NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

We generally account for investments under the equity method when we have significant influence over, but do not have control of, these entities. In these cases, our pro rata shares of the entities’ net assets are included in Investments on the Consolidated Balance Sheets. We adjust each investment for our share of each investee’s earnings or losses, dividends, and other comprehensive income or loss. We evaluate the carrying value of unconsolidated entities for impairment under the U.S. GAAP provisions for equity method investments.

We provide the carrying value of our investments and earnings (losses) on these investments below:



EQUITY METHOD AND OTHER INVESTMENT BALANCES
(Dollars in millions)
	December 31,
	2017		2016
Sempra South American Utilities:
Eletrans⁽¹⁾	$	16	$	(8	)
Sempra Mexico:
DEN	—		42
Energía Sierra Juárez⁽²⁾	39		38
IMG⁽³⁾	221		100
TAG⁽⁴⁾	364		—
Sempra Renewables:
Wind:
Auwahi Wind	42		41
Broken Bow 2 Wind	32		35
Cedar Creek 2 Wind	72		75
Flat Ridge 2 Wind	255		271
Fowler Ridge 2 Wind	44		43
Mehoopany Wind	89		92
Solar:
California solar partnership	107		113
Copper Mountain Solar 2	35		33
Copper Mountain Solar 3	44		42
Mesquite Solar 1	81		86
Other	12		13
Sempra LNG & Midstream:
Cameron LNG JV⁽⁵⁾	997		997
Parent and other:
RBS Sempra Commodities	67		67
Total equity method investments	2,517		2,080
Other	10		17
Total	$	2,527	$	2,097


⁽¹⁾	Reflects losses on forward exchange contracts entered into to manage the foreign currency exchange rate risk of the CLF relative to the U.S. dollar, related to certain construction commitments that are denominated in CLF. The contracts settle based on anticipated payments to vendors, generally monthly, ending in July 2018.


⁽²⁾	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.


⁽³⁾	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, which we discuss below.


⁽⁴⁾	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.


⁽⁵⁾	The carrying value of our equity method investment is $237 million and $190 million higher than the underlying equity in the net assets of the investee at December 31, 2017 and 2016, respectively, primarily due to guarantees, which we discuss below, and interest capitalized on the investment, as the joint venture has not commenced its planned principal operations.



EARNINGS (LOSSES) FROM EQUITY METHOD INVESTMENTS
(Dollars in millions)
	Years ended December 31,
	2017			2016			2015
Earnings (losses) recorded before income tax:
Sempra Renewables:
Wind:
Auwahi Wind	$	5		$	4		$	4
Broken Bow 2 Wind	(2		)	(2		)	(2		)
Cedar Creek 2 Wind	(2		)	(2		)	(6		)
Flat Ridge 2 Wind	(13		)	(7		)	(12		)
Fowler Ridge 2 Wind	4			4			4
Mehoopany Wind	(1		)	—			(1		)
Solar:
California solar partnership	7			7			6
Copper Mountain Solar 2	5			6			7
Copper Mountain Solar 3	8			8			8
Mesquite Solar 1	18			17			16
Other	—			(1		)	—
Sempra LNG & Midstream:
Cameron LNG JV	5			(2		)	5
Rockies Express Pipeline	—			(26		)	79
Parent and other:
RBS Sempra Commodities	—			—			(4		)
	$	34		$	6		$	104
Earnings (losses) recorded net of income tax⁽¹⁾:
Sempra South American Utilities:
Eletrans	$	4		$	3		$	(4	)
Sempra Mexico:
DEN	(13		)	5			—
Energía Sierra Juárez	—			6			6
IEnova Pipelines	—			64			83
IMG	45			—			—
TAG	6			—			—
	$	42		$	78		$	85


⁽¹⁾	As the earnings (losses) from these investments are recorded net of income tax, they are presented below the income tax expense line, so as not to impact our ETR.

Our share of the undistributed earnings of equity method investments was $89 million and $44 million at December 31, 2017 and 2016, respectively. These balances do not include remaining distributions of $67 million associated with our investment in RBS Sempra Commodities and expected to be received from the partnership as it is dissolved, as we discuss below.

