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INVESTMENTS IN UNCONSOLIDATED ENTITIES

12 Months Ended

Dec. 31, 2019

We generally account for investments under the equity method when we have significant influence over, but do not have control of, these entities. Equity earnings and losses, both before and net of income tax, are combined and presented as Equity Earnings on the Consolidated Statements of Operations.

Our equity method investments include various domestic and foreign entities. Our domestic equity method investees are typically partnerships that are pass-through entities for income tax purposes and therefore they do not record income tax. Sempra Energy’s income tax on earnings from these equity method investees, other than Oncor Holdings as we discuss below, is included in Income Tax (Expense) Benefit on the Consolidated Statement of Operations. Our foreign equity method investees are corporations whose operations are generally taxable on a standalone basis in the countries in which they operate, and we recognize our equity in such income or loss net of investee income tax. See Note 8 for information on how equity earnings and losses before income taxes are factored into the calculations of our pretax income or loss and ETR.

We provide the carrying values of our investments and earnings (losses) on these investments in the following tables.



EQUITY METHOD AND OTHER INVESTMENT BALANCES
(Dollars in millions)
	Percent ownership
	December 31,				December 31,
	2019		2018		2019		2018
Sempra Texas Utilities:
Oncor Holdings⁽¹⁾	100	%	100	%	$	11,519	$	9,652
Sempra Texas Utilities:
Sharyland Holdings⁽²⁾	50		—		$	100	$	—
Sempra Mexico:
Energía Sierra Juárez⁽³⁾	50		50		39		43
IMG JV⁽⁴⁾	40		40		337		328
TAG JV⁽⁵⁾	50		50		365		376
Sempra Renewables:
Auwahi Wind	—		50		—		38
Cedar Creek 2 Wind	—		50		—		69
Flat Ridge 2 Wind⁽⁶⁾	—		50		—		82
Fowler Ridge 2 Wind	—		50		—		45
Mehoopany Wind⁽⁷⁾	—		50		—		57
Sempra LNG:
Cameron LNG JV⁽⁸⁾	50.2		50.2		1,256		1,271
Total other equity method investments					2,097		2,309
Other					6		11
Total other investments					$	2,103	$	2,320

⁽¹⁾

The carrying value of our equity method investment is $2,823 million and $2,814 million higher than the underlying equity in the net assets of the investee at December 31, 2019 and 2018, respectively, due to $2,868 million of equity method goodwill and $69 million in basis differences in AOCI, offset by $114 million at December 31, 2019 and $123 million at December 31, 2018 due to a tax sharing liability to TTI under the tax sharing agreement.


⁽²⁾	The carrying value of our equity method investment is $42 million higher than the underlying equity in the net assets of the investee due to equity method goodwill.


⁽³⁾	The carrying value of our equity method investment is $12 million higher than the underlying equity in the net assets of the investee due to the remeasurement of our retained investment to fair value in 2014.


⁽⁴⁾	The carrying value of our equity method investment is $5 million higher than the underlying equity in the net assets of the investee due to guarantees.


⁽⁵⁾	The carrying value of our equity method investment is $130 million higher than the underlying equity in the net assets of the investee due to equity method goodwill.


⁽⁶⁾	The carrying value of our equity method investment at December 31, 2018 was $169 million lower than the underlying equity in the net assets of the investee due to an other-than-temporary impairment recorded in 2018.


⁽⁷⁾	The carrying value of our equity method investment at December 31, 2018 was $31 million lower than the underlying equity in the net assets of the investee due to an other-than-temporary impairment recorded in 2018.

⁽⁸⁾

The carrying value of our equity method investment is $263 million and $246 million higher than the underlying equity in the net assets of the investee at December 31, 2019 and 2018, respectively, primarily due to guarantees, which we discuss below, interest capitalized on the investment prior to the JV commencing its planned principal operations in August 2019 and amortization of guarantee fees and capitalized interest thereafter.



