filings.toolsItem 16. FORM 10-K SUMMARY
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Item 16. FORM 10-K SUMMARY
Not applicable.
| Sempra Energy: | |||||
| SIGNATURES | |||||
| Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | |||||
| SEMPRA ENERGY, (Registrant) | |||||
| By: /s/ J. Walker Martin | |||||
| J. Walker Martin Chairman, Chief Executive Officer and President | |||||
| Date: February 25, 2021 |
| Pursuant to the requirements of the Securities Exchange Act of 1934 (the Act), this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||||||||
| Name/Title | Signature | Date | ||||||
| Principal Executive Officer: J. Walker Martin Chief Executive Officer and President | /s/ J. Walker Martin | February 25, 2021 | ||||||
| Principal Financial Officer: Trevor I. Mihalik Executive Vice President and Chief Financial Officer | /s/ Trevor I. Mihalik | February 25, 2021 | ||||||
| Principal Accounting Officer: Peter R. Wall Senior Vice President, Controller and Chief Accounting Officer | /s/ Peter R. Wall | February 25, 2021 | ||||||
| Directors: | ||||||||
| J. Walker Martin, Chairman | /s/ J. Walker Martin | February 25, 2021 | ||||||
| Alan L. Boeckmann, Director | /s/ Alan L. Boeckmann | February 25, 2021 | ||||||
| Kathleen L. Brown, Director | /s/ Kathleen L. Brown | February 25, 2021 | ||||||
| Andrés Conesa, Director | /s/ Andrés Conesa | February 25, 2021 | ||||||
| Maria Contreras-Sweet, Director | /s/ Maria Contreras-Sweet | February 25, 2021 | ||||||
| Pablo A. Ferrero, Director | /s/ Pablo A. Ferrero | February 25, 2021 | ||||||
| William D. Jones, Director | /s/ William D. Jones | February 25, 2021 | ||||||
| Bethany J. Mayer, Director | /s/ Bethany J. Mayer | February 25, 2021 | ||||||
| Michael N. Mears, Director | /s/ Michael N. Mears | February 25, 2021 | ||||||
| Jack T. Taylor, Director | /s/ Jack T. Taylor | February 25, 2021 | ||||||
| Cynthia L. Walker, Director | /s/ Cynthia L. Walker | February 25, 2021 | ||||||
| Cynthia J. Warner, Director | /s/ Cynthia J. Warner | February 25, 2021 | ||||||
| James C. Yardley, Director | /s/ James C. Yardley | February 25, 2021 |
| San Diego Gas & Electric Company: | |||||
| SIGNATURES | |||||
| Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | |||||
| SAN DIEGO GAS & ELECTRIC COMPANY, (Registrant) | |||||
| By: /s/ Caroline A. Winn | |||||
| Caroline A. Winn Chief Executive Officer | |||||
| Date: February 25, 2021 |
| Pursuant to the requirements of the Securities Exchange Act of 1934 (the Act), this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||||||||
| Name/Title | Signature | Date | ||||||
| Principal Executive Officer: Caroline A. Winn Chief Executive Officer | /s/ Caroline A. Winn | February 25, 2021 | ||||||
| Principal Financial Officer: Bruce A. Folkmann President and Chief Financial Officer | /s/ Bruce A. Folkmann | February 25, 2021 | ||||||
| Principal Accounting Officer: Valerie A. Bille Vice President, Controller and Chief Accounting Officer | /s/ Valerie A. Bille | February 25, 2021 | ||||||
| Directors: | ||||||||
| Kevin C. Sagara, Non-Executive Chairman | /s/ Kevin C. Sagara | February 25, 2021 | ||||||
| Robert J. Borthwick, Director | /s/ Robert J. Borthwick | February 25, 2021 | ||||||
| Erbin B. Keith, Director | /s/ Erbin B. Keith | February 25, 2021 | ||||||
| Trevor I. Mihalik, Director | /s/ Trevor I. Mihalik | February 25, 2021 | ||||||
| Caroline A. Winn, Director | /s/ Caroline A. Winn | February 25, 2021 |
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
No annual report, proxy statement, form of proxy or other soliciting material has been sent to security holders during the period covered by this annual report on Form 10-K, and no such materials are to be furnished to security holders subsequent to the filing of this annual report on Form 10-K.
| Southern California Gas Company: | |||||
| SIGNATURES | |||||
| Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | |||||
| SOUTHERN CALIFORNIA GAS COMPANY, (Registrant) | |||||
| By: /s/ Scott D. Drury | |||||
| Scott D. Drury Chief Executive Officer | |||||
| Date: February 25, 2021 |
| Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||||||||
| Name/Title | Signature | Date | ||||||
| Principal Executive Officer: Scott D. Drury Chief Executive Officer | /s/ Scott D. Drury | February 25, 2021 | ||||||
| Principal Financial and Accounting Officer: Mia L. DeMontigny Vice President, Controller, Chief Financial Officer and Chief Accounting Officer | /s/ Mia L. DeMontigny | February 25, 2021 | ||||||
| Directors: | ||||||||
| Kevin C. Sagara, Non-Executive Chairman | /s/ Kevin C. Sagara | February 25, 2021 | ||||||
| Scott D. Drury, Director | /s/ Scott D. Drury | February 25, 2021 | ||||||
| Lisa Larroque Alexander, Director | /s/ Lisa Larroque Alexander | February 25, 2021 | ||||||
| Trevor I. Mihalik, Director | /s/ Trevor I. Mihalik | February 25, 2021 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Sempra Energy:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sempra Energy and subsidiaries (“Sempra Energy”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, the related notes, and the schedule listed in Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Sempra Energy as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Sempra Energy’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on Sempra Energy’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of Sempra Energy’s management. Our responsibility is to express an opinion on Sempra Energy’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Sempra Energy in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Insurance Receivable and Legal Contingencies Related to Aliso Canyon Gas Leak - Refer to Note 16 of the Notes to Consolidated Financial Statements
Critical Audit Matter Description
Sempra Energy has an insurance receivable of $445 million as of December 31, 2020 related to certain costs arising from the Aliso Canyon natural gas storage facility gas leak. Sempra Energy has determined that the insurance receivable is probable of recovery based on the nature of the insurance claims, the costs incurred, and the coverage provided by applicable insurance policies.
Additionally, Sempra Energy is named in various lawsuits related to the gas leak and the liabilities could be material. Sempra Energy’s accrual for civil litigation matters associated with the gas leak, inclusive of estimated legal costs, is included within its $451 million Reserve for Aliso Canyon Costs as of December 31, 2020.
F-2
We identified the recoverability of the insurance receivable as a critical audit matter due to the management judgments required in assessing if, and to what degree, the coverage provided by applicable insurance policies would cover the types of costs included in the insurance claims submitted. Also, we identified the contingency accrual related to the civil litigation as a critical audit matter due to the management judgments required in assessing the probability and reasonable estimation of the potential liability related to the civil litigation. Auditing the probability of recovery of the insurance receivable and the contingency accrual related to the civil litigation required subjective auditor judgment and extensive audit effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the probability of recovery of the insurance receivable for the costs related to the Aliso Canyon natural gas storage facility gas leak included the following, among others:
▪We tested the effectiveness of management’s internal controls over the costs included in the related insurance receivable and the evaluation of the recoverability of this insurance receivable.
▪With the assistance of an insurance specialist, we evaluated management’s judgments related to the determination of the recoverability of the insurance receivable by:
◦Evaluating the coverage provided by applicable insurance policies and evaluating the potential coverage available under such policies based on the nature of the underlying costs.
◦Evaluating the probability of recovery of the insurance receivable by obtaining correspondence between Sempra Energy and the applicable insurers.
◦Evaluating the probability of recovery of the insurance receivable through inquiries with management and with external legal counsel of Sempra Energy and we evaluated whether the information provided was consistent with our other procedures.
◦Searching external sources for and considering any contradictory evidence to Sempra Energy’s accounting assessment of probability of recoverability of the insurance receivable.
Our audit procedures related to civil litigation matters included the following, among others:
▪We tested the effectiveness of management’s internal controls over (1) Sempra Energy’s determination of whether a loss was probable and reasonably estimable and (2) the financial statement disclosures related to the gas leak.
▪We evaluated management’s judgments related to (1) whether a loss was probable and reasonably estimable and (2) whether additional losses are reasonably possible by inquiring of management and legal counsel of Sempra Energy regarding the amounts of probable and reasonably estimable losses.
▪We read a settlement offer and external information for any evidence that might contradict management’s assertions.
▪We read legal letters from external and internal legal counsel of Sempra Energy regarding information from settlement discussions and we evaluated whether the information therein was consistent with the information obtained in our procedures.
▪We evaluated whether Sempra Energy’s disclosures were appropriate and consistent with the information obtained in our procedures.
Regulatory Accounting - Impact of Rate Regulation on the Financial Statements - Refer to Note 1 of the Notes to Consolidated Financial Statements
Critical Audit Matter Description
Sempra Energy is subject to rate regulation by regulators and commissions in various jurisdictions (collectively, the “Commissions”) that have jurisdiction with respect to the rates of electric and gas transmission and distribution companies in those jurisdictions. Management has determined it meets the requirements under U.S. GAAP to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; depreciation expense; and taxes.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management’s judgments include assessing the likelihood of (1) the recovery in future rates of incurred costs and (2) potential refunds to customers. Auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the application of specialized rules to account for the effects of cost-based rate regulation and the uncertainty of future decisions by the Commissions included the following, among others:
F-3
▪We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We tested the effectiveness of management’s controls over the initial recognition of amounts as regulatory assets or liabilities and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.
▪We read relevant regulatory orders issued by the Commissions for Sempra Energy and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.
▪We evaluated Sempra Energy’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2021
We have served as Sempra Energy’s auditor since 1935.
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Directors of San Diego Gas & Electric Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of San Diego Gas & Electric Company (“SDG&E”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of SDG&E as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), SDG&E’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on SDG&E’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of SDG&E’s management. Our responsibility is to express an opinion on SDG&E’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to SDG&E in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Accounting - Impact of Rate Regulation on the Financial Statements - Refer to Note 1 of the Notes to Consolidated Financial Statements
Critical Audit Matter Description
SDG&E is subject to rate regulation by regulators and commissions in various jurisdictions (collectively, the “Commissions”) that have jurisdiction with respect to the rates of electric and gas transmission and distribution companies in those jurisdictions. Management has determined it meets the requirements under U.S. GAAP to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; depreciation expense; and taxes.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management’s judgments include assessing the likelihood of (1) the recovery in future rates of incurred costs and (2) potential refunds to customers. Auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
F-5
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the application of specialized rules to account for the effects of cost-based rate regulation and the uncertainty of future decisions by the Commissions included the following, among others:
▪We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We tested the effectiveness of management’s controls over the initial recognition of amounts as regulatory assets or liabilities and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.
▪We read relevant regulatory orders issued by the Commissions for SDG&E and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.
▪We evaluated SDG&E’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2021
We have served as SDG&E’s auditor since 1935.
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Southern California Gas Company:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Southern California Gas Company (“SoCalGas”) as of December 31, 2020 and 2019, the related statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of SoCalGas as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), SoCalGas’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on SoCalGas’ internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of SoCalGas’ management. Our responsibility is to express an opinion on SoCalGas’ financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to SoCalGas in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Insurance Receivable and Legal Contingencies Related to Aliso Canyon Gas Leak - Refer to Note 16 of the Notes to Financial Statements
Critical Audit Matter Description
SoCalGas has an insurance receivable of $445 million as of December 31, 2020 related to certain costs arising from the Aliso Canyon natural gas storage facility gas leak. SoCalGas has determined that the insurance receivable is probable of recovery based on the nature of the insurance claims, the costs incurred, and the coverage provided by applicable insurance policies.
Additionally, SoCalGas is named in various lawsuits related to the gas leak and the liabilities could be material. SoCalGas’ accrual for civil litigation matters associated with the gas leak, inclusive of estimated legal costs, is included within its $451 million Reserve for Aliso Canyon Costs as of December 31, 2020.
We identified the recoverability of the insurance receivable as a critical audit matter due to the management judgments required in assessing if, and to what degree, the coverage provided by applicable insurance policies would cover the types of costs included in the insurance claims submitted. Also, we identified the contingency accrual related to the civil litigation as a critical audit matter due to the management judgments required in assessing the probability and reasonable estimation of the potential liability related to the civil litigation. Auditing the probability of recovery of the insurance receivable and the contingency accrual related to the civil litigation required subjective auditor judgment and extensive audit effort.
F-7
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the probability of recovery of the insurance receivable for the costs related to the Aliso Canyon natural gas storage facility gas leak included the following, among others:
▪We tested the effectiveness of management’s internal controls over the costs included in the related insurance receivable and the evaluation of the recoverability of this insurance receivable.
▪With the assistance of an insurance specialist, we evaluated management’s judgments related to the determination of the recoverability of the insurance receivable by:
◦Evaluating the coverage provided by applicable insurance policies and evaluating the potential coverage available under such policies based on the nature of the underlying costs.
◦Evaluating the probability of recovery of the insurance receivable by obtaining correspondence between SoCalGas and the applicable insurers.
◦Evaluating the probability of recovery of the insurance receivable through inquiries with management and with external legal counsel of SoCalGas and we evaluated whether the information provided was consistent with our other procedures.
◦Searching external sources for and considering any contradictory evidence to SoCalGas’ accounting assessment of probability of recoverability of the insurance receivable.
Our audit procedures related to civil litigation matters included the following, among others:
▪We tested the effectiveness of management’s internal controls over (1) SoCalGas’ determination of whether a loss was probable and reasonably estimable and (2) the financial statement disclosures related to the gas leak.
▪We evaluated management’s judgments related to (1) whether a loss was probable and reasonably estimable and (2) whether additional losses are reasonably possible by inquiring of management and legal counsel of Sempra Energy and SoCalGas regarding the amounts of probable and reasonably estimable losses.
▪We read a settlement offer and external information for any evidence that might contradict management’s assertions.
▪We read legal letters from external and internal legal counsel of Sempra Energy regarding information from settlement discussions and we evaluated whether the information therein was consistent with the information obtained in our procedures.
▪We evaluated whether SoCalGas’ disclosures were appropriate and consistent with the information obtained in our procedures.
Regulatory Accounting - Impact of Rate Regulation on the Financial Statements - Refer to Note 1 of the Notes to Financial Statements
Critical Audit Matter Description
SoCalGas is subject to rate regulation by regulators and commissions in various jurisdictions (collectively, the “Commissions”) that have jurisdiction with respect to the rates of gas transmission and distribution companies in those jurisdictions. Management has determined it meets the requirements under U.S. GAAP to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; depreciation expense; and taxes.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management’s judgments include assessing the likelihood of (1) the recovery in future rates of incurred costs and (2) potential refunds to customers. Auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the application of specialized rules to account for the effects of cost-based rate regulation and the uncertainty of future decisions by the Commissions included the following, among others:
▪We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We tested the effectiveness of management’s controls over the initial recognition of amounts as regulatory assets or liabilities and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.
▪We read relevant regulatory orders issued by the Commissions for SoCalGas and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.
F-8
▪We evaluated SoCalGas’ disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2021
We have served as SoCalGas’ auditor since 1937.
F-9
| SEMPRA ENERGY | ||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||||||
| (Dollars in millions, except per share amounts; shares in thousands) | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| REVENUES | ||||||||||||||||||||
| Utilities | $ | 10,025 | $ | 9,448 | $ | 8,539 | ||||||||||||||
| Energy-related businesses | 1,345 | 1,381 | 1,563 | |||||||||||||||||
| Total revenues | 11,370 | 10,829 | 10,102 | |||||||||||||||||
| EXPENSES AND OTHER INCOME | ||||||||||||||||||||
| Utilities: | ||||||||||||||||||||
| Cost of natural gas | (925) | (1,139) | (1,208) | |||||||||||||||||
| Cost of electric fuel and purchased power | (1,187) | (1,188) | (1,358) | |||||||||||||||||
| Energy-related businesses cost of sales | (276) | (344) | (357) | |||||||||||||||||
| Operation and maintenance | (3,940) | (3,466) | (3,150) | |||||||||||||||||
| Aliso Canyon litigation and regulatory matters | (307) | — | — | |||||||||||||||||
| Depreciation and amortization | (1,666) | (1,569) | (1,491) | |||||||||||||||||
| Franchise fees and other taxes | (543) | (496) | (472) | |||||||||||||||||
| Impairment losses | (1) | (43) | (1,122) | |||||||||||||||||
| (Loss) gain on sale of assets | (3) | 63 | 513 | |||||||||||||||||
| Other (expense) income, net | (48) | 77 | 58 | |||||||||||||||||
| Interest income | 96 | 87 | 85 | |||||||||||||||||
| Interest expense | (1,081) | (1,077) | (886) | |||||||||||||||||
| Income from continuing operations before income taxes and equity earnings | 1,489 | 1,734 | 714 | |||||||||||||||||
| Income tax (expense) benefit | (249) | (315) | 49 | |||||||||||||||||
| Equity earnings | 1,015 | 580 | 175 | |||||||||||||||||
| Income from continuing operations, net of income tax | 2,255 | 1,999 | 938 | |||||||||||||||||
| Income from discontinued operations, net of income tax | 1,850 | 363 | 188 | |||||||||||||||||
| Net income | 4,105 | 2,362 | 1,126 | |||||||||||||||||
| Earnings attributable to noncontrolling interests | (172) | (164) | (76) | |||||||||||||||||
| Preferred dividends | (168) | (142) | (125) | |||||||||||||||||
| Preferred dividends of subsidiary | (1) | (1) | (1) | |||||||||||||||||
| Earnings attributable to common shares | $ | 3,764 | $ | 2,055 | $ | 924 | ||||||||||||||
| Basic EPS: | ||||||||||||||||||||
| Earnings from continuing operations | $ | 6.61 | $ | 6.22 | $ | 2.86 | ||||||||||||||
| Earnings from discontinued operations | $ | 6.32 | $ | 1.18 | $ | 0.59 | ||||||||||||||
| Earnings | $ | 12.93 | $ | 7.40 | $ | 3.45 | ||||||||||||||
| Weighted-average common shares outstanding | 291,077 | 277,904 | 268,072 | |||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||
| Earnings from continuing operations | $ | 6.58 | $ | 6.13 | $ | 2.84 | ||||||||||||||
| Earnings from discontinued operations | $ | 6.30 | $ | 1.16 | $ | 0.58 | ||||||||||||||
| Earnings | $ | 12.88 | $ | 7.29 | $ | 3.42 | ||||||||||||||
| Weighted-average common shares outstanding | 292,252 | 282,033 | 269,852 |
See Notes to Consolidated Financial Statements.