SEMPRA SOUTH AMERICAN UTILITIES

In February 2017, Sempra South American Utilities recorded the equitization of its $19 million note receivable due from Eletrans,

resulting in an increase in its investment in this unconsolidated joint venture. During the year ended December 31, 2017, Sempra South American Utilities invested cash of $1 million in Eletrans.

SEMPRA MEXICO

IEnova Pipelines, DEN and TAG

On September 26, 2016, IEnova completed the acquisition of the remaining 50-percent interest in IEnova Pipelines and IEnova Pipelines became a consolidated subsidiary. Prior to the acquisition date, IEnova owned 50 percent of IEnova Pipelines and accounted for its interest as an equity method investment. As of the acquisition date, IEnova accounted for IEnova Pipelines’ 50-percent interest in DEN as an equity method investment.

On November 15, 2017, IEnova acquired the remaining 50-percent interest in DEN, and DEN became a consolidated subsidiary. Since the acquisition date, IEnova accounts for DEN’s 50-percent interest in TAG as an equity method investment. We discuss these acquisitions in Note 3.

IMG

In June 2016, IMG, a joint venture between IEnova and a subsidiary of TransCanada, was awarded the right to build, own and operate the Sur de Texas-Tuxpan natural gas marine pipeline by the CFE. IEnova has a 40-percent interest in the project and accounts for its interest as an equity method investment, and TransCanada owns the remaining 60-percent interest. The marine pipeline is fully contracted under a 25-year natural gas transportation service contract with the CFE. We expect the project to be completed in the second half of 2018. During the years ended December 31, 2017 and 2016, Sempra Mexico invested cash of $72 million and $100 million respectively, in the IMG joint venture.

SEMPRA RENEWABLES

Sempra Renewables has 50-percent interests in wind and solar energy generation facilities in operation in the U.S. The generating capacities of the facilities are contracted under long-term PPAs. These facilities are accounted for under the equity method. During the years ended December 31, 2016 and 2015, Sempra Renewables invested cash of $18 million and $21 million, respectively, in its unconsolidated joint ventures.

SEMPRA LNG & MIDSTREAM

Rockies Express

As we discuss in Note 3, in May 2016, Sempra LNG & Midstream sold its 25-percent interest in Rockies Express, a partnership that operates a natural gas pipeline, REX, that links the Rocky Mountain region to the upper Midwest and the eastern U.S. In 2015, Sempra LNG & Midstream invested $113 million of cash in Rockies Express to repay project debt that matured in early 2015.

Cameron LNG JV

The Cameron LNG JV is a joint venture partnership that was formed in October 2014 among Sempra Energy and three project partners. The Cameron LNG existing regasification terminal that was contributed to the joint venture included two marine berths and three LNG storage tanks, and facilities capable of processing 1.5 Bcf of natural gas per day. The current liquefaction project, which is utilizing Cameron LNG JV’s existing facilities, is comprised of three liquefaction trains and is being designed to 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. As of October 2014, Sempra LNG & Midstream began accounting for its investment in Cameron LNG JV under the equity method.

During the years ended December 31, 2017, 2016 and 2015, Sempra LNG & Midstream capitalized $47 million, $47 million and $49 million, respectively, of interest related to this equity method investment that has not commenced planned principal operations. During the years ended December 31, 2017 and 2015, Sempra LNG & Midstream invested $1 million and $10 million, respectively, of cash 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 Cameron LNG JV 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 will be 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.

Interest. The weighted-average all-in cost of the loans outstanding under all the Loan Facility Agreements (and based on certain assumptions as to timing of drawdown) is 1.59 percent per annum over LIBOR prior to financial completion of the project and 1.78 percent per annum over LIBOR following financial completion of the project. The Loan Facility Agreements require Cameron LNG JV to hedge 50 percent 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 percent. 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 percent 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 percent for the LIBOR component of the interest rate on the loans.