EARNINGS (LOSSES) FROM EQUITY METHOD INVESTMENTS
(Dollars in millions)
	Years ended December 31,
	2019			2018			2017
EARNINGS (LOSSES) RECORDED BEFORE INCOME TAX⁽¹⁾:
Sempra Texas Utilities:
Sharyland Holdings	$	2		$	—		$	—
Sempra Renewables:
Wind:
Auwahi Wind	—			3			5
Broken Bow 2 Wind	—			(2		)	(2		)
Cedar Creek 2 Wind	—			(1		)	(2		)
Flat Ridge 2 Wind⁽²⁾	(3		)	(178		)	(13		)
Fowler Ridge 2 Wind	5			3			4
Mehoopany Wind⁽²⁾	1			(30		)	(1		)
Solar:
California solar partnership	—			8			7
Copper Mountain Solar 2	—			5			5
Copper Mountain Solar 3	—			8			8
Mesquite Solar 1	—			18			18
Other	2			(3		)	—
Sempra LNG:
Cameron LNG JV	24			—			5
Parent and other:
RBS Sempra Commodities⁽²⁾	—			(67		)	—
Other	(1		)	—			—
	30			(236		)	34
EARNINGS (LOSSES) RECORDED NET OF INCOME TAX:
Sempra Texas Utilities:
Oncor Holdings	526			371			—
Sempra Mexico:
DEN	—			—			(13		)
Energía Sierra Juárez	2			2			—
IMG JV	9			29			45
TAG JV	13			9			6
	550			411			38
Total	$	580		$	175		$	72


⁽¹⁾	We provide our ETR calculation in Note 8.


⁽²⁾	Losses from equity method investment in 2018 include an other-than-temporary impairment charge, which we discuss below.

We disclose distributions received from our investments, by segment, in the table below.



DISTRIBUTIONS FROM INVESTMENTS
(Dollars in millions)
	Years ended December 31,
	2019		2018		2017
Sempra Texas Utilities	$	246	$	149	$	—
Sempra Mexico	2		—		—
Sempra Renewables	1		63		65
Parent and other	7		—		—
Total	256		212		65

At December 31, 2019 and 2018, our share of the undistributed earnings of equity method investments was $634 million and $332 million, respectively, including $501 million at December 31, 2019 in undistributed earnings from investments for which we have more than 50% equity interests.

SEMPRA TEXAS UTILITIES

Oncor Holdings

As we discuss in Note 5, on March 9, 2018, we completed the acquisition of an indirect, 100% interest in Oncor Holdings, which, at December 31, 2019, owns an 80.25% interest in Oncor. Sempra Energy does not control Oncor Holdings or Oncor, and the ring-fencing measures, governance mechanisms and commitments in effect limit our ability to direct the management, policies and operations of Oncor Holdings and Oncor, including the deployment or disposition of their assets, declarations of dividends, strategic planning and other important corporate issues and actions. We also have limited representation on the Oncor Holdings and Oncor boards of directors. As we do not have the power to direct the significant activities of Oncor Holdings and Oncor, we account for our 100% ownership interest in Oncor Holdings as an equity method investment.

Oncor is a domestic partnership for U.S. federal income tax purposes and is not included in the consolidated income tax return of Sempra Energy. Rather, only our pretax equity earnings from our investment in Oncor Holdings (a disregarded entity for tax purposes) are included in our consolidated income tax return. A tax sharing agreement with TTI, Oncor Holdings and Oncor provides for the calculation of an income tax liability substantially as if Oncor Holdings and Oncor were taxed as corporations and requires tax payments determined on that basis. While partnerships are not subject to income taxes, in consideration of the tax sharing agreement and Oncor being subject to the provisions of U.S. GAAP governing rate-regulated operations, Oncor recognizes amounts determined under cost-based regulatory rate-setting processes (with such costs including income taxes), as if it were taxed as a corporation. As a result, since Oncor Holdings consolidates Oncor, we recognize equity earnings from our investment in Oncor Holdings net of its recorded income tax.

We provide summarized income statement and balance sheet information for Oncor Holdings in the following table.