F-10
| SEMPRA ENERGY | |||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||
| Sempra Energy shareholders’ equity | |||||||||||||||||||||||||||||
| Pretax amount | Income tax (expense) benefit | Net-of-tax amount | Noncontrolling interests (after tax) | Total | |||||||||||||||||||||||||
| 2020: | |||||||||||||||||||||||||||||
| Net income | $ | 5,368 | $ | (1,435) | $ | 3,933 | $ | 172 | $ | 4,105 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 547 | — | 547 | (12) | 535 | ||||||||||||||||||||||||
| Financial instruments | (146) | 33 | (113) | (12) | (125) | ||||||||||||||||||||||||
| Pension and other postretirement benefits | 11 | 1 | 12 | — | 12 | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | 412 | 34 | 446 | (24) | 422 | ||||||||||||||||||||||||
| Comprehensive income | 5,780 | (1,401) | 4,379 | 148 | 4,527 | ||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | — | (1) | — | (1) | ||||||||||||||||||||||||
| Comprehensive income, after preferred dividends of subsidiary | $ | 5,779 | $ | (1,401) | $ | 4,378 | $ | 148 | $ | 4,526 | |||||||||||||||||||
| 2019: | |||||||||||||||||||||||||||||
| Net income | $ | 2,585 | $ | (387) | $ | 2,198 | $ | 164 | $ | 2,362 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (43) | — | (43) | 3 | (40) | ||||||||||||||||||||||||
| Financial instruments | (161) | 53 | (108) | (10) | (118) | ||||||||||||||||||||||||
| Pension and other postretirement benefits | 25 | (7) | 18 | — | 18 | ||||||||||||||||||||||||
| Total other comprehensive loss | (179) | 46 | (133) | (7) | (140) | ||||||||||||||||||||||||
| Comprehensive income | 2,406 | (341) | 2,065 | 157 | 2,222 | ||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | — | (1) | — | (1) | ||||||||||||||||||||||||
| Comprehensive income, after preferred dividends of subsidiary | $ | 2,405 | $ | (341) | $ | 2,064 | $ | 157 | $ | 2,221 | |||||||||||||||||||
| 2018: | |||||||||||||||||||||||||||||
| Net income | $ | 1,146 | $ | (96) | $ | 1,050 | $ | 76 | $ | 1,126 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (144) | — | (144) | (11) | (155) | ||||||||||||||||||||||||
| Financial instruments | 64 | (21) | 43 | 13 | 56 | ||||||||||||||||||||||||
| Pension and other postretirement benefits | (38) | 4 | (34) | — | (34) | ||||||||||||||||||||||||
| Total other comprehensive (loss) income | (118) | (17) | (135) | 2 | (133) | ||||||||||||||||||||||||
| Comprehensive income | 1,028 | (113) | 915 | 78 | 993 | ||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | — | (1) | — | (1) | ||||||||||||||||||||||||
| Comprehensive income, after preferred dividends of subsidiary | $ | 1,027 | $ | (113) | $ | 914 | $ | 78 | $ | 992 |
See Notes to Consolidated Financial Statements.
F-11
| SEMPRA ENERGY | |||||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 960 | $ | 108 | |||||||
| Restricted cash | 22 | 31 | |||||||||
| Accounts receivable – trade, net | 1,578 | 1,261 | |||||||||
| Accounts receivable – other, net | 403 | 455 | |||||||||
| Due from unconsolidated affiliates | 20 | 32 | |||||||||
| Income taxes receivable | 113 | 112 | |||||||||
| Inventories | 308 | 277 | |||||||||
| Regulatory assets | 190 | 222 | |||||||||
| Greenhouse gas allowances | 553 | 72 | |||||||||
| Assets held for sale in discontinued operations | — | 445 | |||||||||
| Other current assets | 364 | 324 | |||||||||
| Total current assets | 4,511 | 3,339 | |||||||||
| Other assets: | |||||||||||
| Restricted cash | 3 | 3 | |||||||||
| Due from unconsolidated affiliates | 780 | 742 | |||||||||
| Regulatory assets | 1,822 | 1,930 | |||||||||
| Nuclear decommissioning trusts | 1,019 | 1,082 | |||||||||
| Investment in Oncor Holdings | 12,440 | 11,519 | |||||||||
| Other investments | 1,388 | 2,103 | |||||||||
| Goodwill | 1,602 | 1,602 | |||||||||
| Other intangible assets | 202 | 213 | |||||||||
| Dedicated assets in support of certain benefit plans | 512 | 488 | |||||||||
| Insurance receivable for Aliso Canyon costs | 445 | 339 | |||||||||
| Deferred income taxes | 136 | 155 | |||||||||
| Greenhouse gas allowances | 101 | 470 | |||||||||
| Right-of-use assets – operating leases | 543 | 591 | |||||||||
| Wildfire fund | 363 | 392 | |||||||||
| Assets held for sale in discontinued operations | — | 3,513 | |||||||||
| Other long-term assets | 753 | 732 | |||||||||
| Total other assets | 22,109 | 25,874 | |||||||||
| Property, plant and equipment: | |||||||||||
| Property, plant and equipment | 53,928 | 49,329 | |||||||||
| Less accumulated depreciation and amortization | (13,925) | (12,877) | |||||||||
| Property, plant and equipment, net | 40,003 | 36,452 | |||||||||
| Total assets | $ | 66,623 | $ | 65,665 |
See Notes to Consolidated Financial Statements.
F-12
| SEMPRA ENERGY | |||||||||||
| CONSOLIDATED BALANCE SHEETS (CONTINUED) | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | 885 | $ | 3,505 | |||||||
| Accounts payable – trade | 1,359 | 1,234 | |||||||||
| Accounts payable – other | 154 | 179 | |||||||||
| Due to unconsolidated affiliates | 45 | 5 | |||||||||
| Dividends and interest payable | 551 | 515 | |||||||||
| Accrued compensation and benefits | 446 | 476 | |||||||||
| Regulatory liabilities | 140 | 319 | |||||||||
| Current portion of long-term debt and finance leases | 1,540 | 1,526 | |||||||||
| Reserve for Aliso Canyon costs | 150 | 9 | |||||||||
| Greenhouse gas obligations | 553 | 72 | |||||||||
| Liabilities held for sale in discontinued operations | — | 444 | |||||||||
| Other current liabilities | 1,016 | 866 | |||||||||
| Total current liabilities | 6,839 | 9,150 | |||||||||
| Long-term debt and finance leases | 21,781 | 20,785 | |||||||||
| Deferred credits and other liabilities: | |||||||||||
| Due to unconsolidated affiliates | 234 | 195 | |||||||||
| Pension and other postretirement benefit plan obligations, net of plan assets | 1,059 | 1,067 | |||||||||
| Deferred income taxes | 2,871 | 2,577 | |||||||||
| Regulatory liabilities | 3,372 | 3,741 | |||||||||
| Reserve for Aliso Canyon costs | 301 | 7 | |||||||||
| Asset retirement obligations | 3,113 | 2,923 | |||||||||
| Greenhouse gas obligations | — | 301 | |||||||||
| Liabilities held for sale in discontinued operations | — | 1,052 | |||||||||
| Deferred credits and other | 2,119 | 2,062 | |||||||||
| Total deferred credits and other liabilities | 13,069 | 13,925 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Equity: | |||||||||||
| Preferred stock (50 million shares authorized): | |||||||||||
| Mandatory convertible preferred stock, series A (17.25 million shares outstanding) | 1,693 | 1,693 | |||||||||
| Mandatory convertible preferred stock, series B (5.75 million shares outstanding) | 565 | 565 | |||||||||
| Preferred stock, series C (0.9 million shares outstanding) | 889 | — | |||||||||
| Common stock (750 million shares authorized; 288 million and 292 million shares outstanding at December 31, 2020 and 2019, respectively; no par value) | 7,053 | 7,480 | |||||||||
| Retained earnings | 13,673 | 11,130 | |||||||||
| Accumulated other comprehensive income (loss) | (500) | (939) | |||||||||
| Total Sempra Energy shareholders’ equity | 23,373 | 19,929 | |||||||||
| Preferred stock of subsidiary | 20 | 20 | |||||||||
| Other noncontrolling interests | 1,541 | 1,856 | |||||||||
| Total equity | 24,934 | 21,805 | |||||||||
| Total liabilities and equity | $ | 66,623 | $ | 65,665 |
See Notes to Consolidated Financial Statements.
F-13
| SEMPRA ENERGY | |||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | 4,105 | $ | 2,362 | $ | 1,126 | |||||||||||
| Less: Income from discontinued operations, net of income tax | (1,850) | (363) | (188) | ||||||||||||||
| Income from continuing operations, net of income tax | 2,255 | 1,999 | 938 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 1,666 | 1,569 | 1,491 | ||||||||||||||
| Deferred income taxes and investment tax credits | 159 | 189 | (242) | ||||||||||||||
| Impairment losses | 1 | 43 | 1,122 | ||||||||||||||
| Loss (gain) on sale of assets | 3 | (63) | (513) | ||||||||||||||
| Equity earnings | (1,015) | (580) | (175) | ||||||||||||||
| Foreign currency transaction losses (gains), net | 25 | (21) | 6 | ||||||||||||||
| Share-based compensation expense | 71 | 75 | 83 | ||||||||||||||
| Other | 132 | 47 | 106 | ||||||||||||||
| Net change in other working capital components: | |||||||||||||||||
| Accounts receivable | (315) | (91) | (145) | ||||||||||||||
| Income taxes receivable/payable, net | (94) | (166) | 88 | ||||||||||||||
| Inventories | (35) | (22) | 32 | ||||||||||||||
| Other current assets | 38 | (88) | (79) | ||||||||||||||
| Accounts payable | 73 | 12 | 96 | ||||||||||||||
| Regulatory balancing accounts | (231) | 13 | 263 | ||||||||||||||
| Reserve for Aliso Canyon costs | 141 | (144) | 56 | ||||||||||||||
| Other current liabilities | (127) | (99) | 52 | ||||||||||||||
| Intercompany activities with discontinued operations, net | — | 378 | 70 | ||||||||||||||
| Distributions from investments | 651 | 247 | 202 | ||||||||||||||
| Insurance receivable for Aliso Canyon costs | (106) | 122 | (43) | ||||||||||||||
| Wildfire fund, current and noncurrent | — | (323) | — | ||||||||||||||
| Reserve for Aliso Canyon costs, noncurrent | 294 | — | — | ||||||||||||||
| Changes in other noncurrent assets and liabilities, net | 56 | (399) | (188) | ||||||||||||||
| Net cash provided by continuing operations | 3,642 | 2,698 | 3,220 | ||||||||||||||
| Net cash (used in) provided by discontinued operations | (1,051) | 390 | 296 | ||||||||||||||
| Net cash provided by operating activities | 2,591 | 3,088 | 3,516 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||
| Expenditures for property, plant and equipment | (4,676) | (3,708) | (3,544) | ||||||||||||||
| Expenditures for investments and acquisitions | (652) | (1,797) | (10,168) | ||||||||||||||
| Proceeds from sale of assets | 19 | 899 | 1,580 | ||||||||||||||
| Distributions from investments | 761 | 9 | 10 | ||||||||||||||
| Purchases of nuclear decommissioning trust assets | (1,439) | (914) | (890) | ||||||||||||||
| Proceeds from sales of nuclear decommissioning trust assets | 1,439 | 914 | 890 | ||||||||||||||
| Advances to unconsolidated affiliates | (92) | (16) | (95) | ||||||||||||||
| Repayments of advances to unconsolidated affiliates | 7 | 3 | 3 | ||||||||||||||
| Intercompany activities with discontinued operations, net | — | 8 | (22) | ||||||||||||||
| Other | 15 | 21 | 31 | ||||||||||||||
| Net cash used in continuing operations | (4,618) | (4,581) | (12,205) | ||||||||||||||
| Net cash provided by (used in) discontinued operations | 5,171 | (12) | (265) | ||||||||||||||
| Net cash provided by (used in) investing activities | 553 | (4,593) | (12,470) |
See Notes to Consolidated Financial Statements
F-14
| SEMPRA ENERGY | |||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||||||
| Common dividends paid | (1,174) | (993) | (877) | ||||||||||||||
| Preferred dividends paid | (157) | (142) | (89) | ||||||||||||||
| Issuances of preferred stock, net | 891 | — | 2,258 | ||||||||||||||
| Issuances of common stock, net | 11 | 1,830 | 2,272 | ||||||||||||||
| Repurchases of common stock | (566) | (26) | (21) | ||||||||||||||
| Issuances of debt (maturities greater than 90 days) | 6,051 | 4,296 | 8,927 | ||||||||||||||
| Payments on debt (maturities greater than 90 days) and finance leases | (5,864) | (3,667) | (3,342) | ||||||||||||||
| (Decrease) increase in short-term debt, net | (1,759) | 656 | (84) | ||||||||||||||
| Advances from unconsolidated affiliates | 64 | 155 | — | ||||||||||||||
| Proceeds from sale of noncontrolling interests, net | 26 | 5 | 90 | ||||||||||||||
| Purchases of noncontrolling interests | (248) | (30) | (7) | ||||||||||||||
| Contributions from (distributions to) noncontrolling interests, net | 1 | 98 | (26) | ||||||||||||||
| Intercompany activities with discontinued operations, net | — | (266) | (109) | ||||||||||||||
| Other | (50) | (49) | (117) | ||||||||||||||
| Net cash (used in) provided by continuing operations | (2,774) | 1,867 | 8,875 | ||||||||||||||
| Net cash provided by (used in) discontinued operations | 401 | (392) | (25) | ||||||||||||||
| Net cash (used in) provided by financing activities | (2,373) | 1,475 | 8,850 | ||||||||||||||
| Effect of exchange rate changes in continuing operations | — | — | (2) | ||||||||||||||
| Effect of exchange rate changes in discontinued operations | (3) | 1 | (12) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (3) | 1 | (14) | ||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash, including discontinued operations | 768 | (29) | (118) | ||||||||||||||
| Cash, cash equivalents and restricted cash, including discontinued operations, January 1 | 217 | 246 | 364 | ||||||||||||||
| Cash, cash equivalents and restricted cash, including discontinued operations, December 31 | $ | 985 | $ | 217 | $ | 246 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||||||||
| Interest payments, net of amounts capitalized | $ | 1,046 | $ | 1,051 | $ | 773 | |||||||||||
| Income tax payments, including discontinued operations, net of refunds | 1,385 | 360 | 174 | ||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||||||||||||
| Acquisitions: | |||||||||||||||||
| Assets acquired | $ | — | $ | — | $ | 9,670 | |||||||||||
| Liabilities assumed | — | — | (102) | ||||||||||||||
| Cash paid | $ | — | $ | — | $ | 9,568 | |||||||||||
| Accrued interest receivable from unconsolidated affiliate | $ | — | $ | 55 | $ | 62 | |||||||||||
| Accrued capital expenditures | 535 | 515 | 425 | ||||||||||||||
| Accrued commercial paper proceeds | — | 67 | — | ||||||||||||||
| Increase in finance lease obligations for investment in property, plant and equipment | 77 | 38 | 556 | ||||||||||||||
| Increase in ARO for investment in PP&E | 142 | 36 | 78 | ||||||||||||||
| Equitization of long-term debt for deficit held by NCI | 22 | — | — | ||||||||||||||
| Contribution to Cameron LNG JV | 50 | — | — | ||||||||||||||
| Distribution from Cameron LNG JV | 50 | — | — | ||||||||||||||
| Preferred dividends declared but not paid | 47 | 36 | 36 | ||||||||||||||
| Common dividends issued in stock | 22 | 55 | 54 | ||||||||||||||
| Common dividends declared but not paid | 301 | 283 | 245 |
See Notes to Consolidated Financial Statements
F-15
| SEMPRA ENERGY | |||||||||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Sempra Energy shareholders' equity | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | — | $ | 3,149 | $ | 10,147 | $ | (626) | $ | 12,670 | $ | 2,470 | $ | 15,140 | |||||||||||||||||||||||||||
| Adoption of ASU 2017-12 | 2 | (3) | (1) | (1) | |||||||||||||||||||||||||||||||||||||
| Adjusted balance as of December 31, 2017 | — | 3,149 | 10,149 | (629) | 12,669 | 2,470 | 15,139 | ||||||||||||||||||||||||||||||||||
| Net income | 1,050 | 1,050 | 76 | 1,126 | |||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (135) | (135) | 2 | (133) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 83 | 83 | 83 | ||||||||||||||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||||||||||||||
| Series A preferred stock ($6.10/share) | (105) | (105) | (105) | ||||||||||||||||||||||||||||||||||||||
| Series B preferred stock ($3.41/share) | (20) | (20) | (20) | ||||||||||||||||||||||||||||||||||||||
| Common stock ($3.58/share) | (969) | (969) | (969) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | (1) | (1) | ||||||||||||||||||||||||||||||||||||||
| Issuance of series A preferred stock | 1,693 | 1,693 | 1,693 | ||||||||||||||||||||||||||||||||||||||
| Issuance of series B preferred stock | 565 | 565 | 565 | ||||||||||||||||||||||||||||||||||||||
| Issuances of common stock | 2,326 | 2,326 | 2,326 | ||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (21) | (21) | (21) | ||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities: | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 66 | 66 | |||||||||||||||||||||||||||||||||||||||
| Distributions | (110) | (110) | |||||||||||||||||||||||||||||||||||||||
| Purchases | (1) | (1) | (7) | (8) | |||||||||||||||||||||||||||||||||||||
| Sales, net of offering costs | 4 | 4 | 86 | 90 | |||||||||||||||||||||||||||||||||||||
| Acquisition | 13 | 13 | |||||||||||||||||||||||||||||||||||||||
| Deconsolidations | (486) | (486) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 2,258 | 5,540 | 10,104 | (764) | 17,138 | 2,110 | 19,248 | ||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-02 | 17 | 17 | 17 | ||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2018-02 | 40 | (42) | (2) | (2) | |||||||||||||||||||||||||||||||||||||
| Adjusted balance as of December 31, 2018 | 2,258 | 5,540 | 10,161 | (806) | 17,153 | 2,110 | 19,263 | ||||||||||||||||||||||||||||||||||
| Net income | 2,198 | 2,198 | 164 | 2,362 | |||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (133) | (133) | (7) | (140) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 75 | 75 | 75 | ||||||||||||||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||||||||||||||
| Series A preferred stock ($6.00/share) | (103) | (103) | (103) | ||||||||||||||||||||||||||||||||||||||
| Series B preferred stock ($6.75/share) | (39) | (39) | (39) | ||||||||||||||||||||||||||||||||||||||
| Common stock ($3.87/share) | (1,086) | (1,086) | (1,086) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | (1) | (1) | ||||||||||||||||||||||||||||||||||||||
| Issuances of common stock | 1,885 | 1,885 | 1,885 | ||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (26) | (26) | (26) | ||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities: | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 175 | 175 | |||||||||||||||||||||||||||||||||||||||
| Distributions | 5 | 5 | (103) | (98) | |||||||||||||||||||||||||||||||||||||
| Purchases | (3) | (3) | (27) | (30) | |||||||||||||||||||||||||||||||||||||
| Sale | 4 | 4 | 1 | 5 | |||||||||||||||||||||||||||||||||||||
| Acquisition | 3 | 3 | |||||||||||||||||||||||||||||||||||||||
| Deconsolidations | (440) | (440) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 2,258 | 7,480 | 11,130 | (939) | 19,929 | 1,876 | 21,805 |
See Notes to Consolidated Financial Statements.
