1.0.0.3 false COMMITMENTS AND CONTINGENCIES false 1 $ false false 2 Notes to Condensed Consolidated Financial Statements 0 sre_NotesToConsolidatedFinancialStatementsAbstract sre false na duration string No definition available. false false false false false true false false false 1 false false 0 0 false false No definition available. false 3 Commitments and Contingencies Disclosure 1 us-gaap_CommitmentsAndContingenciesDisclosureTextBlock us-gaap true na duration string No definition available. false false false false false false false false false 1 false false 0 0 <div style="font-size:12pt">NOTE 10. COMMITMENTS AND CONTINGENCIES Legal Proceedings The uncertainties that exist in legal proceedings make it difficult to estimate with reasonable certainty the costs and effects of resolving these matters. Accordingly, actual costs incurred may differ materially from insured or reserved amounts and could materially adversely affect our business, cash flows, results of operations, and financial condition. We record reserves for legal proceedings in accordance with ASC 450, Contingencies (ASC 450) (SFAS 5). At September 30, 2009, Sempra Energy's reserves for unresolved legal proceedings, on a consolidated basis, were $258 million. At September 30, 2009, SDG&E and SoCalGas had reserves for unresolved legal proceedings of $240 million and $11 million, respectively. The amounts for Sempra Energy Consolidated and SDG&E include $219 million of expected insurance settlements related to the SDG&E 2007 wildfire litigation discussed below.SDG&E 2007 Wildfire Litigation In October 2007, San Diego County experienced catastrophic wildfires. In July 2008, the California Department of Forestry and Fire Protection (Cal Fire) issued investigation reports stating that two fires (the Witch and Rice fires) were SDG&E "power line caused" and that a third fire (the Guejito fire) occurred when a wire securing a Cox Communications' fiber optic cable came into contact with an SDG&E power line "causing an arc and starting the fire." Cal Fire states that the Rice fire burned approximately 9,500 acres and damaged 206 homes and two commercial properties. The reports indicate that the Witch and Guejito fires merged and eventually burned approximately 198,000 acres, resulted in two fatalities, injured approximately 40 firefighters and destroyed approximately 1,141 homes. In September 2008, the Consumer Protection and Safety Division of the CPUC issued a staff investigative report reaching substantially the same conclusions as the Cal Fire reports. However, the staff report also opines that the power lines involved in the Witch and Rice fires and the lashing wire involved in the Guejito fire were not properly designed, constructed and maintained as required by CPUC rules. In November 2008, the CPUC initiated investigations to determine whether SDG&E and Cox Communications violated any rules or regulations in connection with the fires. In October 2009, SDG&E and the Consumer Protection and Safety Division entered into a $14.75 million settlement that, if approved by the CPUC, would resolve the investigations without any admission of SDG&E responsibility for the wildfires. Approximately 175 lawsuits have been filed against SDG&E and Sempra Energy in San Diego County Superior Court seeking to recover damages in unspecified amounts, including punitive damages and other costs associated with the three fires. The lawsuits assert various bases for recovery, including inverse condemnation based upon a California Court of Appeal decision finding that another California investor-owned utility was subject to strict liability, without regard to foreseeability or negligence, for damages resulting from a wildfire ignited by power lines. SDG&E has filed cross-complaints against Cox Communications seeking indemnification for any liability that SDG&E may incur that relates to the Guejito fire. In June 2009, the trial court ruled that the lawsuits cannot proceed as class actions on behalf of all persons who experienced wildfire damages, but must instead be pursued in individual lawsuits. Plaintiffs have appealed this ruling. By July 2009, insurers representing nearly 99 percent of the total California homeowner insurance market (homeowner insurers) had paid out and reserved approximately $1.6 billion on more than 19,000 claims relating to the three fires. These include claims for approximately 1,000 of the 1,300 houses, mobile homes, and apartment units identified in public records as having been destroyed by the three fires. During 2009, SDG&E and its liability insurers held a number of settlement discussions with the homeowner insurers in the litigation. Based on the information provided in these discussions, SDG&E concluded that its exposure to the homeowner insurers was reasonably estimable and established a reserve of $940 million