SUMMARIZED FINANCIAL INFORMATION – ONCOR HOLDINGS
(Dollars in millions)
	Year ended December 31, 2019			March 9 - December 31, 2018
Operating revenues	$	4,347		$	3,347
Operating expense	(3,135		)	(2,434		)
Income from operations	1,212			913
Interest expense	(375		)	(285		)
Income tax expense	(131		)	(119		)
Net income	643			455
Noncontrolling interest held by TTI	(129		)	(94		)
Earnings attributable to Sempra Energy	514			360

	At December 31,
	2019			2018
Current assets	$	913		$	772
Noncurrent assets	26,012			21,980
Current liabilities	1,626			2,217
Noncurrent liabilities	14,125			11,756
Noncontrolling interest held by TTI	2,473			1,951

In 2019, we contributed cash of $1,587 million to Oncor, including $1,067 million to fund Oncor’s May 2019 acquisition of interests in InfraREIT and certain acquisition-related expenses. In 2018, we contributed $230 million in cash to Oncor in accordance with the terms of the Merger Agreement, which enabled Oncor to achieve its required capital structure calculated for regulatory purposes. In 2019 and 2018, Oncor Holdings distributed to Sempra Energy $246 million and $149 million, respectively, in dividends and $10 million and $18 million, respectively, in tax sharing payments.

Sharyland Holdings

As we discuss in Note 5, on May 16, 2019, we acquired an indirect, 50% interest in Sharyland Holdings, which owns a 100% interest in Sharyland Utilities, for $95 million, net of $7 million in post-closing adjustments, which we account for as an equity method investment. In 2019, we invested cash of $3 million in Sharyland Holdings.

SEMPRA MEXICO

IMG JV

IEnova has a 40% interest in IMG JV, a JV with a subsidiary of TC Energy, and accounts for its interest as an equity method investment. IMG JV owns and operates the Sur de Texas-Tuxpan natural gas marine pipeline, which is fully contracted under a 35-year natural gas transportation service contract with the CFE and commenced commercial operation in September 2019. In 2018 and 2017, Sempra Mexico invested cash of $80 million and $72 million, respectively, in IMG JV.

DEN and TAG JV

On November 15, 2017, IEnova acquired the remaining 50% interest in DEN, and DEN became a consolidated subsidiary. Since the acquisition date, IEnova accounts for DEN’s 50% interest in TAG JV as an equity method investment. We discuss this acquisition in Note 5.

SEMPRA RENEWABLES

As a result of the plan of sale, Sempra Renewables recorded an other-than-temporary impairment on certain of our wind equity method investments totaling $200 million in 2018, which is included in Equity Earnings on Sempra Energy’s Consolidated Statement of Operations. Sempra Renewables completed the sales of all its operating solar assets, including its solar equity method investments and one wind equity method investment, in December 2018 and its remaining wind assets and investments in April 2019. We discuss these divestitures further in Note 5.

In 2018, Sempra Renewables invested cash of $5 million in its unconsolidated JVs.

SEMPRA LNG

Cameron LNG JV

Cameron LNG JV was formed in October 2014 among Sempra Energy and three project partners, TOTAL S.A., Mitsui & Co., Ltd., and Japan LNG Investment, LLC, a company jointly owned by Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha. We account for our 50.2% investment in Cameron LNG JV under the equity method.

Cameron LNG JV is constructing a three-train natural gas liquefaction export facility with a nameplate capacity of 13.9 Mtpa of LNG, with an expected export capability of 12 Mtpa of LNG, or approximately 1.7 Bcf per day. In August 2019, the first of three trains commenced commercial operation under the JV’s tolling agreements. Prior to commencing commercial operation, Sempra LNG capitalized interest of $33 million in 2019 and $47 million in each of 2018 and 2017 related to this equity method investment. In 2019, 2018 and 2017, Sempra LNG invested cash of $77 million, $228 million and $1 million, respectively, in Cameron LNG JV.

Cameron LNG JV Financing

General. In August 2014, Cameron LNG JV entered into finance documents (collectively, Loan Facility Agreements) for senior secured financing in an initial aggregate principal amount of up to $7.4 billion under three debt facilities provided by the Japan Bank for International Cooperation (JBIC) and 29 international commercial banks, some of which will benefit from insurance coverage provided by Nippon Export and Investment Insurance (NEXI).

The Loan Facility Agreements and related finance documents provide senior secured term loans with a maturity date of July 15, 2030. The proceeds of the loans are being used for financing the cost of development and construction of the three-train Cameron LNG project. The Loan Facility Agreements and related finance documents contain customary representations and affirmative and negative covenants for project finance facilities of this kind with the lenders of the type participating in the Cameron LNG JV financing.