F-16
| SEMPRA ENERGY | |||||||||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED) | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Sempra Energy shareholders' equity | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 2,258 | 7,480 | 11,130 | (939) | 19,929 | 1,876 | 21,805 | ||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-13 | (7) | (7) | (2) | (9) | |||||||||||||||||||||||||||||||||||||
| Adjusted balance as of December 31, 2019 | 2,258 | 7,480 | 11,123 | (939) | 19,922 | 1,874 | 21,796 | ||||||||||||||||||||||||||||||||||
| Net income | 3,933 | 3,933 | 172 | 4,105 | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 446 | 446 | (24) | 422 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 71 | 71 | 71 | ||||||||||||||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||||||||||||||
| Series A preferred stock ($6.00/share) | (104) | (104) | (104) | ||||||||||||||||||||||||||||||||||||||
| Series B preferred stock ($6.75/share) | (39) | (39) | (39) | ||||||||||||||||||||||||||||||||||||||
| Series C preferred stock ($27.90/share) | (25) | (25) | (25) | ||||||||||||||||||||||||||||||||||||||
| Common stock ($4.18/share) | (1,214) | (1,214) | (1,214) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends of subsidiary | (1) | (1) | (1) | ||||||||||||||||||||||||||||||||||||||
| Issuances of series C preferred stock | 889 | 889 | 889 | ||||||||||||||||||||||||||||||||||||||
| Issuances of common stock | 33 | 33 | 33 | ||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (566) | (566) | (566) | ||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities: | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
| Distributions | (1) | (1) | |||||||||||||||||||||||||||||||||||||||
| Purchases | 34 | (7) | 27 | (275) | (248) | ||||||||||||||||||||||||||||||||||||
| Sale | 1 | 1 | 27 | 28 | |||||||||||||||||||||||||||||||||||||
| Acquisition | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
| Equitization of long-term debt for deficit held by NCI | 22 | 22 | |||||||||||||||||||||||||||||||||||||||
| Deconsolidation | (236) | (236) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 3,147 | $ | 7,053 | $ | 13,673 | $ | (500) | $ | 23,373 | $ | 1,561 | $ | 24,934 |
See Notes to Consolidated Financial Statements.
F-17
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating revenues | |||||||||||||||||
| Electric | $ | 4,619 | $ | 4,267 | $ | 4,003 | |||||||||||
| Natural gas | 694 | 658 | 565 | ||||||||||||||
| Total operating revenues | 5,313 | 4,925 | 4,568 | ||||||||||||||
| Operating expenses | |||||||||||||||||
| Cost of electric fuel and purchased power | 1,191 | 1,194 | 1,370 | ||||||||||||||
| Cost of natural gas | 162 | 176 | 152 | ||||||||||||||
| Operation and maintenance | 1,455 | 1,181 | 1,058 | ||||||||||||||
| Depreciation and amortization | 801 | 760 | 688 | ||||||||||||||
| Franchise fees and other taxes | 331 | 301 | 290 | ||||||||||||||
| Total operating expenses | 3,940 | 3,612 | 3,558 | ||||||||||||||
| Operating income | 1,373 | 1,313 | 1,010 | ||||||||||||||
| Other income, net | 52 | 39 | 56 | ||||||||||||||
| Interest income | 2 | 4 | 4 | ||||||||||||||
| Interest expense | (413) | (411) | (221) | ||||||||||||||
| Income before income taxes | 1,014 | 945 | 849 | ||||||||||||||
| Income tax expense | (190) | (171) | (173) | ||||||||||||||
| Net income | 824 | 774 | 676 | ||||||||||||||
| Earnings attributable to noncontrolling interest | — | (7) | (7) | ||||||||||||||
| Earnings attributable to common shares | $ | 824 | $ | 767 | $ | 669 |
See Notes to Consolidated Financial Statements.
F-18
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||
| SDG&E shareholder's equity | |||||||||||||||||||||||||||||
| Pretax amount | Income tax (expense) benefit | Net-of-tax amount | Noncontrolling interest (after tax) | Total | |||||||||||||||||||||||||
| 2020: | |||||||||||||||||||||||||||||
| Net income | $ | 1,014 | $ | (190) | $ | 824 | $ | — | $ | 824 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Pension and other postretirement benefits | 8 | (2) | 6 | — | 6 | ||||||||||||||||||||||||
| Total other comprehensive income | 8 | (2) | 6 | — | 6 | ||||||||||||||||||||||||
| Comprehensive income | $ | 1,022 | $ | (192) | $ | 830 | $ | — | $ | 830 | |||||||||||||||||||
| 2019: | |||||||||||||||||||||||||||||
| Net income | $ | 938 | $ | (171) | $ | 767 | $ | 7 | $ | 774 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Financial instruments | — | — | — | 2 | 2 | ||||||||||||||||||||||||
| Pension and other postretirement benefits | (6) | 2 | (4) | — | (4) | ||||||||||||||||||||||||
| Total other comprehensive (loss) income | (6) | 2 | (4) | 2 | (2) | ||||||||||||||||||||||||
| Comprehensive income | $ | 932 | $ | (169) | $ | 763 | $ | 9 | $ | 772 | |||||||||||||||||||
| 2018: | |||||||||||||||||||||||||||||
| Net income | $ | 842 | $ | (173) | $ | 669 | $ | 7 | $ | 676 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Financial instruments | — | — | — | 8 | 8 | ||||||||||||||||||||||||
| Pension and other postretirement benefits | (2) | — | (2) | — | (2) | ||||||||||||||||||||||||
| Total other comprehensive (loss) income | (2) | — | (2) | 8 | 6 | ||||||||||||||||||||||||
| Comprehensive income | $ | 840 | $ | (173) | $ | 667 | $ | 15 | $ | 682 |
See Notes to Consolidated Financial Statements.
F-19
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 262 | $ | 10 | |||||||
| Accounts receivable – trade, net | 573 | 398 | |||||||||
| Accounts receivable – other, net | 143 | 119 | |||||||||
| Income taxes receivable, net | — | 128 | |||||||||
| Inventories | 104 | 94 | |||||||||
| Prepaid expenses | 153 | 120 | |||||||||
| Regulatory assets | 174 | 209 | |||||||||
| Fixed-price contracts and other derivatives | 56 | 43 | |||||||||
| Greenhouse gas allowances | 113 | 13 | |||||||||
| Other current assets | 22 | 24 | |||||||||
| Total current assets | 1,600 | 1,158 | |||||||||
| Other assets: | |||||||||||
| Regulatory assets | 534 | 440 | |||||||||
| Nuclear decommissioning trusts | 1,019 | 1,082 | |||||||||
| Greenhouse gas allowances | 83 | 189 | |||||||||
| Right-of-use assets – operating leases | 102 | 130 | |||||||||
| Wildfire fund | 363 | 392 | |||||||||
| Other long-term assets | 189 | 202 | |||||||||
| Total other assets | 2,290 | 2,435 | |||||||||
| Property, plant and equipment: | |||||||||||
| Property, plant and equipment | 24,436 | 22,504 | |||||||||
| Less accumulated depreciation and amortization | (6,015) | (5,537) | |||||||||
| Property, plant and equipment, net | 18,421 | 16,967 | |||||||||
| Total assets | $ | 22,311 | $ | 20,560 |
See Notes to Consolidated Financial Statements.
F-20
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||
| CONSOLIDATED BALANCE SHEETS (CONTINUED) | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | — | $ | 80 | |||||||
| Accounts payable | 553 | 496 | |||||||||
| Due to unconsolidated affiliates | 64 | 53 | |||||||||
| Interest payable | 46 | 43 | |||||||||
| Accrued compensation and benefits | 135 | 138 | |||||||||
| Accrued franchise fees | 56 | 53 | |||||||||
| Regulatory liabilities | 61 | 76 | |||||||||
| Current portion of long-term debt and finance leases | 611 | 56 | |||||||||
| Customer deposits | 56 | 74 | |||||||||
| Greenhouse gas obligations | 113 | 13 | |||||||||
| Asset retirement obligations | 117 | 95 | |||||||||
| Other current liabilities | 199 | 133 | |||||||||
| Total current liabilities | 2,011 | 1,310 | |||||||||
| Long-term debt and finance leases | 6,866 | 6,306 | |||||||||
| Deferred credits and other liabilities: | |||||||||||
| Pension obligation, net of plan assets | 92 | 153 | |||||||||
| Deferred income taxes | 2,019 | 1,848 | |||||||||
| Deferred investment tax credits | 13 | 14 | |||||||||
| Regulatory liabilities | 2,195 | 2,319 | |||||||||
| Asset retirement obligations | 759 | 771 | |||||||||
| Greenhouse gas obligations | — | 62 | |||||||||
| Deferred credits and other | 626 | 677 | |||||||||
| Total deferred credits and other liabilities | 5,704 | 5,844 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Shareholder’s Equity: | |||||||||||
| Preferred stock (45 million shares authorized; none issued) | — | — | |||||||||
| Common stock (255 million shares authorized; 117 million shares outstanding; no par value) | 1,660 | 1,660 | |||||||||
| Retained earnings | 6,080 | 5,456 | |||||||||
| Accumulated other comprehensive income (loss) | (10) | (16) | |||||||||
| Total shareholder’s equity | 7,730 | 7,100 | |||||||||
| Total liabilities and shareholder’s equity | $ | 22,311 | $ | 20,560 |
See Notes to Consolidated Financial Statements.
F-21
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | 824 | $ | 774 | $ | 676 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 801 | 760 | 688 | ||||||||||||||
| Deferred income taxes and investment tax credits | 35 | 105 | 39 | ||||||||||||||
| Other | 27 | 13 | (17) | ||||||||||||||
| Net change in other working capital components: | |||||||||||||||||
| Accounts receivable | (134) | (15) | 30 | ||||||||||||||
| Due to/from affiliates, net | 11 | (8) | (2) | ||||||||||||||
| Income taxes receivable/payable, net | 129 | (126) | 23 | ||||||||||||||
| Inventories | (10) | 4 | 3 | ||||||||||||||
| Other current assets | 4 | (19) | (6) | ||||||||||||||
| Accounts payable | 31 | 32 | (1) | ||||||||||||||
| Regulatory balancing accounts | (71) | (101) | 138 | ||||||||||||||
| Other current liabilities | (100) | 4 | 4 | ||||||||||||||
| Wildfire fund, current and noncurrent | — | (323) | — | ||||||||||||||
| Changes in other noncurrent assets and liabilities, net | (158) | (10) | 9 | ||||||||||||||
| Net cash provided by operating activities | 1,389 | 1,090 | 1,584 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||
| Expenditures for property, plant and equipment | (1,942) | (1,522) | (1,542) | ||||||||||||||
| Decrease in cash from deconsolidation of Otay Mesa VIE | — | (8) | — | ||||||||||||||
| Purchases of nuclear decommissioning trust assets | (1,439) | (914) | (890) | ||||||||||||||
| Proceeds from sales of nuclear decommissioning trust assets | 1,439 | 914 | 890 | ||||||||||||||
| Other | 8 | 8 | — | ||||||||||||||
| Net cash used in investing activities | (1,934) | (1,522) | (1,542) | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||||||
| Common dividends paid | (200) | — | (250) | ||||||||||||||
| Equity contribution from Sempra Energy | — | 322 | — | ||||||||||||||
| Issuances of debt (maturities greater than 90 days) | 1,598 | 400 | 618 | ||||||||||||||
| Payments on debt (maturities greater than 90 days) and finance leases | (510) | (274) | (492) | ||||||||||||||
| (Decrease) increase in short-term debt, net | (80) | (211) | 38 | ||||||||||||||
| Contributions from noncontrolling interest, net | — | 172 | 57 | ||||||||||||||
| Debt issuance costs | (11) | (4) | (5) | ||||||||||||||
| Net cash provided by (used in) financing activities | 797 | 405 | (34) | ||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 252 | (27) | 8 | ||||||||||||||
| Cash, cash equivalents and restricted cash, January 1 | 10 | 37 | 29 | ||||||||||||||
| Cash, cash equivalents and restricted cash, December 31 | $ | 262 | $ | 10 | $ | 37 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||||||||
| Interest payments, net of amounts capitalized | $ | 404 | $ | 405 | $ | 214 | |||||||||||
| Income tax payments, net of refunds | 25 | 191 | 112 | ||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||||||||||||
| Accrued capital expenditures | $ | 199 | $ | 174 | $ | 159 | |||||||||||
| Increase in finance lease obligations for investment in property, plant and equipment | 30 | 16 | 550 | ||||||||||||||
| Increase (decrease) in ARO for investment in PP&E | 31 | (1) | 35 |
See Notes to Consolidated Financial Statements
F-22
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||||||||
| Common stock | Retained earnings | Accumulated other comprehensive income (loss) | SDG&E shareholder's equity | Noncontrolling interest | Total equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 1,338 | $ | 4,268 | $ | (8) | $ | 5,598 | $ | 28 | $ | 5,626 | |||||||||||||||||||||||
| Net income | 669 | 669 | 7 | 676 | |||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (2) | (2) | 8 | 6 | |||||||||||||||||||||||||||||||
| Common stock dividends declared ($2.14/share) | (250) | (250) | (250) | ||||||||||||||||||||||||||||||||
| Noncontrolling interest activities: | |||||||||||||||||||||||||||||||||||
| Contributions | 65 | 65 | |||||||||||||||||||||||||||||||||
| Distributions | (8) | (8) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 1,338 | 4,687 | (10) | 6,015 | 100 | 6,115 | |||||||||||||||||||||||||||||
| Adoption of ASU 2018-02 | 2 | (2) | — | — | |||||||||||||||||||||||||||||||
| Adjusted balance at December 31, 2018 | 1,338 | 4,689 | (12) | 6,015 | 100 | 6,115 | |||||||||||||||||||||||||||||
| Net income | 767 | 767 | 7 | 774 | |||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (4) | (4) | 2 | (2) | |||||||||||||||||||||||||||||||
| Equity contribution from Sempra Energy | 322 | 322 | 322 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest activities: | |||||||||||||||||||||||||||||||||||
| Contributions | 175 | 175 | |||||||||||||||||||||||||||||||||
| Distributions | (3) | (3) | |||||||||||||||||||||||||||||||||
| Deconsolidation | (281) | (281) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 1,660 | 5,456 | (16) | 7,100 | — | 7,100 | |||||||||||||||||||||||||||||
| Net income | 824 | 824 | — | 824 | |||||||||||||||||||||||||||||||
| Other comprehensive income | 6 | 6 | — | 6 | |||||||||||||||||||||||||||||||
| Common stock dividends declared ($1.72/share) | (200) | (200) | (200) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 1,660 | $ | 6,080 | $ | (10) | $ | 7,730 | $ | — | $ | 7,730 |
See Notes to Consolidated Financial Statements.