in the first six months of 2009 that was recorded as a current liability in the Condensed Consolidated Balance Sheets and was fully offset by a current receivable of $940 million payable from SDG&E's $1.l billion of liability insurance. There was no effect on SDG&E's or Sempra Energy's 2009 earnings or cash flows from the recording of the reserve. After payments by SDG&E's liability insurers in the third quarter of 2009, the reserve has been reduced to $289 million. The remaining receivable of $266 million reflects timing differences between payments by SDG&E's liability insurers and settlement payments. At October 30, 2009, SDG&E and homeowner insurers holding approximately 97 percent of the insurer plaintiffs' claims had entered into settlement agreements. SDG&E has agreed to pay the settling insurers approximately $910 million (representing 57.5 percent of their $1.58 billion of paid and reserved claims) to settle all of their claims relating to the three wildfires. The settlements are entirely funded by SDG&E’s liability insurance coverage, and the settling insurers assign their claims against Cox Communications to SDG&E. Discussions are continuing with the remaining homeowner insurers for settlements on substantially the same terms. After giving effect to the money paid out and reserved in connection with the homeowner insurer settlements as well as defense costs, SDG&E's remaining liability insurance coverage for the litigation would be approximately $140 million. In addition to the claims of homeowner insurers, the wildfire litigation also includes claims of approximately 1,800 plaintiffs for uninsured and underinsured structures, firefighting costs, business interruption, evacuation expenses, agricultural damage, and personal injuries. SDG&E does not have sufficient information under ASC 450 to reasonably estimate any liability it may have for these additional claims and, accordingly, has not established a reserve for any wildfire claims other than those of the homeowner insurers. SDG&E expects that the aggregate amount of these additional claims and the remaining homeowner insurer claims that are ultimately asserted will substantially exceed its remaining $140 million in insurance coverage. If its ultimate liability were to exceed the remaining insurance and amounts that it may recover from Cox Communications and other defendants, SDG&E would request authorization from the FERC and the CPUC to recover the excess amount in utility rates. SDG&E is unable to reasonably predict the degree of success it may have in pursuing such requests or the timing of any recovery. In light of the complexity of these matters and the large number of parties involved, the wildfire litigation, including any appeals, could take several years to be resolved. California Department of Water Resources (DWR) Contract In February 2002, the California Energy Oversight Board (CEOB) and the CPUC filed challenges at the FERC to the DWR's contracts with Sempra Generation and other power suppliers. After the FERC upheld the contracts in 2003, the CEOB and CPUC appealed to the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit Court of Appeals), challenging the FERC's application of the Mobile-Sierra doctrine's "public interest" standard of review to the contracts without having first determined that the contracts met a more rigorous "just and reasonable" standard of review. In June 2008, the United States Supreme Court (Supreme Court) ruled that the FERC was correct to apply the Mobile-Sierra doctrine (which presumes that contract rates are just and reasonable) absent a demonstration that one of the contracting parties engaged in unlawful market manipulation that directly affected contract rates. The Supreme Court ruled that the FERC should clarify its findings on this issue and consider whether the contract rates seriously harm the public interest. At various times since the contract's inception, Sempra Generation and the DWR have also had disputes regarding the meaning of terms and performance of their agreement under which Sempra Generation sells electricity to the DWR. In 2002, in a state civil action, the DWR sought to terminate its contract with Sempra Generation, seeking rescission, damages, injunctive and declaratory relief, and $100 million in punitive damages. The DWR claims that Sempra Generation misrepresented its intention and ability to construct a temporary phase of one power project and, alternatively, breached its contract by failure to construct and deliver power from that phase. In June 2005, the California Court of Appeal reversed a previous summary judgment in favor of Sempra Generation. The Court concluded that the contract language was ambiguous and presented triable issues of material fact that must be addressed by further evidence and proceedings. The case was sent back to the