In December 2019, Cameron LNG JV refinanced $3.0 billion of the uncovered bank facility portion of the Loan Facility Agreements in a private placement bond offering. The newly issued senior secured notes bear interest at a fixed weighted-average rate of 3.39% and have a weighted-average tenor of 15.4 years at December 31, 2019.

Interest. The weighted-average all-in cost of the loans that remain outstanding under the original Loan Facility Agreements (and based on certain assumptions as to timing of drawdown) is 0.98% per annum over LIBOR prior to financial completion of the project and 1.22% per annum over LIBOR following financial completion of the project. The original Loan Facility Agreements required Cameron LNG JV to hedge 50% of outstanding borrowings to fix the interest rate, beginning in 2016. The hedges are to

remain in place until the debt principal has been amortized by 50%. In November 2014, Cameron LNG JV entered into floating-to-fixed interest rate swaps for approximately $3.7 billion notional amount, resulting in an effective fixed rate of 3.19% for the LIBOR component of the interest rate on the loans. In June 2015, Cameron LNG JV entered into additional floating-to-fixed interest rate swaps effective starting in 2020, for approximately $1.5 billion notional amount, resulting in an effective fixed rate of 3.32% for the LIBOR component of the interest rate on the loans. In December 2019, approximately $790 million of the $1.5 billion notional amount was terminated as a result of the refinancing, resulting in an effective fixed rate of 3.26% for the LIBOR component of the interest rate on the remaining loans outstanding.

The weighted-average all-in cost of the loans outstanding under the original Loan Facility Agreements and the newly issued senior secured notes is 3.72%.

Guarantees. In August 2014 and December 2019, Sempra Energy entered into agreements for the benefit of all of Cameron LNG JV’s creditors under the original Loan Facility Agreements and the newly issued senior secured notes, respectively. Pursuant to these agreements, Sempra Energy has severally guaranteed 50.2% of Cameron LNG JV’s obligations under the original Loan Facility Agreements and the newly issued senior secured notes, or a maximum amount of $4.0 billion. Guarantees for the remaining 49.8% of Cameron LNG JV’s senior secured financing have been provided by the other project owners. Sempra Energy’s agreements and guarantees will terminate upon financial completion of the three-train Cameron LNG project, which is subject to satisfaction of certain conditions, including all three trains achieving commercial operations and meeting certain operational performance tests. We expect the project to achieve financial completion and the guarantees to be terminated approximately nine months after all three trains achieve commercial operation. Sempra Energy recorded a liability of $82 million in October 2014 for the fair value of its obligations associated with the original Loan Facility Agreements, which constitute guarantees. This liability was fully amortized at December 31, 2019. Sempra Energy recorded a liability of $3 million in December 2019 for the fair value of its obligations associated with Cameron LNG JV’s newly issued senior secured notes, which also constitute guarantees. This liability will be reduced on a straight-line basis over the duration of the guarantees by increasing our investment in Cameron LNG JV.

In August 2014, Sempra Energy and the other project owners entered into a transfer restrictions agreement with Société Générale, as intercreditor agent for the lenders under the Loan Facility Agreements. Pursuant to the transfer restriction agreement, Sempra Energy agreed to certain restrictions on its ability to dispose of Sempra Energy’s indirect fully diluted economic and beneficial ownership interests in Cameron LNG JV. These restrictions vary over time. Prior to financial completion of the three-train Cameron LNG project, Sempra Energy must retain 37.65% of such interest in Cameron LNG JV. Starting six months after financial completion of the three-train Cameron LNG project, Sempra Energy must retain at least 10% of the indirect fully diluted economic and beneficial ownership interest in Cameron LNG JV. In addition, at all times, a Sempra Energy controlled (but not necessarily wholly owned) subsidiary must directly own 50.2% of the membership interests of Cameron LNG JV.

Events of Default. Cameron LNG JV’s Loan Facility Agreements and related finance documents contain events of default customary for such financings, including events of default for: failure to pay principal and interest on the due date; insolvency of Cameron LNG JV; abandonment of the project; expropriation; unenforceability or termination of the finance documents; and a failure to achieve financial completion of the project by a financial completion deadline date of September 30, 2021 (with up to an additional 365 days extension beyond such date permitted in cases of force majeure). A delay in construction that results in a failure to achieve financial completion of the project by this financial completion deadline date would therefore result in an event of default under Cameron LNG JV’s financing and a potential demand on Sempra Energy’s guarantees.