F-23
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||
| STATEMENTS OF OPERATIONS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating revenues | $ | 4,748 | $ | 4,525 | $ | 3,962 | |||||||||||
| Operating expenses | |||||||||||||||||
| Cost of natural gas | 783 | 977 | 1,048 | ||||||||||||||
| Operation and maintenance | 2,029 | 1,780 | 1,613 | ||||||||||||||
| Aliso Canyon litigation and regulatory matters | 307 | — | — | ||||||||||||||
| Depreciation and amortization | 654 | 602 | 556 | ||||||||||||||
| Franchise fees and other taxes | 190 | 173 | 154 | ||||||||||||||
| Impairment losses | — | 37 | — | ||||||||||||||
| Total operating expenses | 3,963 | 3,569 | 3,371 | ||||||||||||||
| Operating income | 785 | 956 | 591 | ||||||||||||||
| Other (expense) income, net | (28) | (55) | 15 | ||||||||||||||
| Interest income | 2 | 2 | 2 | ||||||||||||||
| Interest expense | (158) | (141) | (115) | ||||||||||||||
| Income before income taxes | 601 | 762 | 493 | ||||||||||||||
| Income tax expense | (96) | (120) | (92) | ||||||||||||||
| Net income | 505 | 642 | 401 | ||||||||||||||
| Preferred dividends | (1) | (1) | (1) | ||||||||||||||
| Earnings attributable to common shares | $ | 504 | $ | 641 | $ | 400 |
See Notes to Financial Statements.
F-24
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||
| Pretax amount | Income tax (expense) benefit | Net-of-tax amount | |||||||||||||||
| 2020: | |||||||||||||||||
| Net income | $ | 601 | $ | (96) | $ | 505 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Pension and other postretirement benefits | (12) | 4 | (8) | ||||||||||||||
| Total other comprehensive loss | (12) | 4 | (8) | ||||||||||||||
| Comprehensive income | $ | 589 | $ | (92) | $ | 497 | |||||||||||
| 2019: | |||||||||||||||||
| Net income | $ | 762 | $ | (120) | $ | 642 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Financial instruments | 1 | — | 1 | ||||||||||||||
| Pension and other postretirement benefits | 1 | (1) | — | ||||||||||||||
| Total other comprehensive income | 2 | (1) | 1 | ||||||||||||||
| Comprehensive income | $ | 764 | $ | (121) | $ | 643 | |||||||||||
| 2018: | |||||||||||||||||
| Net income | $ | 493 | $ | (92) | $ | 401 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Financial instruments | 1 | — | 1 | ||||||||||||||
| Total other comprehensive income | 1 | — | 1 | ||||||||||||||
| Comprehensive income | $ | 494 | $ | (92) | $ | 402 |
See Notes to Financial Statements
F-25
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||
| BALANCE SHEETS | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 4 | $ | 10 | |||||||
| Accounts receivable – trade, net | 786 | 710 | |||||||||
| Accounts receivable – other, net | 64 | 87 | |||||||||
| Due from unconsolidated affiliates | 22 | 11 | |||||||||
| Income taxes receivable, net | — | 161 | |||||||||
| Inventories | 153 | 136 | |||||||||
| Regulatory assets | 16 | 7 | |||||||||
| Greenhouse gas allowances | 390 | 52 | |||||||||
| Other current assets | 47 | 44 | |||||||||
| Total current assets | 1,482 | 1,218 | |||||||||
| Other assets: | |||||||||||
| Regulatory assets | 1,208 | 1,407 | |||||||||
| Insurance receivable for Aliso Canyon costs | 445 | 339 | |||||||||
| Greenhouse gas allowances | 9 | 248 | |||||||||
| Right-of-use assets – operating leases | 74 | 94 | |||||||||
| Other long-term assets | 499 | 447 | |||||||||
| Total other assets | 2,235 | 2,535 | |||||||||
| Property, plant and equipment: | |||||||||||
| Property, plant and equipment | 21,180 | 19,362 | |||||||||
| Less accumulated depreciation and amortization | (6,437) | (6,038) | |||||||||
| Property, plant and equipment, net | 14,743 | 13,324 | |||||||||
| Total assets | $ | 18,460 | $ | 17,077 |
See Notes to Financial Statements.
F-26
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||
| BALANCE SHEETS (CONTINUED) | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | 113 | $ | 630 | |||||||
| Accounts payable – trade | 600 | 545 | |||||||||
| Accounts payable – other | 122 | 110 | |||||||||
| Due to unconsolidated affiliates | 31 | 47 | |||||||||
| Accrued compensation and benefits | 189 | 182 | |||||||||
| Regulatory liabilities | 79 | 243 | |||||||||
| Current portion of long-term debt and finance leases | 10 | 6 | |||||||||
| Customer deposits | 48 | 71 | |||||||||
| Reserve for Aliso Canyon costs | 150 | 9 | |||||||||
| Greenhouse gas obligations | 390 | 52 | |||||||||
| Asset retirement obligations | 59 | 65 | |||||||||
| Other current liabilities | 291 | 222 | |||||||||
| Total current liabilities | 2,082 | 2,182 | |||||||||
| Long-term debt and finance leases | 4,763 | 3,788 | |||||||||
| Deferred credits and other liabilities: | |||||||||||
| Pension obligation, net of plan assets | 853 | 785 | |||||||||
| Deferred income taxes | 1,406 | 1,403 | |||||||||
| Deferred investment tax credits | 8 | 7 | |||||||||
| Regulatory liabilities | 1,177 | 1,422 | |||||||||
| Reserve for Aliso Canyon costs | 301 | 7 | |||||||||
| Asset retirement obligations | 2,309 | 2,112 | |||||||||
| Greenhouse gas obligations | — | 208 | |||||||||
| Deferred credits and other | 417 | 415 | |||||||||
| Total deferred credits and other liabilities | 6,471 | 6,359 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Preferred stock (11 million shares authorized; 1 million shares outstanding) | 22 | 22 | |||||||||
| Common stock (100 million shares authorized; 91 million shares outstanding; no par value) | 866 | 866 | |||||||||
| Retained earnings | 4,287 | 3,883 | |||||||||
| Accumulated other comprehensive income (loss) | (31) | (23) | |||||||||
| Total shareholders’ equity | 5,144 | 4,748 | |||||||||
| Total liabilities and shareholders’ equity | $ | 18,460 | $ | 17,077 |
See Notes to Financial Statements.
F-27
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||
| STATEMENTS OF CASH FLOWS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | 505 | $ | 642 | $ | 401 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 654 | 602 | 556 | ||||||||||||||
| Deferred income taxes and investment tax credits | (112) | 88 | 78 | ||||||||||||||
| Impairment losses | — | 37 | — | ||||||||||||||
| Other | 59 | (5) | (7) | ||||||||||||||
| Net change in working capital components: | |||||||||||||||||
| Accounts receivable | (101) | (73) | (87) | ||||||||||||||
| Due to/from affiliates, net | (27) | (1) | (10) | ||||||||||||||
| Income taxes receivable/payable, net | 189 | (156) | 14 | ||||||||||||||
| Inventories | (19) | 1 | (2) | ||||||||||||||
| Other current assets | (12) | (9) | 11 | ||||||||||||||
| Accounts payable | 64 | (7) | 71 | ||||||||||||||
| Regulatory balancing accounts | (160) | 114 | 125 | ||||||||||||||
| Reserve for Aliso Canyon costs | 141 | (144) | 56 | ||||||||||||||
| Other current liabilities | (21) | (21) | (6) | ||||||||||||||
| Insurance receivable for Aliso Canyon costs | (106) | 122 | (43) | ||||||||||||||
| Reserve for Aliso Canyon costs, noncurrent | 294 | — | — | ||||||||||||||
| Changes in other noncurrent assets and liabilities, net | 178 | (322) | (144) | ||||||||||||||
| Net cash provided by operating activities | 1,526 | 868 | 1,013 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||
| Expenditures for property, plant and equipment | (1,843) | (1,439) | (1,538) | ||||||||||||||
| Other | — | 1 | 7 | ||||||||||||||
| Net cash used in investing activities | (1,843) | (1,438) | (1,531) | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||||||
| Common dividends paid | (100) | (150) | (50) | ||||||||||||||
| Preferred dividends paid | (1) | (1) | (1) | ||||||||||||||
| Issuances of debt (maturities greater than 90 days) | 949 | 349 | 949 | ||||||||||||||
| Payments on debt (maturities greater than 90 days) and finance leases | (12) | (6) | (500) | ||||||||||||||
| (Decrease) increase in short-term debt, net | (517) | 374 | 140 | ||||||||||||||
| Debt issuance costs | (8) | (4) | (10) | ||||||||||||||
| Net cash provided by financing activities | 311 | 562 | 528 | ||||||||||||||
| (Decrease) increase in cash and cash equivalents | (6) | (8) | 10 | ||||||||||||||
| Cash and cash equivalents, January 1 | 10 | 18 | 8 | ||||||||||||||
| Cash and cash equivalents, December 31 | $ | 4 | $ | 10 | $ | 18 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||||||||
| Interest payments, net of amounts capitalized | $ | 146 | $ | 126 | $ | 105 | |||||||||||
| Income tax payments, net of refunds | 19 | 188 | — | ||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||||||||||||
| Accrued capital expenditures | $ | 208 | $ | 205 | $ | 191 | |||||||||||
| Increase in finance lease obligations for investment in property, plant and equipment | 47 | 22 | 6 | ||||||||||||||
| Increase in ARO for investment in PP&E | 107 | 35 | 35 |
See Notes to Financial Statements
F-28
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||||||||||||||
| STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||||||||||||||
| Preferred stock | Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 22 | $ | 866 | $ | 3,040 | $ | (21) | $ | 3,907 | |||||||||||||||||||
| Net income | 401 | 401 | |||||||||||||||||||||||||||
| Other comprehensive income | 1 | 1 | |||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||
| Preferred stock ($1.50/share) | (1) | (1) | |||||||||||||||||||||||||||
| Common stock ($0.55/share) | (50) | (50) | |||||||||||||||||||||||||||
| Balance at December 31, 2018 | 22 | 866 | 3,390 | (20) | 4,258 | ||||||||||||||||||||||||
| Adoption of ASU 2018-02 | 2 | (4) | (2) | ||||||||||||||||||||||||||
| Adjusted balance as of December 31, 2018 | 22 | 866 | 3,392 | (24) | 4,256 | ||||||||||||||||||||||||
| Net income | 642 | 642 | |||||||||||||||||||||||||||
| Other comprehensive income | 1 | 1 | |||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||
| Preferred stock ($1.50/share) | (1) | (1) | |||||||||||||||||||||||||||
| Common stock ($1.64/share) | (150) | (150) | |||||||||||||||||||||||||||
| Balance at December 31, 2019 | 22 | 866 | 3,883 | (23) | 4,748 | ||||||||||||||||||||||||
| Net income | 505 | 505 | |||||||||||||||||||||||||||
| Other comprehensive loss | (8) | (8) | |||||||||||||||||||||||||||
| Dividends declared: | |||||||||||||||||||||||||||||
| Preferred stock ($1.50/share) | (1) | (1) | |||||||||||||||||||||||||||
| Common stock ($1.10/share) | (100) | (100) | |||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 22 | $ | 866 | $ | 4,287 | $ | (31) | $ | 5,144 |
See Notes to Financial Statements
F-29
SEMPRA ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER FINANCIAL DATA
PRINCIPLES OF CONSOLIDATION
Sempra Energy
Sempra Energy’s Consolidated Financial Statements include the accounts of Sempra Energy, a California-based energy-services holding company, and its consolidated subsidiaries and VIEs. Sempra Global is the holding company for our subsidiaries that are not subject to California or Texas utility regulation. Sempra Energy’s businesses were managed within six separate reportable segments until April 2019 and five separate reportable segments thereafter, which we discuss in Note 17. All references in these Notes to our reportable segments are not intended to refer to any legal entity with the same or similar name.
SDG&E
SDG&E’s Consolidated Financial Statements include its accounts and the accounts of a VIE of which SDG&E was the primary beneficiary until August 23, 2019, at which time SDG&E deconsolidated the VIE, as we discuss below in “Variable Interest Entities.” SDG&E’s common stock is wholly owned by Enova, which is a wholly owned subsidiary of Sempra Energy.
SoCalGas
SoCalGas’ common stock is wholly owned by PE, which is a wholly owned subsidiary of Sempra Energy.
In this report, we refer to SDG&E and SoCalGas collectively as the California Utilities.
BASIS OF PRESENTATION
This is a combined report of Sempra Energy, SDG&E and SoCalGas. We provide separate information for SDG&E and SoCalGas as required. References in this report to “we,” “our,” “us” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, unless otherwise indicated by the context. We have eliminated intercompany accounts and transactions within the consolidated financial statements of each reporting entity.
Throughout these Notes, we refer to the following as Consolidated Financial Statements and Notes to Consolidated Financial Statements when discussed together or collectively:
▪the Consolidated Financial Statements and related Notes of Sempra Energy and its subsidiaries and VIEs;
▪the Consolidated Financial Statements and related Notes of SDG&E and its VIE (until deconsolidation of the VIE in August 2019); and
▪the Financial Statements and related Notes of SoCalGas.
Use of Estimates in the Preparation of the Financial Statements
We have prepared our Consolidated Financial Statements in conformity with U.S. GAAP. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including the disclosure of contingent assets and liabilities at the date of the financial statements. Although we believe the estimates and assumptions are reasonable, actual amounts ultimately may differ significantly from those estimates.
Discontinued Operations
In January 2019, our board of directors approved a plan to sell our South American businesses based on our strategic focus on North America. We determined that these businesses, which previously constituted the Sempra South American Utilities segment, and certain activities associated with these businesses, met the held-for-sale criteria. These businesses are presented as discontinued operations, which we discuss further in Note 5. We completed the sales in the second quarter of 2020. Our discussions in the Notes below relate only to our continuing operations unless otherwise noted.
Subsequent Events
F-30
We evaluated events and transactions that occurred after December 31, 2020 through the date the financial statements were issued, and in the opinion of management, the accompanying statements reflect all adjustments and disclosures necessary for a fair presentation.
EFFECTS OF REGULATION
The California Utilities’ accounting policies and financial statements reflect the application of U.S. GAAP provisions governing rate-regulated operations and the policies of the CPUC and the FERC. Under these provisions, a regulated utility records regulatory assets, which are generally costs that would otherwise be charged to expense, if it is probable that, through the ratemaking process, the utility will recover those assets from customers. To the extent that recovery is no longer probable, the related regulatory assets are written off. Regulatory liabilities generally represent amounts collected from customers in advance of the actual expenditure by the utility. If the actual expenditures are less than amounts previously collected from ratepayers, the excess would be refunded to customers, generally by reducing future rates. Regulatory liabilities may also arise from other transactions such as unrealized gains on fixed price contracts and other derivatives or certain deferred income tax benefits that are passed through to customers in future rates. In addition, the California Utilities record regulatory liabilities when the CPUC or the FERC requires a refund to be made to customers or has required that a gain or other transaction of net allowable costs be given to customers over future periods.
Determining probability of recovery of regulatory assets requires significant judgment by management and may include, but is not limited to, consideration of:
▪the nature of the event giving rise to the assessment
▪existing statutes and regulatory code
▪legal precedents
▪regulatory principles and analogous regulatory actions
▪testimony presented in regulatory hearings
▪regulatory orders
▪a commission-authorized mechanism established for the accumulation of costs
▪status of applications for rehearings or state court appeals
▪specific approval from a commission
▪historical experience
Sempra Mexico’s natural gas distribution utility, Ecogas, also applies U.S. GAAP for rate-regulated utilities to its operations, including the same evaluation of probability of recovery of regulatory assets described above.
We provide information concerning regulatory assets and liabilities in Note 4.
Our Sempra Texas Utilities segment is comprised of our equity method investments in Oncor Holdings, which, at December 31, 2020, owns an 80.25% interest in Oncor, and Sharyland Holdings, which owns 100% of Sharyland Utilities. Oncor and Sharyland Utilities are regulated electric transmission and distribution utilities in Texas and their rates are regulated by the PUCT and certain cities and are subject to regulatory rate-setting processes and annual earnings oversight. Oncor and Sharyland Utilities prepare their financial statements in accordance with the provisions of U.S. GAAP governing rate-regulated operations.
Our Sempra Mexico segment includes the operating companies of our subsidiary, IEnova, as well as certain holding companies and risk management activity. Certain business activities at IEnova are regulated by the CRE and meet the regulatory accounting requirements of U.S. GAAP. Pipeline projects currently under construction at IEnova that meet the regulatory accounting requirements of U.S. GAAP record the impact of AFUDC related to equity. We discuss AFUDC below in “Property, Plant and Equipment.”
FAIR VALUE MEASUREMENTS
We measure certain assets and liabilities at fair value on a recurring basis, primarily NDT and benefit plan trust assets and derivatives. We also measure certain assets at fair value on a non-recurring basis in certain circumstances.
A fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Also, we consider an issuer’s credit standing when measuring its liabilities at fair value.
F-31
We establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 – Pricing inputs are unadjusted quoted prices available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 financial instruments primarily consist of listed equities and U.S. government treasury securities, primarily in the NDT and benefit plan trusts, and exchange-traded derivatives.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including:
▪quoted forward prices for commodities
▪time value
▪current market and contractual prices for the underlying instruments
▪volatility factors
▪other relevant economic measures
Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Our financial instruments in this category include listed equities, domestic corporate bonds, municipal bonds and other foreign bonds, primarily in the NDT and benefit plan trusts, and non-exchange-traded derivatives such as interest rate instruments and over-the-counter forwards and options.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. Our Level 3 financial instruments consist of CRRs and fixed-price electricity positions at SDG&E and the Support Agreement at Sempra LNG.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents are highly liquid investments with original maturities of three months or less at the date of purchase.