trial court. In January 2007, the DWR added additional claims for fraud and breach of contract. In June 2008, the California Court of Appeal upheld the trial court's denial of Sempra Generation's motion to compel the DWR to arbitrate its new claims. The case was returned to the San Diego Superior Court for further proceedings and a jury trial began in October 2009. In February 2006, the DWR began an additional arbitration against Sempra Generation related to the manner in which Sempra Generation schedules its Mexicali plant. The DWR sought $100 million in damages and an order terminating the contract. Arbitration hearings were held in November 2008, and in January 2009, the arbitration panel issued a decision denying all of the DWR's claims. The panel decision was confirmed by the San Francisco Superior Court in May 2009. In September 2008, the DWR initiated another arbitration proceeding against Sempra Generation, alleging that Sempra Generation had breached the parties’ agreement in various operational respects, and violated the order issued by the first arbitration panel relating to the amount refunded to the DWR and the manner in which Sempra Generation operates. The DWR seeks $60 million in damages and an order terminating the contract. Arbitration hearings are scheduled for August 2010.FERC Refund Proceedings The FERC is investigating prices charged by various electric suppliers to buyers in the California Power Exchange (PX) and ISO markets. In December 2002, a FERC Administrative Law Judge (ALJ) issued preliminary findings indicating that the PX and ISO owe power suppliers $1.2 billion for the October 2, 2000 through June 20, 2001 period. This amount is the $3.0 billion that the California PX and ISO still owe energy companies less $1.8 billion that the energy companies charged California customers in excess of the preliminarily determined competitive market clearing prices. In March 2003, the FERC adopted its ALJ's findings, but changed the calculation of the refund by basing it on a different benchmark of natural gas prices. This change would increase the refund obligations from $1.8 billion to more than $3 billion for the same time period. Various parties, including Sempra Commodities, appealed the FERC's order to the Ninth Circuit Court of Appeals. In August 2006, the Court of Appeals held that the FERC had properly established October 2, 2000 through June 20, 2001 as the refund period and had properly excluded certain short-term bilateral transactions between sellers and the DWR from the refund proceedings. However, the court also held that the FERC erred in excluding certain multi-day transactions from the refund proceedings. Finally, while the court upheld the FERC's decision not to extend the refund proceedings to the summer period (prior to October 2, 2000), it found that the FERC should have considered other remedies for tariff violations that are alleged to have occurred prior to October 2, 2000. In April 2009, the Ninth Circuit Court of Appeals denied requests for rehearing of its August 2006 decision that Sempra Commodities and other entities filed and returned the matter to the FERC for further proceedings. In August 2007, the Ninth Circuit Court of Appeals issued a decision reversing and remanding FERC orders declining to provide refunds in a related proceeding regarding short-term bilateral sales up to one month in the Pacific Northwest. The court found that some of the short-term sales between the DWR and various sellers (including Sempra Commodities) that had previously been excluded from the refund proceeding involving sales in the ISO and PX markets in California were within the scope of the Pacific Northwest refund proceeding. In April 2009, the Ninth Circuit Court of Appeals denied requests for rehearing of its August 2007 decision that Sempra Commodities and other entities filed and returned the matter to the FERC for further proceedings. The court's orders could be the subject of further appeals. In a separate complaint filed with the FERC in 2002, the California Attorney General challenged the FERC's authority to establish a market-based rate system and also contended that even if such a system were valid, electricity sellers had failed to comply with the FERC's quarterly reporting requirements. The Attorney General requested that the FERC order refunds from suppliers. The FERC dismissed the complaint and instead ordered sellers to restate their reports. After an appeal by the California Attorney General, the Ninth Circuit Court of Appeals upheld the FERC's authority to establish a market-based rate system, but stated that failure to file transaction-specific quarterly reports gave the FERC authority to order refunds with respect to jurisdictional sellers. The FERC is in the process of addressing these issues on remand. In May 2009, the California