Security. To support Cameron LNG JV’s obligations under its debt agreements, Cameron LNG JV has granted security over all of its assets, subject to customary exceptions, and all equity interests in Cameron LNG JV have been pledged to HSBC Bank USA, National Association, as security trustee for the benefit of all of Cameron LNG JV’s creditors. As a result, an enforcement action by the lenders taken in accordance with the finance documents could result in the exercise of such security interests by the lenders and the loss of ownership interests in Cameron LNG JV by Sempra Energy and the other project partners.

The security trustee under Cameron LNG JV’s financing can demand that a payment be made by Sempra Energy under its guarantees of Sempra Energy’s 50.2% share of senior debt obligations due and payable either on the date such amounts were due from Cameron LNG JV (taking into account cure periods) in the event of a failure by Cameron LNG JV to pay such senior debt obligations when they become due or within 10 business days in the event of an acceleration of senior debt obligations under the terms of the finance documents. If an event of default occurs under the Sempra Energy completion agreement, the security trustee can demand that Sempra Energy purchase its 50.2% share of all then outstanding senior debt obligations within five business days (other than in the case of a bankruptcy default, which is automatic).

RBS SEMPRA COMMODITIES

RBS Sempra Commodities is a United Kingdom limited liability partnership formed by Sempra Energy and RBS in 2008 to own and operate the commodities-marketing businesses previously operated through wholly owned subsidiaries of Sempra Energy. We and RBS sold substantially all of the partnership’s businesses and assets in four separate transactions completed in 2010 and 2011. Since 2011, our investment balance has reflected our share of the remaining partnership assets, including amounts retained by the partnership to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership and the distribution of the partnership’s remaining assets, if any. We account for our investment in RBS Sempra Commodities under the equity method.

In September 2018, we fully impaired our remaining equity method investment in RBS Sempra Commodities by recording a charge of $65 million in Equity Earnings on Sempra Energy’s Consolidated Statement of Operations. We discuss matters related to RBS Sempra Commodities further in “Other Litigation” in Note 16.

SUMMARIZED FINANCIAL INFORMATION

We present summarized financial information below, aggregated for all other equity method investments (excluding Oncor Holdings) for the periods in which we were invested in the entities. The amounts below represent the results of operations and aggregate financial position of 100% of each of Sempra Energy’s other equity method investments.



SUMMARIZED FINANCIAL INFORMATION – OTHER EQUITY METHOD INVESTMENTS
(Dollars in millions)
	Years ended December 31,
	2019⁽¹⁾			2018⁽²⁾			2017⁽³⁾
Gross revenues	$	798		$	706		$	833
Operating expense	(372		)	(609		)	(585		)
Income from operations	426			97			248
Interest expense	(401		)	(322		)	(219		)
Net income (loss)/Earnings (losses)⁽⁴⁾	85			(36		)	108



	At December 31,
	2019⁽¹⁾		2018⁽²⁾
Current assets	$	1,124	$	564
Noncurrent assets	15,039		14,558
Current liabilities	1,232		801
Noncurrent liabilities	11,438		9,966


⁽¹⁾	On April 22, 2019, Sempra Renewables sold its remaining wind assets and investments to AEP. As of April 22, 2019, these wind assets and investments are no longer equity method investments.


⁽²⁾	On December 13, 2018, Sempra Renewables sold all its operating solar assets, including its solar equity method investments, and its 50% interest in the Broken Bow 2 wind power generation facility to a subsidiary of Con Ed. As of December 13, 2018, the solar equity method investments and Broken Bow 2 are no longer equity method investments.


⁽³⁾	On November 15, 2017, IEnova completed the asset acquisition of PEMEX’s 50% interest in DEN, increasing its ownership percentage to 100%. As of November 15, 2017, DEN is no longer an equity method investment.

⁽⁴⁾

Except for our investments in Mexico, there was no income tax recorded by the entities, as they are primarily domestic partnerships.