Restricted cash includes funds primarily denominated in Mexican pesos to pay for rights-of-way, license fees, permits, topographic surveys and other costs pursuant to trust and debt agreements related to pipeline projects at Sempra Mexico.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Consolidated Balance Sheets to the sum of such amounts reported on the Consolidated Statements of Cash Flows.
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |||||||||||
| (Dollars in millions) | |||||||||||
| At December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Cash and cash equivalents | $ | 960 | $ | 108 | |||||||
| Restricted cash, current | 22 | 31 | |||||||||
| Restricted cash, noncurrent | 3 | 3 | |||||||||
| Cash, cash equivalents and restricted cash in discontinued operations | — | 75 | |||||||||
| Total cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows | $ | 985 | $ | 217 |
In the Sempra Energy Consolidated Statement of Cash Flows for the year ended December 31, 2020, the ending cash, cash equivalents and restricted cash balance in discontinued operations of $4.6 billion is considered to be cash, cash equivalents and restricted cash for continuing operations following the sales of the South American businesses.
CREDIT LOSSES
We are exposed to credit losses from financial assets measured at amortized cost, including trade and other accounts receivable and amounts due from unconsolidated affiliates. We are also exposed to credit losses from off-balance sheet arrangements through our guarantees of Cameron LNG JV’s debt.
F-32
We regularly monitor and evaluate credit losses and record allowances for expected credit losses, if necessary, for trade and other accounts receivable using a combination of factors, including past-due status based on contractual terms, trends in write-offs, the age of the receivable, historical and industry trends, counterparty creditworthiness, economic conditions and specific events, such as bankruptcies. We write off financial assets measured at amortized cost in the period in which we determine they are not recoverable. We record recoveries of amounts previously written off when it is known that they will be recovered.
In connection with the COVID-19 pandemic, the California Utilities have implemented certain measures to assist customers, including suspending service disconnections due to nonpayment for residential and small business customers, waiving late payment fees for business customers, and offering flexible payment plans to customers experiencing difficulty paying their electric or gas bills. As we discuss in Note 4, the CPUC authorized each of the California Utilities to track and request recovery of incremental costs, including uncollectible expenses, associated with complying with residential and small business customer protection measures implemented by the CPUC related to the COVID-19 pandemic.
In June 2020, the CPUC issued a decision in a separate proceeding addressing service disconnections that, among other things, allows each of the California Utilities to establish a two-way balancing account to record the uncollectible expenses associated with residential customers’ inability to pay their electric or gas bills. This decision also directs the California Utilities to establish an AMP that provides successfully participating, income-qualified residential customers with relief from outstanding utility bill amounts. Refer to Note 4 for further discussion.
The California Utilities have recorded increases in their allowances for expected credit losses as of December 31, 2020 primarily related to expected forgiveness of outstanding utility bill amounts, including increases due to the effect of the COVID-19 pandemic, for residential customers eligible under the AMP. Our businesses will continue to monitor macroeconomic factors and customer payment patterns when evaluating their allowances for credit losses in future reporting periods, which may increase significantly due to the effects of the COVID-19 pandemic or other factors.
We provide below allowances and changes in allowances for credit losses for trade and other accounts receivable, excluding allowances related to amounts due from unconsolidated affiliates and off-balance sheet arrangements, which we discuss separately below the table. The California Utilities record changes in the allowances for credit losses related to Accounts Receivable – Trade in regulatory accounts.
| TRADE AND OTHER ACCOUNTS RECEIVABLE – ALLOWANCES FOR CREDIT LOSSES | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Allowances for credit losses at January 1 | $ | 29 | $ | 21 | $ | 25 | |||||||||||
| Incremental allowance upon adoption of ASU 2016-13 | 1 | — | — | ||||||||||||||
| Provisions for expected credit losses | 124 | 22 | 10 | ||||||||||||||
| Write-offs | (16) | (14) | (14) | ||||||||||||||
| Allowances for credit losses at December 31(1) | $ | 138 | $ | 29 | $ | 21 | |||||||||||
| SDG&E: | |||||||||||||||||
| Allowances for credit losses at January 1 | $ | 14 | $ | 11 | $ | 9 | |||||||||||
| Provisions for expected credit losses | 65 | 10 | 9 | ||||||||||||||
| Write-offs | (10) | (7) | (7) | ||||||||||||||
| Allowances for credit losses at December 31(2) | $ | 69 | $ | 14 | $ | 11 | |||||||||||
| SoCalGas: | |||||||||||||||||
| Allowances for credit losses at January 1 | $ | 15 | $ | 10 | $ | 16 | |||||||||||
| Provisions for expected credit losses | 59 | 12 | 1 | ||||||||||||||
| Write-offs | (6) | (7) | (7) | ||||||||||||||
| Allowances for credit losses at December 31(3) | $ | 68 | $ | 15 | $ | 10 |
(1) Balances at December 31, 2020 and 2019 include $111 million and $7 million, respectively, in Accounts Receivable – Trade, Net and $27 million and $22 million, respectively, in Accounts Receivable – Other, Net.
(2) Balances at December 31, 2020 and 2019 include $55 million and $4 million, respectively, in Accounts Receivable – Trade, Net and $14 million and $10 million, respectively, in Accounts Receivable – Other, Net.
(3) Balances at December 31, 2020 and 2019 include $55 million and $3 million, respectively, in Accounts Receivable – Trade, Net and $13 million and $12 million, respectively, in Accounts Receivable – Other, Net.
F-33
For amounts due from unconsolidated affiliates and off-balance sheet arrangements, on a quarterly basis, we evaluate credit losses and record allowances for expected credit losses, if necessary, based on credit quality indicators such as external credit ratings, published default rate studies, the maturity date of the instrument and past delinquencies. However, we do not record allowances for expected credit losses related to accrued interest receivable on loans due from unconsolidated affiliates because we write off such amounts, if any, through a reversal of interest income in the period we determine such amounts are uncollectible. In the absence of external credit ratings, we may utilize an internally developed credit rating based on our analysis of a counterparty’s financial statements to determine our expected credit losses.
As we discuss below in “Transactions with Affiliates,” we have loans due from unconsolidated affiliates with varying tenors, interest rates and currencies. We provide below the changes in allowances for credit losses for loans and other amounts due from unconsolidated affiliates.
| AMOUNTS DUE FROM UNCONSOLIDATED AFFILIATES – ALLOWANCES FOR CREDIT LOSSES | |||||
| (Dollars in millions) | |||||
| Sempra Energy Consolidated(1) | |||||
| Allowances for credit losses at January 1, 2020 | $ | — | |||
| Allowance established upon adoption of ASU 2016-13 | 6 | ||||
| Reduction to expected credit losses | (3) | ||||
| Allowances for credit losses at December 31, 2020 | $ | 3 |
(1) Balance at December 31, 2020 includes negligible amounts and $3 million in Due from Unconsolidated Affiliates – Current and Due from Unconsolidated Affiliates – Noncurrent, respectively.
As we discuss in Note 6, Sempra Energy has provided guarantees for the benefit of Cameron LNG JV related to its debt obligations for a maximum aggregate amount of $4.0 billion. We established a liability for credit losses of $6 million for this off-balance sheet arrangement upon adoption of ASU 2016-13 on January 1, 2020 and we subsequently reduced this liability by $4 million in the year ended December 31, 2020 through a reduction to credit loss expense, which is included in O&M on the Sempra Energy Consolidated Statement of Operations. At December 31, 2020, expected credit losses of $2 million are included in Other Current Liabilities on the Sempra Energy Consolidated Balance Sheet.
CONCENTRATION OF CREDIT RISK
Credit risk is the risk of loss that would be incurred as a result of nonperformance by our counterparties on their contractual obligations. We have policies governing the management of credit risk that are administered by the respective credit departments at each of our segments and overseen by their separate risk management committees.
This oversight includes calculating current and potential credit risk on a regular basis and monitoring actual balances in comparison to approved limits. We establish credit limits based on risk and return considerations under terms customarily available in the industry. We avoid concentration of counterparties whenever possible, and we believe our credit policies significantly reduce overall credit risk. These policies include an evaluation of:
▪prospective counterparties’ financial condition (including credit ratings)
▪collateral requirements
▪the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty
▪downgrade triggers
We believe that we have provided adequate reserves for counterparty nonperformance in our allowances for credit losses.
When our development projects become operational, we rely significantly on the ability of suppliers to perform under long-term agreements and on our ability to enforce contract terms in the event of nonperformance. Also, the factors that we consider in evaluating a development project include negotiating customer and supplier agreements and, therefore, we rely on these agreements for future performance. We also may condition our decision to go forward on development projects on first obtaining these customer and supplier agreements.
F-34
INVENTORIES
The California Utilities value natural gas inventory using the last-in first-out method. As inventories are sold, differences between the last-in first-out valuation and the estimated replacement cost are reflected in customer rates. These differences are generally temporary, but may become permanent if the natural gas inventory withdrawn from storage during the year is not replaced by year end. The California Utilities generally value materials and supplies at the lower of average cost or net realizable value.
Sempra Mexico and Sempra LNG value natural gas inventory and materials and supplies at the lower of average cost or net realizable value. Sempra Mexico and Sempra LNG value LNG inventory using the first-in first-out method.
The components of inventories are as follows:
| INVENTORY BALANCES AT DECEMBER 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Natural gas | LNG | Materials and supplies | Total | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | $ | 118 | $ | 110 | $ | 7 | $ | 9 | $ | 183 | $ | 158 | $ | 308 | $ | 277 | |||||||||||||||||||||||||||||||
| SDG&E | — | 1 | — | — | 104 | 93 | 104 | 94 | |||||||||||||||||||||||||||||||||||||||
| SoCalGas | 94 | 90 | — | — | 59 | 46 | 153 | 136 | |||||||||||||||||||||||||||||||||||||||
WILDFIRE FUND
In July 2019, the Wildfire Legislation was signed into law. The Wildfire Legislation addresses certain issues related to catastrophic wildfires in the State of California and their impact on electric IOUs. Investor-owned gas distribution utilities such as SoCalGas are not covered by this legislation. The issues addressed include wildfire mitigation, cost recovery standards and requirements, a wildfire fund, a cap on liability, and the establishment of a wildfire safety board.
The Wildfire Legislation provided that SDG&E would not recover the ROE on its first $215 million of fire risk mitigation capital expenditures.
The Wildfire Legislation established a revised legal standard for the recovery of wildfire costs (Revised Prudent Manager Standard) and established a fund (the Wildfire Fund) designed to provide liquidity to SDG&E, PG&E and Edison to pay IOU wildfire-related claims in the event that the governmental agency responsible for determining causation determines the applicable IOU’s equipment caused the ignition of a wildfire, primary insurance coverage is exceeded and certain other conditions are satisfied. A primary purpose of the Wildfire Fund is to pool resources provided by shareholders and ratepayers of the IOUs and make those resources available to reimburse the IOUs for third-party wildfire claims incurred after July 12, 2019, the effective date of the Wildfire Legislation, subject to certain limitations.
An IOU may seek payment from the Wildfire Fund for settled or adjudicated third-party damage claims arising from certain wildfires that exceed, in aggregate in a calendar year, the greater of $1 billion or the IOU’s required amount of insurance coverage as recommended by the Wildfire Fund’s administrator. Wildfire claims approved by the Wildfire Fund’s administrator will be paid by the Wildfire Fund to the IOU to the extent funds are available. These utilized funds will be subject to review by the CPUC, which will make a determination as to the degree an IOU’s conduct related to an ignition of a wildfire was prudent or imprudent. The Revised Prudent Manager Standard requires that the CPUC apply clear standards when reviewing wildfire liability losses paid when determining the reasonableness of an IOU’s conduct related to an ignition. Under this standard, the conduct under review related to the ignition may include factors within and beyond the IOU’s control, including humidity, temperature and winds. Costs and expenses may be allocated for cost recovery in full or in part. Also, under this standard, an IOU’s conduct will be deemed reasonable if a valid annual safety certification is in place at the time of the ignition, unless a serious doubt is raised, in which case the burden shifts to the utility to dispel that doubt. The IOUs will receive an annual safety certification from the CPUC if they meet various requirements.
If an IOU has maintained a valid annual safety certification, to the extent it is found to be imprudent, claims will be reimbursable by the IOU to the Wildfire Fund up to a cap based on the IOU’s rate base. The aggregate requirement to reimburse the Wildfire Fund over a trailing three calendar year period is capped at 20% of the equity portion of an IOU’s electric transmission and distribution rate base in the year of the prudency determination. Based on its 2020 rate base, the liability cap for SDG&E is approximately $950 million, which is adjusted annually. The liability cap will apply on a rolling three-year basis so long as future annual safety certifications are received and the Wildfire Fund has not been terminated, which could occur if funds are exhausted. Amounts in excess of the liability cap and amounts that are determined to be prudently incurred do not need to be reimbursed by an IOU to the Wildfire Fund. The Wildfire Fund does not have a specified term and coverage will continue until the assets of the
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Wildfire Fund are exhausted and the Wildfire Fund is terminated, in which case, the remaining funds, if any, will be transferred to California’s general fund to be used for fire risk mitigation programs.
In June 2020, the CPUC approved SDG&E’s 2020 wildfire mitigation plan, which is effective until the CPUC approves a new plan. In addition, on September 14, 2020, SDG&E received its 2020 safety certification from the Wildfire Safety Division of the CPUC. The certificate is valid for 12 months from the issue date.
The Wildfire Fund has been initially funded up to $10.5 billion by a loan from the State of California Surplus Money Investment Fund. The loan is financed through a DWR bond, which was put in place on October 1, 2020 and is securitized through a dedicated surcharge on ratepayers’ bills attributable to the DWR. In October 2019, the CPUC adopted a decision authorizing a non-bypassable charge to be collected by the IOUs to support the anticipated DWR bond issuance authorized by AB 1054. The CPUC decision also determined that ratepayers of non-participating electrical corporations shall not pay the non-bypassable charge.
The Wildfire Fund has also been funded $7.5 billion from initial shareholder contributions from the IOUs (SDG&E’s share was $322.5 million, PG&E’s share was $4.8 billion and Edison’s share was $2.4 billion). The IOUs are also required to make annual shareholder contributions to the Wildfire Fund with an aggregate value of $3 billion over a 10-year period starting in 2019 (SDG&E’s share is $129 million, PG&E’s share is $1.9 billion and Edison’s share is $945 million). The contributions are not subject to rate recovery.
In a complaint filed in U.S. District Court for the Northern District of California in July 2019, plaintiffs seek to invalidate AB 1054 based on allegations that the legislation violates federal law. That court dismissed the complaint and the plaintiffs have petitioned the U.S. Court of Appeals for the Ninth Circuit to review the dismissal.
Wildfire Fund Asset and Obligation
In the third quarter of 2019, SDG&E recorded both a Wildfire Fund asset and a related obligation of $451.5 million for its commitment to make shareholder contributions to the Wildfire Fund, measured at present value as of July 25, 2019 (the date by which both Edison and SDG&E opted to contribute to the Wildfire Fund). SDG&E paid its initial shareholder contribution of $322.5 million to the Wildfire Fund in September 2019. SDG&E funded this contribution with proceeds from an equity contribution from Sempra Energy. Sempra Energy funded the equity contribution to SDG&E with proceeds from settling forward sale agreements through physical delivery of shares of Sempra Energy common stock in exchange for cash, which we discuss in Note 14. Edison paid its initial shareholder contribution in September 2019 and PG&E paid its initial shareholder contribution in July 2020 after receiving bankruptcy court approval to participate in the Wildfire Fund. SDG&E expects to make annual shareholder contributions of $12.9 million through December 31, 2028. SDG&E accretes the present value of the Wildfire Fund obligation until the liability is settled.
SDG&E is amortizing the Wildfire Fund asset on a straight-line basis over the estimated period of benefit, as adjusted for utilization by the IOUs. The estimated period of benefit of the Wildfire Fund asset is 15 years and is based on several assumptions, including, but not limited to:
-
historical wildfire experience of each IOU in the State of California, including frequency and severity of the wildfires
-
the value of property potentially damaged by wildfires
-
the effectiveness of wildfire risk mitigation efforts by each IOU
-
liability cap of each IOU
-
IOU prudency determination levels
-
FERC jurisdictional allocation levels
-
insurance coverage levels
The use of different assumptions, or changes to the assumptions used, could have a significant impact on the estimated period of benefit of the Wildfire Fund asset. SDG&E periodically evaluates the estimated period of benefit of the Wildfire Fund asset based on actual experience and changes in these assumptions. SDG&E may recognize a reduction of its Wildfire Fund asset and record a charge against earnings in the period when there is a reduction of the available coverage due to recoverable claims from any of the participating IOUs. Wildfire claims that are recoverable from the Wildfire Fund, net of anticipated or actual reimbursement to the Wildfire Fund by the responsible IOU, would decrease the Wildfire Fund asset and remaining available coverage. Although California experienced some of the largest wildfires in its history in 2020 (measured by acres burned), including fires in each participating IOU’s service territory, SDG&E is not aware of any claims made by any participating IOU requiring a reduction of the Wildfire Fund asset as of December 31, 2020.