Guarantees. In August 2014, Sempra Energy entered into agreements for the benefit of all of Cameron LNG JV’s creditors under the Loan Facility Agreements and related finance documents. Pursuant to these agreements, Sempra Energy has severally guaranteed 50.2 percent of Cameron LNG JV’s obligations under the Loan Facility Agreements and related finance documents, or a maximum amount of $3.9 billion. Guarantees for the remaining 49.8 percent of Cameron LNG JV’s senior secured financing have been provided by the other project partners. The Sempra Energy guarantee of 50.2 percent of Cameron LNG JV’s financing became effective upon effectiveness of the joint venture. 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, with an associated carrying value of $26 million at December 31, 2017, for the fair value of its obligations associated with the Loan Facility Agreements and related finance documents, which constitute guarantees. This liability is being reduced on a straight-line basis over the duration of the guarantees by recognizing equity earnings from Cameron LNG JV, included in Equity Earnings, Before Income Tax.

In August 2014, Sempra Energy and the other project partners 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 percent 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 percent 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 percent of the membership interests of the 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 the Loan Facility Agreements and related finance documents, 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-percent 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-percent 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. We account for our investment in RBS Sempra Commodities under the equity method, and report miscellaneous costs since the sale of the business in Parent and Other.

In April 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. The investment balance of $67 million at December 31, 2017 reflects remaining distributions expected to be received from the partnership in accordance with the Letter Agreement. The timing and amount of distributions, if any, may be impacted by the matters we discuss related to RBS Sempra Commodities in Note 15 in “Legal Proceedings – Other Litigation.” In addition, amounts may be retained by the partnership for an extended period of time to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership.

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

SUMMARIZED FINANCIAL INFORMATION

We present summarized financial information below, aggregated for all of our equity method investments for the periods in which we were invested in the entity. The amounts below represent the aggregate financial position and results of operations of 100 percent of each of Sempra Energy’s equity method investments.



SUMMARIZED FINANCIAL INFORMATION
(Dollars in millions)
	Years ended December 31,
	2017⁽¹⁾			2016⁽²⁾			2015
Gross revenues	$	846		$	1,079		$	1,533
Operating expense	(590		)	(726		)	(845		)
Income from operations	256			353			688
Interest expense	(217		)	(127		)	(312		)
Net income/Earnings⁽³⁾	116			252			440



	At December 31,
	2017⁽¹⁾		2016⁽²⁾
Current assets	$	974	$	704
Noncurrent assets	14,087		9,970
Current liabilities	797		629
Noncurrent liabilities	9,809		6,627


⁽¹⁾	On November 15, 2017, IEnova completed the asset acquisition of PEMEX’s 50-percent interest in DEN, increasing its ownership percentage to 100 percent. At December 31, 2017, DEN is no longer an equity method investment.


⁽²⁾	On September 26, 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, increasing its ownership percentage to 100 percent, and on May 9, 2016, Sempra LNG & Midstream sold its 25-percent interest in Rockies Express. At December 31, 2016, IEnova Pipelines and Rockies Express are no longer equity method investments.


⁽³⁾	Except for our investments in South America and Mexico, there was no income tax recorded by the entities, as they are primarily domestic partnerships.

GUARANTEES

Project financing at our solar and wind joint ventures generally requires the joint venture partners, for each partner’s interest, to return cash to the projects in the event that the projects do not meet certain cash flow criteria or in the event that the projects’ debt service, O&M, and firm transmission and PTC reserve accounts are not maintained at specific thresholds. In some cases, the joint venture partners have provided guarantees to the lenders in lieu of the projects funding the reserve account requirements. We recorded liabilities for the fair value of certain of our obligations associated with these guarantees and the liabilities are being amortized over their expected lives. The outstanding loans at our solar and wind joint ventures are not guaranteed by the partners, but are secured by project assets.

IEnova has an indirect 40-percent ownership interest and TransCanada has an indirect 60-percent ownership interest in IMG. IEnova and TransCanada have each provided guarantees to third parties associated with construction of IMG’s Sur de Texas-Tuxpan natural gas marine pipeline. The aggregate amount of the obligations guaranteed by IEnova shall not exceed $288 million and will terminate upon completion of all guaranteed obligations. IEnova expects the construction giving rise to these guarantees to be completed by the end of 2018.

At December 31, 2017, we provided guarantees aggregating a maximum of $183 million with an associated aggregated carrying value of $6 million for guarantees related to project financing. In addition, at December 31, 2017, we provided guarantees to joint ventures aggregating a maximum of $370 million with an associated aggregated carrying value of $3 million, primarily related to PPAs and EPC contracts.