Attorney General filed another complaint at the FERC against various sellers, including Sempra Commodities. In this complaint, the Attorney General seeks to collect for alleged overcharges related to short-term bilateral transactions between sellers and the DWR from January 18, 2001 through June 20, 2001. These transactions also have been the subject of the Ninth Circuit Court of Appeals' orders in the proceedings described above. In the cases described above, the FERC could order additional refunds or the disgorgement of profits. RBS Sempra Commodities has reserves for its estimate of the effect of the FERC's revision of the benchmark prices it will use to calculate refunds and other related developments. Pursuant to the agreements related to the formation of RBS Sempra Commodities, we have indemnified RBS related to these proceedings should the liability from the final resolution be greater than the reserves.FERC Manipulation Investigation The FERC has separately investigated whether there was manipulation of short-term energy markets in the western United States that would constitute violations of applicable tariffs and warrant disgorgement of associated profits. In May 2002, the FERC ordered all energy companies engaged in electric energy trading activities to state whether they had engaged in various specific trading activities in violation of the PX and ISO tariffs. In June 2003, the FERC ordered a number of entities, including Sempra Commodities, to show why they should not disgorge profits from certain transactions between January 1, 2000 and June 20, 2001 that are asserted to have constituted gaming and/or anomalous market behavior under the California ISO and/or PX tariffs. In October 2003, Sempra Commodities agreed to pay $7.2 million in full resolution of these investigations. That liability was recorded as of December 31, 2003. The Sempra Commodities settlement was approved by the FERC in August 2004. Certain California parties sought rehearing of this order, which the FERC largely denied in November 2008. The California parties have appealed the FERC's orders to the Ninth Circuit Court of Appeals.Other Litigation Sempra Energy and several subsidiaries, along with three oil and natural gas companies, the City of Beverly Hills, and the Beverly Hills Unified School District, are defendants in a toxic tort lawsuit filed in Los Angeles County Superior Court by approximately 1,000 plaintiffs. This lawsuit claims that various emissions resulted in cancer or fear of cancer. We have submitted the case to our insurers, who have reserved their rights with respect to coverage. In November 2006, the court granted the defendants' summary judgment motions based on lack of medical causation for the 12 initial plaintiffs scheduled to go to trial first. The court also granted summary judgment excluding punitive damages. The court has stayed the case as to the remaining plaintiffs pending the appeal of the rulings. In 1998, we converted our traditional pension plans (other than the SoCalGas union employee plan) to cash balance plans. In July 2005, a lawsuit was filed against SoCalGas in the U.S. District Court for the Central District of California alleging that the conversion unlawfully discriminated against older employees and failed to provide required disclosure of a possible reduction in benefits. The discrimination claims were subsequently dismissed from the lawsuit. In May 2009, the parties agreed to settle the litigation on the remaining issue for a nominal amount and the court approved a class action settlement agreement in October 2009. RBS Sempra Commodities assumed litigation reserves related to Sempra Commodities, however, we have indemnified RBS should the liabilities from the final resolution of these matters be greater than the reserves. We are also defendants in ordinary routine litigation incidental to our businesses, including personal injury, product liability, property damage and other claims. California juries have demonstrated an increasing willingness to grant large awards, including punitive damages, in these cases.Resolved Matters We have accrued liabilities for resolved matters of: <ul><li>$373 million at Sempra Energy Consolidated </li><li>$98 million at SDG&E </li><li>$56 million at SoCalGas </li></ul>These amounts for Sempra Energy Consolidated and SDG&E include $70 million of insurance settlements as of September 30, 2009, related to the SDG&E 2007 wildfire litigation discussed above. The remaining amounts are primarily for settlements related to certain litigation arising out of the 2000 – 2001 California energy crisis, including the Continental Forge settlement and settlements of natural gas and electricity cases. We discuss the terms of the settlements related to the Continental Forge and natural gas and electricity cases in Note 16 of the Notes to Consolidated