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The following table summarizes the location of balances related to the Wildfire Fund on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets and Consolidated Statements of Operations.
| WILDFIRE FUND | ||||||||||||||
| (Dollars in millions) | ||||||||||||||
| December 31, | ||||||||||||||
| Location | 2020 | 2019 | ||||||||||||
| Wildfire Fund asset: | ||||||||||||||
| Current | Other Current Assets(1) | $ | 29 | $ | 29 | |||||||||
| Noncurrent | Wildfire Fund | 363 | 392 | |||||||||||
| Wildfire Fund obligation: | ||||||||||||||
| Current | Other Current Liabilities | $ | 13 | $ | 13 | |||||||||
| Noncurrent | Deferred Credits and Other | 75 | 86 | |||||||||||
| Years ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Amortization of Wildfire Fund asset | Operation and Maintenance | $ | 29 | $ | 12 | |||||||||
| Accretion of Wildfire Fund obligation | Operation and Maintenance | 2 | 1 |
(1) Included in Prepaid Expenses for SDG&E.
INCOME TAXES
Income tax expense includes current and deferred income taxes. We record deferred income taxes for temporary differences between the book and the tax basis of assets and liabilities. Investment tax credits from prior years are amortized to income by the California Utilities over the estimated service lives of the properties as required by the CPUC.
Under the regulatory accounting treatment required for flow-through temporary differences, the California Utilities and Sempra Mexico recognize:
▪regulatory assets to offset deferred income tax liabilities if it is probable that the amounts will be recovered from customers; and
▪regulatory liabilities to offset deferred income tax assets if it is probable that the amounts will be returned to customers.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take has to have at least a more-likely-than-not chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more-likely-than-not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefit associated with the position. We recognize a benefit for a tax position that meets the more-likely-than-not criterion at the largest amount of tax benefit that is greater than 50% likely of being realized upon its effective resolution.
Unrecognized income tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our ETR.
We accrue income tax to the extent we intend to repatriate cash to the U.S. from our continuing international operations. We currently do not record deferred income taxes for other basis differences between financial statement and income tax investment amounts in non-U.S. subsidiaries to the extent the related cumulative undistributed earnings are indefinitely reinvested. We recognize income tax expense for basis differences related to global intangible low-taxed income as a period cost if and when incurred.
We provide additional information about income taxes in Note 8.
GREENHOUSE GAS ALLOWANCES AND OBLIGATIONS
The California Utilities, Sempra Mexico and Sempra LNG are required by AB 32 to acquire GHG allowances for every metric ton of carbon dioxide equivalent emitted into the atmosphere during electric generation and natural gas transportation. At the California Utilities, many GHG allowances are allocated to us on behalf of our customers at no cost. We record purchased and allocated GHG allowances at the lower of weighted-average cost or market. We measure the compliance obligation, which is based on emissions, at the carrying value of allowances held plus the fair value of additional allowances necessary to satisfy the obligation. The California Utilities balance costs and revenues associated with the GHG program through regulatory balancing accounts. Sempra Mexico and Sempra LNG record the cost of GHG obligations in cost of sales. We remove the assets and liabilities from the balance sheets as the allowances are surrendered.
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RENEWABLE ENERGY CERTIFICATES
RECs are energy rights established by governmental agencies for the environmental and social promotion of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source in certain markets.
Retail sellers of electricity obtain RECs through renewable energy PPAs, internal generation or separate purchases in the market to comply with the RPS Program established by the governmental agencies. RECs provide documentation for the generation of a unit of renewable energy that is used to verify compliance with the RPS Program. The cost of RECs at SDG&E, which is recoverable in rates, is recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations.
PROPERTY, PLANT AND EQUIPMENT
PP&E is recorded at cost and primarily represents the buildings, equipment and other facilities used by the California Utilities to provide natural gas and electric utility services, and by the Sempra Global businesses in their operations, including construction work in progress. PP&E also includes lease improvements and other equipment at Parent and Other. Our plant costs include labor, materials and contract services and expenditures for replacement parts incurred during a major maintenance outage of a plant. In addition, the cost of utility plant at our rate-regulated businesses and PP&E under regulated projects that meet the regulatory accounting requirements of U.S. GAAP includes AFUDC. The cost of PP&E includes capitalized interest. Maintenance costs are expensed as incurred. The cost of most retired depreciable utility plant assets less salvage value is charged to accumulated depreciation.
We discuss assets collateralized as security for certain indebtedness in Note 7.
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| PROPERTY, PLANT AND EQUIPMENT BY MAJOR FUNCTIONAL CATEGORY | |||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| December 31, | Depreciation rates for years ended December 31, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||||||||
| Natural gas operations | $ | 2,805 | $ | 2,534 | 2.51 | % | 2.47 | % | 2.44 | % | |||||||||||||||||||
| Electric distribution | 8,592 | 7,985 | 3.90 | 3.94 | 3.91 | ||||||||||||||||||||||||
| Electric transmission(1) | 7,156 | 6,577 | 3.10 | 2.79 | 2.76 | ||||||||||||||||||||||||
| Electric generation | 2,440 | 2,415 | 4.56 | 4.50 | 4.12 | ||||||||||||||||||||||||
| Other electric | 1,743 | 1,492 | 6.92 | 6.61 | 6.43 | ||||||||||||||||||||||||
| Construction work in progress(1) | 1,700 | 1,501 | NA | NA | NA | ||||||||||||||||||||||||
| Total SDG&E | 24,436 | 22,504 | |||||||||||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||||||||
| Natural gas operations | 19,961 | 18,370 | 3.63 | 3.60 | 3.60 | ||||||||||||||||||||||||
| Other non-utility | 45 | 34 | 3.80 | 5.08 | 5.39 | ||||||||||||||||||||||||
| Construction work in progress | 1,174 | 958 | NA | NA | NA | ||||||||||||||||||||||||
| Total SoCalGas | 21,180 | 19,362 | |||||||||||||||||||||||||||
| Other operating units and parent(2): | Estimated useful lives | Weighted-average useful life | |||||||||||||||||||||||||||
| Land and land rights | 283 | 278 | 16 to 50 years(3) | 31 | |||||||||||||||||||||||||
| Machinery and equipment: | |||||||||||||||||||||||||||||
| Generating plants | 1,288 | 1,154 | 11 to 25 years | 22 | |||||||||||||||||||||||||
| LNG terminals | 1,138 | 1,134 | 43 years | 43 | |||||||||||||||||||||||||
| Pipelines and storage | 3,482 | 3,596 | 5 to 50 years | 44 | |||||||||||||||||||||||||
| Other | 359 | 180 | 1 to 50 years | 14 | |||||||||||||||||||||||||
| Construction work in progress | 1,514 | 895 | NA | NA | |||||||||||||||||||||||||
| Other | 248 | 226 | 4 to 50 years | 23 | |||||||||||||||||||||||||
| 8,312 | 7,463 | ||||||||||||||||||||||||||||
| Total Sempra Energy Consolidated | $ | 53,928 | $ | 49,329 |
(1) At December 31, 2020, includes $505 million in electric transmission assets and $9 million in construction work in progress related to SDG&E’s 88% interest in the Southwest Powerlink transmission line, jointly owned by SDG&E with other utilities. SDG&E, and each of the other owners, holds its undivided interest as a tenant in common in the property. Each owner is responsible for its share of the project and participates in decisions concerning operations and capital expenditures. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Consolidated Statements of Operations.
(2) Includes $191 million and $178 million at December 31, 2020 and 2019, respectively, of utility plant, primarily pipelines and other distribution assets at Ecogas.
(3) Estimated useful lives are for land rights.
Depreciation expense is computed using the straight-line method over the asset’s estimated composite useful life, the CPUC-prescribed period for the California Utilities, or the remaining term of the site leases, whichever is shortest.
| DEPRECIATION EXPENSE | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | $ | 1,646 | $ | 1,551 | $ | 1,470 | |||||||||||
| SDG&E | 797 | 757 | 686 | ||||||||||||||
| SoCalGas | 649 | 598 | 553 |
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| ACCUMULATED DEPRECIATION AND AMORTIZATION | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| SDG&E: | |||||||||||
| Accumulated depreciation: | |||||||||||
| Natural gas operations | $ | 870 | $ | 832 | |||||||
| Electric transmission, distribution and generation(1) | 5,145 | 4,705 | |||||||||
| Total SDG&E | 6,015 | 5,537 | |||||||||
| SoCalGas: | |||||||||||
| Accumulated depreciation: | |||||||||||
| Natural gas operations | 6,422 | 6,023 | |||||||||
| Other non-utility | 15 | 15 | |||||||||
| Total SoCalGas | 6,437 | 6,038 | |||||||||
| Other operating units and parent and other: | |||||||||||
| Accumulated depreciation – other(2) | 1,473 | 1,302 | |||||||||
| Total Sempra Energy Consolidated | $ | 13,925 | $ | 12,877 |
(1) Includes $277 million at December 31, 2020 related to SDG&E’s 88% interest in the Southwest Powerlink transmission line, jointly owned by SDG&E and other utilities.
(2) Includes $51 million and $49 million at December 31, 2020 and 2019, respectively, of accumulated depreciation for utility plant at Ecogas.
The California Utilities finance their construction projects with debt and equity funds. The CPUC and the FERC allow the recovery of the cost of these funds by the capitalization of AFUDC, calculated using rates authorized by the CPUC and the FERC, as a cost component of PP&E. The California Utilities earn a return on the capitalized AFUDC after the utility property is placed in service and recover the AFUDC from their customers over the expected useful lives of the assets.
Pipeline projects currently under construction by Sempra Mexico that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC.
We capitalize interest costs incurred to finance capital projects and interest at equity method investments that have not commenced planned principal operations.
The table below summarizes capitalized interest and AFUDC.
| CAPITALIZED FINANCING COSTS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | $ | 202 | $ | 183 | $ | 193 | |||||||||||
| SDG&E | 104 | 75 | 82 | ||||||||||||||
| SoCalGas | 55 | 47 | 48 |
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is the excess of the purchase price over the fair value of the identifiable net assets of acquired companies measured at the time of acquisition. Goodwill is not amortized, but we test it for impairment annually on October 1 or whenever events or changes in circumstances necessitate an evaluation. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, we record a goodwill impairment loss as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill.
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For our annual goodwill impairment testing, under current U.S. GAAP guidance we have the option to first make a qualitative assessment of whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative goodwill impairment test. If we elect to perform the qualitative assessment, we evaluate relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, changes in key personnel and the overall financial performance of the reporting unit. If, after assessing these qualitative factors, we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we perform the quantitative goodwill impairment test. If, after performing the quantitative goodwill impairment test, we determine that goodwill is impaired, we record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill.
Goodwill of $1,602 million at December 31, 2020 and 2019 relates to the 2016 acquisitions of IEnova Pipelines and Ventika wind power generation facilities at Sempra Mexico.
Other Intangible Assets
Other Intangible Assets included on the Sempra Energy Consolidated Balance Sheets are as follows:
| OTHER INTANGIBLE ASSETS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Amortization period (years) | December 31, | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Renewable energy transmission and consumption permit | 19 | $ | 154 | $ | 154 | ||||||||||||
| O&M agreement | 23 | 66 | 66 | ||||||||||||||
| Other | 10 years to indefinite | 30 | 30 | ||||||||||||||
| 250 | 250 | ||||||||||||||||
| Less accumulated amortization: | |||||||||||||||||
| Renewable energy transmission and consumption permit | (32) | (24) | |||||||||||||||
| O&M agreement | (9) | (6) | |||||||||||||||
| Other | (7) | (7) | |||||||||||||||
| (48) | (37) | ||||||||||||||||
| $ | 202 | $ | 213 |
Other Intangible Assets at December 31, 2020 primarily includes:
▪a renewable energy transmission and consumption permit previously granted by the CRE that was acquired in connection with the acquisition of the Ventika wind power generation facilities; and
▪a favorable O&M agreement acquired in connection with the acquisition of DEN.
Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense for intangible assets in 2020, 2019 and 2018 was $11 million, $11 million and $16 million, respectively. We estimate the amortization expense for the next five years to be $12 million per year.
LONG-LIVED ASSETS
We test long-lived assets for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include intangible assets subject to amortization, but do not include investments in unconsolidated entities. A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the fair value of the asset. This evaluation is performed at the lowest level for which separately identifiable cash flows exist.
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VARIABLE INTEREST ENTITIES
We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based on qualitative and quantitative analyses, which assess:
▪the purpose and design of the VIE;
▪the nature of the VIE’s risks and the risks we absorb;
▪the power to direct activities that most significantly impact the economic performance of the VIE; and
▪the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.
We will continue to evaluate our VIEs for any changes that may impact our determination of whether an entity is a VIE and if we are the primary beneficiary.
SDG&E
SDG&E’s power procurement is subject to reliability requirements that may require SDG&E to enter into various PPAs that include variable interests. SDG&E evaluates the respective entities to determine if variable interests exist and, based on the qualitative and quantitative analyses described above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary.
SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements). SDG&E’s obligation to absorb natural gas costs may be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based on our analysis, the ability to direct the dispatch of electricity may have the most significant impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on a qualitative approach in which it considers the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If SDG&E determines that it is the primary beneficiary, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE.
In addition to tolling agreements, other variable interests involve various elements of fuel and power costs, and other components of cash flows expected to be paid to or received by our counterparties. In most of these cases, the expectation of variability is not substantial, and SDG&E generally does not have the power to direct activities, including the operation and maintenance activities of the generating facility, that most significantly impact the economic performance of the other VIEs. If our ongoing evaluation of these VIEs were to conclude that SDG&E becomes the primary beneficiary and consolidation by SDG&E becomes necessary, the effects could be significant to the financial position and liquidity of SDG&E and Sempra Energy.
SDG&E determined that none of its PPAs and tolling agreements resulted in SDG&E being the primary beneficiary of a VIE at December 31, 2020 and 2019. PPAs and tolling agreements that relate to SDG&E’s involvement with VIEs are primarily accounted for as finance leases. The carrying amounts of the assets and liabilities under these contracts are included in PP&E and finance lease liabilities with balances of $1,237 million and $1,255 million at December 31, 2020 and 2019, respectively. SDG&E recovers costs incurred on PPAs, tolling agreements and other variable interests through CPUC-approved long-term power procurement plans. SDG&E has no residual interest in the respective entities and has not provided or guaranteed any debt or equity support, liquidity arrangements, performance guarantees or other commitments associated with these contracts other than the purchase commitments described in Note 16. As a result, SDG&E’s potential exposure to loss from its variable interest in these VIEs is not significant.
Otay Mesa VIE
Through October 3, 2019, SDG&E had a tolling agreement to purchase power generated at OMEC, a 605-MW generating facility owned by OMEC LLC, which is a VIE that we refer to as Otay Mesa VIE. SDG&E determined that it was the primary beneficiary of Otay Mesa VIE, and therefore, SDG&E and Sempra Energy consolidated Otay Mesa VIE. On August 23, 2019, SDG&E and OMEC LLC executed an amended resource adequacy capacity agreement that resulted in SDG&E and Sempra Energy deconsolidating Otay Mesa VIE. No gain or loss was recognized upon deconsolidation.
Sempra Texas Utilities
Our 100% interest in Oncor Holdings is a VIE that owns an 80.25% interest in Oncor. Sempra Energy is not the primary beneficiary of the VIE because of the structural and operational ring-fencing and governance measures in place that prevent us
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from having the power to direct the significant activities of Oncor Holdings. As a result, we do not consolidate Oncor Holdings and instead account for our ownership interest as an equity method investment. See Notes 5 and 6 for additional information about our equity method investment in Oncor Holdings and restrictions on our ability to influence its activities. Our maximum exposure to loss, which fluctuates over time, from our interest in Oncor Holdings does not exceed the carrying value of our investment, which was $12,440 million and $11,519 million at December 31, 2020 and 2019, respectively.
Sempra Mexico
Sempra Mexico’s businesses also enter into arrangements that could include variable interests. We evaluate these arrangements and applicable entities based on the qualitative and quantitative analyses described above. Certain of these entities are service or project companies that are VIEs because the total equity at risk is not sufficient for the entities to finance their activities without additional subordinated financial support. As the primary beneficiary of these companies, we consolidate them. At December 31, 2019, Sempra Mexico consolidated such a VIE with assets totaling approximately $126 million, which consisted primarily of PP&E and other long-term assets.
Sempra LNG
Cameron LNG JV
Cameron LNG JV is a VIE principally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary of the VIE because we do not have the power to direct the most significant activities of Cameron LNG JV, including LNG production and operation and maintenance activities at the liquefaction facility. Therefore, we account for our investment in Cameron LNG JV under the equity method. The carrying value of our investment, including amounts recognized in AOCI related to interest-rate cash flow hedges at Cameron LNG JV, was $433 million at December 31, 2020 and $1,256 million at December 31, 2019. Our maximum exposure to loss, which fluctuates over time, includes the carrying value of our investment and guarantees that we discuss in Note 6.
CFIN
As we discuss in Note 6, in July 2020, Sempra Energy entered into a Support Agreement for the benefit of CFIN, which is a VIE. Since we do not have the power to direct the most significant activities of the VIE, we are not the primary beneficiary. The conditional obligations of the Support Agreement represent a variable interest that we measure at fair value on a recurring basis (see Note 12). Sempra Energy’s maximum exposure to loss under the terms of the Support Agreement is $979 million.
