), Before Income Tax, on the Sempra Energy Condensed Consolidated Statement of Operations in the first quarter of 2016. We discuss non-recurring fair value measures and the associated accounting impact on our investment in Rockies Express in Note 8.

In the second quarter of 2016, Sempra Natural Gas permanently released pipeline capacity that it held with Rockies Express and others, as we discuss in Note 11.

Mesquite Power Plant

In April 2015, Sempra Natural Gas sold the remaining 625-MW block of the Mesquite Power plant, together with a related power sales contract, for net cash proceeds of $347 million. We recognized a pretax gain on the sale of $61 million ($36 million after-tax), included in Gain on Sale of Assets on our Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2015.