Financial Statements in the Annual Report.Nuclear Insurance SDG&E and the other owners of SONGS have insurance to cover claims from nuclear liability incidents arising at SONGS. This insurance provides $300 million in coverage limits, the maximum amount available, including coverage for acts of terrorism. In addition, the Price-Anderson Act provides for up to $12.2 billion of secondary financial protection (SFP). If a nuclear liability loss occurring at any U.S. licensed/commercial reactor exceeds the $300 million insurance limit, all nuclear reactor owners could be required to contribute to the SFP. SDG&E’s contribution would be up to $47 million. This amount is subject to an annual maximum of $7 million, unless a default occurs by any other SONGS owner. If the SFP is insufficient to cover the liability loss, SDG&E could be subject to an additional assessment. The SONGS owners, including SDG&E, also have $2.75 billion of nuclear property, decontamination, and debris removal insurance. In addition, the SONGS owners have up to $490 million insurance coverage for outage expenses and replacement power costs due to accidental property damage. This coverage is limited to $3.5 million per week for the first 52 weeks, then $2.8 million per week for up to 110 additional weeks. There is a 12-week waiting period deductible. These insurance coverages are provided through a mutual insurance company. Insured members are subject to retrospective premium assessments. SDG&E could be assessed up to $8.5 million. The nuclear property insurance program includes an industry aggregate loss limit for non-certified acts of terrorism (as defined by the Terrorism Risk Insurance Act). The industry aggregate loss limit for property claims arising from non-certified acts of terrorism is $3.24 billion. This is the maximum amount that will be paid to insured members who suffer losses or damages from these non-certified terrorist acts.CONTRACTUAL COMMITMENTS Sempra Energy Consolidated At September 30, 2009, significant increases to contractual commitments at Sempra Energy include <ul><li>the issuance in May 2009 of $750 million of 6.5-percent notes maturing in 2016 at Sempra Energy; </li><li>the issuance in May 2009 of $300 million of 6-percent mortgage bonds maturing in 2039 at SDG&E; </li><li>$1.3 billion new purchased-power contracts at SDG&E; </li><li>$184 million at SDG&E primarily for engineering, material procurement and construction costs associated with the Sunrise Powerlink project; </li><li>$136 million new commitments for construction and infrastructure improvements for gas transmission and distribution operations at SoCalGas; and </li><li>new construction commitments of $112 million at Sempra Pipelines & Storage. </li></ul>The future payments under these contractual commitments are expected to be $341 million for 2009, $320 million for 2010, $197 million for 2011, $176 million for 2012, $161 million for 2013 and $2.5 billion thereafter. These amounts include expected interest payments on the notes and mortgage bonds using the stated interest rate. Also, in October 2009, Sempra Energy issued $750 million of 6-percent notes maturing in 2039. Reserves for Sempra Energy and SDG&E wildfire litigation are discussed above in “SDG&E 2007 Wildfire Litigation.” Decreases to SoCalGas’ natural gas contracts are discussed below. SDG&E At September 30, 2009, the significant changes to contractual commitments at SDG&E are an increase of $1.3 billion due to new purchased-power contracts, $300 million due to the issuance of 6-percent mortgage bonds, and $184 million mainly for the Sunrise Powerlink project, as discussed above. The future payments under these contractual commitments are expected to be $96 million for 2009, $241 million for 2010, $148 million for 2011, $127 million for 2012, $112 million for 2013 and $1.6 billion thereafter. These amounts include expected interest payments on the mortgage bonds using the stated interest rate. SoCalGas At September 30, 2009, the significant changes to contractual commitments at SoCalGas are an increase of $136 million related to commitments discussed above. The future payments under these contractual commitments are expected to be $106 million for 2009 and $30 million for 2010. SoCalGas’ natural gas purchase and pipeline capacity commitments have decreased by $452 million since December 31, 2008. The decrease was primarily due to a reduction of $896 million based on lower natural gas forward prices, offset by new natural gas purchase and pipeline capacity contracts of $444 million. Net future payments are therefore expected to decrease by $725 million for 2009, increase by $285 million for 2010, decrease by $9 million for 2011, increase by $1 million for 2012 and decrease by $4 million in 2013. </div> NOTE 10. 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