ECA LNG Phase 1
ECA LNG Phase 1 is a VIE because its total equity at risk is not sufficient to finance its activities without additional subordinated financial support. We expect that ECA LNG Phase 1 will require future capital contributions or other financial support to finance the construction of the facility. Sempra Energy is the primary beneficiary of the VIE because we have the power to direct the development activities related to the construction of the facility, which we consider to be the most significant activities of ECA LNG Phase 1 during the construction phase of the project. As a result, we consolidate ECA LNG Phase 1. At December 31, 2020, Sempra LNG consolidated $207 million of assets, consisting primarily of PP&E, attributable to ECA LNG Phase 1 that could be used only to settle obligations of the VIE and that are not available to settle obligations of Sempra Energy and $49 million of liabilities, consisting primarily of accounts payable, attributable to ECA LNG Phase 1 for which creditors do not have recourse to the general credit of Sempra Energy. Additionally, as we discuss in Note 7, Sempra Energy, IEnova and TOTAL SE have provided guarantees for the loan facility based on their respective proportionate ownership interest in ECA LNG Phase 1.
ASSET RETIREMENT OBLIGATIONS
For tangible long-lived assets, we record AROs for the present value of liabilities of future costs expected to be incurred when assets are retired from service, if the retirement process is legally required and if a reasonable estimate of fair value can be made. We also record a liability if a legal obligation to perform an asset retirement exists and can be reasonably estimated, but performance is conditional upon a future event. We record the estimated retirement cost over the life of the related asset by depreciating the asset retirement cost (measured as the present value of the obligation at the time the asset is placed into service), and accreting the obligation until the liability is settled. Our rate-regulated entities, including the California Utilities, record regulatory assets or liabilities as a result of the timing difference between the recognition of costs in accordance with U.S. GAAP and costs recovered through the rate-making process.
We have recorded AROs related to various assets, including:
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SDG&E and SoCalGas
▪fuel and storage tanks
▪natural gas transmission and distribution systems
▪hazardous waste storage facilities
▪asbestos-containing construction materials
SDG&E
▪nuclear power facilities
▪electric transmission and distribution systems
▪energy storage systems
▪power generation plants
SoCalGas
▪underground natural gas storage facilities and wells
All Other Sempra Energy Businesses
▪natural gas transportation and distribution systems
▪power generation plants
▪LNG facility
▪LPG terminal
The changes in AROs are as follows:
| CHANGES IN ASSET RETIREMENT OBLIGATIONS | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Balance as of January 1(1) | $ | 3,083 | $ | 2,972 | $ | 866 | $ | 874 | $ | 2,177 | $ | 2,063 | |||||||||||||||||||||||
| Accretion expense | 127 | 123 | 39 | 39 | 86 | 81 | |||||||||||||||||||||||||||||
| Liabilities incurred | 2 | 2 | — | — | — | — | |||||||||||||||||||||||||||||
| Deconsolidation | — | (2) | — | (2) | — | — | |||||||||||||||||||||||||||||
| Payments | (63) | (46) | (60) | (44) | (2) | (2) | |||||||||||||||||||||||||||||
| Revisions | 140 | 34 | 31 | (1) | 107 | 35 | |||||||||||||||||||||||||||||
| Balance at December 31(1) | $ | 3,289 | $ | 3,083 | $ | 876 | $ | 866 | $ | 2,368 | $ | 2,177 |
(1) Current portion of the ARO for Sempra Energy Consolidated is included in Other Current Liabilities on the Consolidated Balance Sheets.
CONTINGENCIES
We accrue losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. For loss contingencies, we accrue the loss if an event has occurred on or before the balance sheet date and:
▪information available through the date we file our financial statements indicates it is probable that a loss has been incurred, given the likelihood of uncertain future events; and
▪the amount of the loss can be reasonably estimated.
We do not accrue contingencies that might result in gains. We continuously assess contingencies for litigation claims, environmental remediation and other events.
LEGAL FEES
Legal fees that are associated with a past event for which a liability has been recorded are accrued when it is probable that fees also will be incurred and amounts are estimable.
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COMPREHENSIVE INCOME
Comprehensive income includes all changes in the equity of a business enterprise (except those resulting from investments by owners and distributions to owners), including:
▪foreign currency translation adjustments
▪certain hedging activities
▪changes in unamortized net actuarial gain or loss and prior service cost related to pension and other postretirement benefits plans
▪unrealized gains or losses on available-for-sale securities
The Consolidated Statements of Comprehensive Income (Loss) show the changes in the components of OCI, including the amounts attributable to NCI. The following tables present the changes in AOCI by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to NCI:
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| CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT**(1)** | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Foreign currency translation adjustments | Financial instruments | Pension and other postretirement benefits | Total accumulated other comprehensive income (loss) | ||||||||||||||||||||
| Sempra Energy Consolidated**(2)****:** | |||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | (420) | $ | (122) | $ | (84) | $ | (626) | |||||||||||||||
| Adoption of ASU 2017-12 | — | (3) | — | (3) | |||||||||||||||||||
| OCI before reclassifications | (144) | 40 | (52) | (156) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | 3 | 18 | 21 | |||||||||||||||||||
| Net OCI | (144) | 43 | (34) | (135) | |||||||||||||||||||
| Balance as of December 31, 2018 | (564) | (82) | (118) | (764) | |||||||||||||||||||
| Adoption of ASU 2018-02 | — | (25) | (17) | (42) | |||||||||||||||||||
| OCI before reclassifications(3) | (43) | (116) | (18) | (177) | |||||||||||||||||||
| Amounts reclassified from AOCI(3) | — | 8 | 36 | 44 | |||||||||||||||||||
| Net OCI | (43) | (108) | 18 | (133) | |||||||||||||||||||
| Balance as of December 31, 2019 | (607) | (215) | (117) | (939) | |||||||||||||||||||
| OCI before reclassifications(3) | (102) | (163) | (26) | (291) | |||||||||||||||||||
| Amounts reclassified from AOCI(3) | 645 | 47 | 38 | 730 | |||||||||||||||||||
| Net OCI(4) | 543 | (116) | 12 | 439 | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | (64) | $ | (331) | $ | (105) | $ | (500) | |||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | (8) | $ | (8) | |||||||||||||||||||
| OCI before reclassifications | (6) | (6) | |||||||||||||||||||||
| Amounts reclassified from AOCI | 4 | 4 | |||||||||||||||||||||
| Net OCI | (2) | (2) | |||||||||||||||||||||
| Balance as of December 31, 2018 | (10) | (10) | |||||||||||||||||||||
| Adoption of ASU 2018-02 | (2) | (2) | |||||||||||||||||||||
| OCI before reclassifications | (5) | (5) | |||||||||||||||||||||
| Amounts reclassified from AOCI | 1 | 1 | |||||||||||||||||||||
| Net OCI | (4) | (4) | |||||||||||||||||||||
| Balance as of December 31, 2019 | (16) | (16) | |||||||||||||||||||||
| OCI before reclassifications(3) | (4) | (4) | |||||||||||||||||||||
| Amounts reclassified from AOCI(3) | 10 | 10 | |||||||||||||||||||||
| Net OCI | 6 | 6 | |||||||||||||||||||||
| Balance as of December 31, 2020 | $ | (10) | $ | (10) | |||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | (13) | $ | (8) | $ | (21) | |||||||||||||||||
| OCI before reclassifications | — | (1) | (1) | ||||||||||||||||||||
| Amounts reclassified from AOCI | 1 | 1 | 2 | ||||||||||||||||||||
| Net OCI | 1 | — | 1 | ||||||||||||||||||||
| Balance as of December 31, 2018 | (12) | (8) | (20) | ||||||||||||||||||||
| Adoption of ASU 2018-02 | (2) | (2) | (4) | ||||||||||||||||||||
| OCI before reclassifications(3) | — | (4) | (4) | ||||||||||||||||||||
| Amounts reclassified from AOCI(3) | 1 | 4 | 5 | ||||||||||||||||||||
| Net OCI | 1 | — | 1 | ||||||||||||||||||||
| Balance as of December 31, 2019 | (13) | (10) | (23) | ||||||||||||||||||||
| OCI before reclassifications(3) | — | (10) | (10) | ||||||||||||||||||||
| Amounts reclassified from AOCI | — | 2 | 2 | ||||||||||||||||||||
| Net OCI | — | (8) | (8) | ||||||||||||||||||||
| Balance as of December 31, 2020 | $ | (13) | $ | (18) | $ | (31) |
(1) All amounts are net of income tax, if subject to tax, and exclude NCI.
(2) Includes discontinued operations.
(3) Pension and Other Postretirement Benefits and Total AOCI include $6 million in transfers of liabilities from SDG&E to SoCalGas and $3 million in transfers of liabilities from SDG&E to Sempra Energy in 2020 and $4 million in transfers of liabilities from SoCalGas to Sempra Energy in 2019 related to the nonqualified pension plans.
(4) Total AOCI includes $4 million of foreign currency translation adjustments and $3 million of financial instruments associated with purchases of NCI, which we discuss below in “Other Noncontrolling Interests – Sempra Mexico,” and which does not impact the Consolidated Statement of Comprehensive Income (Loss).
F-46
| RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Details about accumulated other comprehensive income (loss) components | Amounts reclassified from accumulated other comprehensive income (loss) | Affected line item on Consolidated Statements of Operations | |||||||||||||||||||||
| Years ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Foreign currency translation adjustments | $ | 645 | $ | — | $ | — | Income from Discontinued Operations, Net of Income Tax | ||||||||||||||||
| Financial instruments: | |||||||||||||||||||||||
| Interest rate instruments | $ | — | $ | 10 | $ | 9 | (Loss) Gain on Sale of Assets | ||||||||||||||||
| Interest rate instruments(1) | 10 | 3 | 1 | Interest Expense | |||||||||||||||||||
| Interest rate instruments | 46 | 3 | 9 | Equity Earnings | |||||||||||||||||||
| Foreign exchange instruments | (1) | 2 | (1) | Revenues: Energy-Related Businesses | |||||||||||||||||||
| Interest rate and foreign exchange instruments | 1 | — | (1) | Interest Expense | |||||||||||||||||||
| 11 | (9) | (2) | Other (Expense) Income, Net | ||||||||||||||||||||
| Foreign exchange instruments | — | 2 | (2) | Equity Earnings | |||||||||||||||||||
| Total before income tax | 67 | 11 | 13 | ||||||||||||||||||||
| (19) | (2) | (4) | Income Tax (Expense) Benefit | ||||||||||||||||||||
| Net of income tax | 48 | 9 | 9 | ||||||||||||||||||||
| (1) | (1) | (6) | Earnings Attributable to Noncontrolling Interests | ||||||||||||||||||||
| $ | 47 | $ | 8 | $ | 3 | ||||||||||||||||||
| Pension and other postretirement benefits(2): | |||||||||||||||||||||||
| Amortization of actuarial loss | $ | 8 | $ | 12 | $ | 11 | Other (Expense) Income, Net | ||||||||||||||||
| Amortization of actuarial loss | 6 | 1 | 1 | Income from Discontinued Operations, Net of Income Tax | |||||||||||||||||||
| Amortization of prior service cost | 4 | 3 | 2 | Other (Expense) Income, Net | |||||||||||||||||||
| Settlement charges | 22 | 28 | 12 | Other (Expense) Income, Net | |||||||||||||||||||
| Total before income tax | 40 | 44 | 26 | ||||||||||||||||||||
| (2) | — | — | Income from Discontinued Operations, Net of Income Tax | ||||||||||||||||||||
| (9) | (12) | (8) | Income Tax (Expense) Benefit | ||||||||||||||||||||
| Net of income tax | $ | 29 | $ | 32 | $ | 18 | |||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 721 | $ | 40 | $ | 21 | |||||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Financial instruments: | |||||||||||||||||||||||
| Interest rate instruments(1) | $ | — | $ | 3 | $ | 7 | Interest Expense | ||||||||||||||||
| — | (3) | (7) | Earnings Attributable to Noncontrolling Interest | ||||||||||||||||||||
| $ | — | $ | — | $ | — | ||||||||||||||||||
| Pension and other postretirement benefits(2): | |||||||||||||||||||||||
| Amortization of actuarial loss | $ | 1 | $ | — | $ | 1 | Other Income, Net | ||||||||||||||||
| Amortization of prior service cost | 1 | 1 | — | Other Income, Net | |||||||||||||||||||
| Settlement charges | — | — | 4 | Other Income, Net | |||||||||||||||||||
| Total before income tax | 2 | 1 | 5 | ||||||||||||||||||||
| (1) | — | (1) | Income Tax Expense | ||||||||||||||||||||
| Net of income tax | $ | 1 | $ | 1 | $ | 4 | |||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 1 | $ | 1 | $ | 4 | |||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Financial instruments: | |||||||||||||||||||||||
| Interest rate instruments | $ | — | $ | 1 | $ | 1 | Interest Expense | ||||||||||||||||
| Pension and other postretirement benefits(2): | |||||||||||||||||||||||
| Amortization of actuarial loss | $ | 1 | $ | 1 | $ | — | Other (Expense) Income, Net | ||||||||||||||||
| Amortization of prior service cost | 1 | — | 1 | Other (Expense) Income, Net | |||||||||||||||||||
| Total before income tax | 2 | 1 | 1 | ||||||||||||||||||||
| — | (1) | — | Income Tax Expense | ||||||||||||||||||||
| Net of income tax | $ | 2 | $ | — | $ | 1 | |||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 2 | $ | 1 | $ | 2 |
(1) Amounts in 2019 and 2018 include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE.
(2) Amounts are included in the computation of net periodic benefit cost (see “Net Periodic Benefit Cost” in Note 9).
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NONCONTROLLING INTERESTS
Ownership interests in a consolidated entity that are held by unconsolidated owners are accounted for and reported as NCI.
SoCalGas Preferred Stock
The preferred stock at SoCalGas is presented at Sempra Energy as NCI. Sempra Energy records charges against income related to NCI for preferred dividends declared by SoCalGas. We provide additional information regarding SoCalGas’ preferred stock in Note 13.
Other Noncontrolling Interests
SDG&E
As we discuss in “Variable Interest Entities” above, in August 2019, SDG&E and Sempra Energy deconsolidated Otay Mesa VIE after SDG&E determined that it was no longer the primary beneficiary of the VIE.
Sempra Mexico
On December 2, 2020, we announced a non-binding offer to acquire up to 100% of the publicly held shares of IEnova in exchange for shares of our common stock at an exchange ratio of 0.0313 shares of our common stock for each one IEnova ordinary share. This exchange ratio is non-binding and remains subject to approval by Sempra Energy’s board of directors. We expect to complete this transaction in the second quarter of 2021, subject to authorization by the SEC, CNBV and Mexican Stock Exchange and other closing conditions.
In the first quarter of 2020, IEnova purchased additional shares in ICM Ventures Holdings B.V. for $9 million, increasing its ownership interest from 53.7% to 82.5%. ICM Ventures Holdings B.V. owns certain permits and land where IEnova is building terminals for the receipt, storage and delivery of liquid fuels.
In 2020, IEnova repurchased 77,122,780 shares of its outstanding common stock held by NCI for approximately $231 million, resulting in an increase in Sempra Energy’s ownership interest in IEnova from 66.6% to 70.2%.
In 2019, IEnova repurchased 2,620,000 shares of its outstanding common stock held by NCI for approximately $10 million, resulting in an increase in Sempra Energy’s ownership interest in IEnova from 66.5% to 66.6%.
Sempra LNG
In December 2020, an affiliate of TOTAL SE acquired a 16.6% ownership interest in ECA LNG Phase 1, with Sempra LNG and IEnova each retaining a 41.7% ownership interest. Sempra LNG consolidates ECA LNG Phase 1 and Sempra Energy’s NCI in IEnova’s 41.7% ownership interest is reported at Sempra LNG.
In March 2020, Sempra LNG purchased for $7 million the 24.6% minority interest in Liberty Gas Storage LLC, which owns 100% of LA Storage, LLC, increasing Sempra LNG’s ownership in Liberty Gas Storage LLC to 100%. Prior to the purchase, the minority partner converted $22 million in notes payable due from Sempra LNG to equity. As a result of the purchase, we recorded an increase in Sempra Energy’s shareholders’ equity of $2 million for the difference between the carrying value and fair value related to the change in ownership.
In February 2019, Sempra LNG purchased for $20 million the 9.1% minority interest in Bay Gas immediately prior to the sale of 100% of Bay Gas.
Sempra Renewables
As we discuss in Note 5, in April 2019, Sempra Renewables sold its remaining wind assets and investments, which included its wind tax equity arrangements. The remaining interest in PXiSE Energy Solutions, LLC was subsumed into Parent and other.
Discontinued Operations
As we discuss in Note 5, we completed the sales of our equity interests in our Peruvian and Chilean businesses in the second quarter of 2020. The minority interests in Luz del Sur and Tecsur were deconsolidated upon sale of our Peruvian businesses in April 2020, and the minority interests in the Chilquinta Energía subsidiaries were deconsolidated upon sale of our Chilean businesses in June 2020.
The following table provides information about NCI held by others in subsidiaries or entities consolidated by us and recorded in Other Noncontrolling Interests in Total Equity on Sempra Energy’s Consolidated Balance Sheets.
F-48
| OTHER NONCONTROLLING INTERESTS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Percent ownership held by noncontrolling interests | Equity (deficit) held by noncontrolling interests | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sempra Mexico: | |||||||||||||||||||||||
| IEnova | 29.8 | % | 33.4 | % | $ | 1,487 | $ | 1,608 | |||||||||||||||
| IEnova subsidiaries(1) | 17.5 | 10.0 - 46.3 | 7 | 15 | |||||||||||||||||||
| Sempra LNG: | |||||||||||||||||||||||
| Liberty Gas Storage, LLC | — | 24.6 | — | (13) | |||||||||||||||||||
| ECA LNG Phase 1 | 29.0 | 16.7 | 46 | 12 | |||||||||||||||||||
| Parent and other: | |||||||||||||||||||||||
| PXiSE Energy Solutions, LLC | 20.0 | 20.0 | 1 | 1 | |||||||||||||||||||
| Discontinued Operations: | |||||||||||||||||||||||
| Chilquinta Energía subsidiaries(1) | — | 19.7 - 43.4 | — | 23 | |||||||||||||||||||
| Luz del Sur | — | 16.4 | — | 205 | |||||||||||||||||||
| Tecsur | — | 9.8 | — | 5 | |||||||||||||||||||
| Total Sempra Energy | $ | 1,541 | $ | 1,856 |
(1) IEnova and Chilquinta Energía have subsidiaries with NCI held by others. Percentage range reflects the highest and lowest ownership percentages among these subsidiaries.
REVENUES
See Note 3 for a description of significant accounting policies for revenues.
OPERATION AND MAINTENANCE EXPENSES
Operation and Maintenance includes O&M and general and administrative costs, consisting primarily of personnel costs, purchased materials and services, insurance, rent and litigation expense (except for litigation expense included in Aliso Canyon Litigation and Regulatory Matters).
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Our natural gas distribution utility in Mexico, Ecogas, and the majority of our former operations in South America (until our sale of these operations in the second quarter of 2020) use their local currency as their functional currency. The assets and liabilities of their foreign operations are translated into U.S. dollars at current exchange rates at the end of the reporting period, and revenues and expenses are translated at average exchange rates for the year. The resulting noncash translation adjustments do not enter into the calculation of earnings or retained earnings, but are reflected in OCI and in AOCI.
Cash flows of these consolidated foreign subsidiaries are translated into U.S. dollars using average exchange rates for the period. We report the effect of exchange rate changes on cash balances held in foreign currencies in Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash on the Sempra Energy Consolidated Statements of Cash Flows.
Foreign currency transaction (losses) gains in a currency other than Sempra Mexico’s functional currency were $(25) million, $21 million and $(6) million for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in Other Income, Net, on the Sempra Energy Consolidated Statements of Operations. Foreign currency transaction gains (losses) in a currency other than the functional currencies of our operations in South America are included in discontinued operations.
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TRANSACTIONS WITH AFFILIATES
We summarize amounts due from and to unconsolidated affiliates at Sempra Energy Consolidated, SDG&E and SoCalGas in the following table.
| AMOUNTS DUE FROM (TO) UNCONSOLIDATED AFFILIATES | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Total due from various unconsolidated affiliates – current | $ | 20 | $ | 32 | |||||||
| Sempra Mexico(1): | |||||||||||
| ESJ – Note due December 31, 2022, net of negligible allowance for credit losses at December 31, 2020(2) | $ | 85 | $ | — | |||||||
| IMG JV – Note due March 15, 2022, net of allowance for credit losses of $3 at December 31, 2020(3) | 695 | 742 | |||||||||
| Total due from unconsolidated affiliates – noncurrent | $ | 780 | $ | 742 | |||||||
| Sempra Mexico – TAG Pipelines Norte, S. de R.L. de C.V. – Note due December 20, 2021(1)(4) | $ | (41) | $ | — | |||||||
| Various affiliates | (4) | (5) | |||||||||
| Total due to unconsolidated affiliates – current | $ | (45) | $ | (5) | |||||||
| Sempra Mexico(1): | |||||||||||
| TAG Pipelines Norte, S. de R.L. de C.V. | |||||||||||
| Note due December 20, 2021(4) | $ | — | $ | (39) | |||||||
| 5.5% Note due January 9, 2024(5) | (68) | — | |||||||||
| TAG JV – 5.74% Note due December 17, 2029(5) | (166) | (156) | |||||||||
| Total due to unconsolidated affiliates – noncurrent | $ | (234) | $ | (195) | |||||||
| SDG&E: | |||||||||||
| Sempra Energy | $ | (38) | $ | (37) | |||||||
| SoCalGas | (21) | (10) | |||||||||
| Various affiliates | (5) | (6) | |||||||||
| Total due to unconsolidated affiliates – current | $ | (64) | $ | (53) | |||||||
| Income taxes due from Sempra Energy(6) | $ | — | $ | 130 | |||||||
| SoCalGas: | |||||||||||
| SDG&E | $ | 21 | $ | 10 | |||||||
| Various affiliates | 1 | 1 | |||||||||
| Total due from unconsolidated affiliates – current | $ | 22 | $ | 11 | |||||||
| Sempra Energy | $ | (31) | $ | (45) | |||||||
| Various affiliates | — | (2) | |||||||||
| Total due to unconsolidated affiliates – current | $ | (31) | $ | (47) | |||||||
| Income taxes due (to) from Sempra Energy(6) | $ | (37) | $ | 152 |
(1) Amounts include principal balances plus accumulated interest outstanding.
(2) U.S. dollar-denominated loan at a variable interest rate based on 1-month LIBOR plus 196 bps (2.11% at December 31, 2020). At December 31, 2020, $1 million of accrued interest receivable is included in Due from Unconsolidated Affiliates – Current.
(3) Mexican peso-denominated revolving line of credit for up to 14.2 billion Mexican pesos or approximately $712 million U.S. dollar-equivalent, at a variable interest rate based on the 91-day Interbank Equilibrium Interest Rate plus 220 bps (6.66% at December 31, 2020), to finance construction of the natural gas marine pipeline. At December 31, 2020, $2 million of accrued interest receivable is included in Due from Unconsolidated Affiliates – Current.
(4) U.S. dollar-denominated loan at a variable interest rate based on 6-month LIBOR plus 290 bps (3.16% at December 31, 2020).
(5) U.S. dollar-denominated loan at a fixed interest rate.
(6) SDG&E and SoCalGas are included in the consolidated income tax return of Sempra Energy and their respective income tax expense is computed as an amount equal to that which would result from each company having always filed a separate return.
F-50
The following table summarizes income statement information from unconsolidated affiliates.
| INCOME STATEMENT IMPACT FROM UNCONSOLIDATED AFFILIATES | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | |||||||||||||||||
| Revenue | $ | 37 | $ | 52 | $ | 64 | |||||||||||
| Cost of Sales | 45 | 50 | 46 | ||||||||||||||
| Interest Income | 56 | 74 | 62 | ||||||||||||||
| Interest Expense | 14 | 2 | 2 | ||||||||||||||
| SDG&E: | |||||||||||||||||
| Revenue | $ | 6 | $ | 6 | $ | 5 | |||||||||||
| Cost of Sales | 79 | 74 | 73 | ||||||||||||||
| SoCalGas: | |||||||||||||||||
| Revenue | $ | 88 | $ | 69 | $ | 64 | |||||||||||
| Cost of Sales | — | 8 | — |
California Utilities
Sempra Energy, SDG&E and SoCalGas provide certain services to each other and are charged an allocable share of the cost of such services. Also, from time-to-time, SDG&E and SoCalGas may make short-term advances of surplus cash to Sempra Energy at interest rates based on the federal funds effective rate plus a margin of 13 to 20 bps, depending on the loan balance.
SoCalGas provides natural gas transportation and storage services for SDG&E and charges SDG&E for such services monthly. SoCalGas records revenues and SDG&E records a corresponding amount to cost of sales.
SDG&E and SoCalGas charge one another, as well as other Sempra Energy affiliates, for shared asset depreciation. SoCalGas and SDG&E record revenues and the affiliates record corresponding amounts to O&M.
The natural gas supply for SDG&E’s and SoCalGas’ core natural gas customers is purchased by SoCalGas as a combined procurement portfolio managed by SoCalGas. Core customers are primarily residential and small commercial and industrial customers. This core gas procurement function is considered a shared service; therefore, revenues and costs related to SDG&E are presented net in SoCalGas’ Statements of Operations.
SDG&E has a 20-year contract for up to 155 MW of renewable power supplied from the ESJ wind power generation facility. ESJ is a 50% owned and unconsolidated JV of Sempra Mexico.
Sempra Mexico
Sempra Mexico, through its wholly owned subsidiaries, DEN and IEnova Pipelines, provides operating and maintenance services to TAG Pipelines Norte, S. de. R.L. de C.V., and also provides personnel under an administrative services arrangement to TAG Pipelines Norte, S. de. R.L. de C.V. and TAG JV.
Sempra LNG
Sempra LNG provides certain business services to Cameron LNG JV. Sempra LNG had an agreement to provide transportation services to Cameron LNG JV for capacity on the Cameron Interstate Pipeline through August 2020, when Cameron LNG JV achieved commercial operations of Train 3 of its Phase 1 project. Sempra Energy has provided guarantees to Cameron LNG JV and to CFIN, as we discuss in Note 6.
RESTRICTED NET ASSETS
Sempra Energy Consolidated
As we discuss below, the California Utilities and certain other Sempra Energy subsidiaries have restrictions on the amount of funds that can be transferred to Sempra Energy by dividend, advance or loan as a result of conditions imposed by various regulators. Additionally, certain other Sempra Energy subsidiaries are subject to various financial and other covenants and other restrictions contained in debt and credit agreements (described in Note 7) and in other agreements that limit the amount of funds that can be transferred to Sempra Energy. At December 31, 2020, Sempra Energy was in compliance with all covenants related to its debt agreements.
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At December 31, 2020, the amount of restricted net assets of consolidated entities of Sempra Energy, including the California Utilities discussed below, that may not be distributed to Sempra Energy in the form of a loan or dividend is $12.2 billion. Additionally, the amount of restricted net assets of our unconsolidated entities is $12.6 billion. Although the restrictions cap the amount of funding that the various operating subsidiaries can provide to Sempra Energy, we do not believe these restrictions will have a significant impact on our ability to access cash to pay dividends and fund operating needs.
As we discuss in Note 6, $1.1 billion of Sempra Energy’s consolidated retained earnings represents undistributed earnings of equity method investments at December 31, 2020.
California Utilities
The CPUC’s regulation of the California Utilities’ capital structures limits the amounts available for dividends and loans to Sempra Energy. At December 31, 2020, Sempra Energy could have received combined loans and dividends of approximately $717 million from SDG&E and approximately $148 million from SoCalGas.
The payment and amount of future dividends by SDG&E and SoCalGas are at the discretion of their respective boards of directors. The following restrictions limit the amount of retained earnings that may be paid as common stock dividends or loaned to Sempra Energy from either utility:
▪The CPUC requires that SDG&E’s and SoCalGas’ common equity ratios be no lower than one percentage point below the CPUC-authorized percentage of each entity’s authorized capital structure. The authorized percentage at December 31, 2020 is 52% at both SDG&E and SoCalGas.
▪SDG&E and SoCalGas each have a revolving credit line that requires it to maintain a ratio of consolidated indebtedness to consolidated capitalization (as defined in the agreements) of no more than 65%, as we discuss in Note 7.
Based on these restrictions, at December 31, 2020, SDG&E’s restricted net assets were $7.0 billion and SoCalGas’ restricted net assets were $5.0 billion, which could not be transferred to Sempra Energy.
Sempra Texas Utilities
Sempra Energy owns an indirect, 100% interest in Oncor Holdings, which owns an 80.25% interest in Oncor. As we discuss in Note 6, we account for our investment in Oncor Holdings under the equity method. Significant restrictions at Oncor that limit the amount that may be paid as dividends to Sempra Energy include:
▪In connection with ring-fencing measures, governance mechanisms and commitments, Oncor may not pay any dividends or make any other distributions (except for contractual tax payments) if a majority of its independent directors or a minority member director determines that it is in the best interests of Oncor to retain such amounts to meet expected future requirements.
▪Oncor must remain in compliance with its debt-to-equity ratio established by the PUCT for ratemaking purposes and may not pay dividends or other distributions (except for contractual tax payments) if that payment would cause it to exceed its PUCT authorized debt-to-equity ratio. Oncor’s authorized regulatory capital structure is 57.5% debt to 42.5% equity at December 31, 2020.
▪If the credit rating on Oncor’s senior secured debt by any of the three major credit rating agencies falls below BBB (or the equivalent), Oncor will suspend dividends and other distributions (except for contractual tax payments), unless otherwise allowed by the PUCT. At December 31, 2020, all of Oncor’s senior secured ratings were above BBB.
▪Oncor’s revolving credit line and certain of its other debt agreements require it to maintain a consolidated senior debt-to-capitalization ratio of no more than 65% and observe certain affirmative covenants. At December 31, 2020, Oncor was in compliance with these covenants.
Based on these restrictions, at December 31, 2020, Oncor’s restricted net assets were $11.9 billion, which could not be transferred to Sempra Energy.
Sempra Energy owns an indirect, 50% interest in Sharyland Holdings, which owns a 100% interest in Sharyland Utilities. Significant restrictions related to this equity method investment include:
▪Sharyland Utilities may not pay dividends or make other distributions (except for contractual payments) without the consent of the JV partner.
▪Sharyland Utilities must remain in compliance with the capital structure established by the PUCT for ratemaking purposes and may not pay dividends or other distributions (except for contractual tax payments) if that payment would cause its debt to exceed 55% of its capital structure.
▪Sharyland Utilities has a revolving credit line and a term loan credit agreement that require it to maintain a consolidated debt-to-capitalization ratio of no more than 70% and observe certain customary reporting requirements and other affirmative covenants. At December 31, 2020, Sharyland Utilities was in compliance with these and all other covenants.
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Based on these restrictions, at December 31, 2020, Sharyland Utilities’ restricted net assets were $114 million, which could not be transferred to its owners.
Sempra Mexico
Significant restrictions at Sempra Mexico include:
▪Mexico requires domestic corporations to maintain minimum legal reserves as a percentage of capital stock, resulting in restricted net assets of $185 million at Sempra Energy’s consolidated Mexican subsidiaries at December 31, 2020.
▪Wholly owned IEnova Pipelines has a long-term debt agreement that requires it to maintain a reserve account to pay the projects’ debt. Under this restriction, net assets totaling $12 million are restricted at December 31, 2020.
▪Wholly owned Ventika has long-term debt agreements that require it to maintain reserve accounts to pay the projects’ debt. The debt agreements may limit the project companies’ ability to incur liens, incur additional indebtedness, make investments, pay cash dividends and undertake certain additional actions. Under these restrictions, net assets totaling $9 million are restricted at December 31, 2020.
▪ESJ, a 50% owned and unconsolidated JV of Sempra Mexico, has long-term debt agreements that require the establishment and funding of project and reserve accounts to which the proceeds of loans, letter of credit borrowings, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The long-term debt agreements also limit the JV’s ability to incur liens, incur additional indebtedness, make acquisitions and undertake certain actions. Under these restrictions, net assets totaling $7 million are restricted at December 31, 2020.
▪TAG JV, a 50% owned and unconsolidated JV of Sempra Mexico, has a long-term debt agreement that requires it to maintain a reserve account to pay the projects’ debt. Under these restrictions, net assets totaling $73 million are restricted at December 31, 2020.
Sempra LNG
Sempra LNG has an equity method investment in Cameron LNG JV, which has debt agreements that require the establishment and funding of project accounts to which the proceeds of loans, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The debt agreements require the JV to maintain reserve accounts in order to pay the project debt service, and also contain restrictions related to the payment of dividends and other distributions to the members of the JV. We discuss Cameron LNG JV’s debt agreements and the associated Sempra Energy guarantees in Note 6. Under these restrictions, net assets of Cameron LNG JV of approximately $452 million are restricted at December 31, 2020.
OTHER (EXPENSE) INCOME, NET
Other (Expense) Income, Net on the Consolidated Statements of Operations consists of the following:
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| OTHER (EXPENSE) INCOME, NET | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Allowance for equity funds used during construction | $ | 128 | $ | 94 | $ | 98 | |||||||||||
| Investment gains (losses)(1) | 41 | 61 | (6) | ||||||||||||||
| (Losses) gains on interest rate and foreign exchange instruments, net | (67) | 34 | 7 | ||||||||||||||
| Foreign currency transaction (losses) gains, net(2) | (25) | 21 | (6) | ||||||||||||||
| Non-service component of net periodic benefit cost | (102) | (132) | (35) | ||||||||||||||
| Fine related to Energy Efficiency Program Inquiry | (6) | — | — | ||||||||||||||
| Penalties related to billing practices OII | — | (8) | — | ||||||||||||||
| Interest on regulatory balancing accounts, net | 14 | 14 | 2 | ||||||||||||||
| Sundry, net | (31) | (7) | (2) | ||||||||||||||
| Total | $ | (48) | $ | 77 | $ | 58 | |||||||||||
| SDG&E: | |||||||||||||||||
| Allowance for equity funds used during construction | $ | 79 | $ | 56 | $ | 61 | |||||||||||
| Non-service component of net periodic benefit cost | (20) | (20) | (6) | ||||||||||||||
| Fine related to Energy Efficiency Program Inquiry | (6) | — | — | ||||||||||||||
| Interest on regulatory balancing accounts, net | 9 | 13 | 4 | ||||||||||||||
| Sundry, net | (10) | (10) | (3) | ||||||||||||||
| Total | $ | 52 | $ | 39 | $ | 56 | |||||||||||
| SoCalGas: | |||||||||||||||||
| Allowance for equity funds used during construction | $ | 41 | $ | 34 | $ | 36 | |||||||||||
| Non-service component of net periodic benefit cost | (54) | (72) | (10) | ||||||||||||||
| Penalties related to billing practices OII | — | (8) | — | ||||||||||||||
| Interest on regulatory balancing accounts, net | 5 | 1 | (2) | ||||||||||||||
| Sundry, net | (20) | (10) | (9) | ||||||||||||||
| Total | $ | (28) | $ | (55) | $ | 15 |
(1) Represents investment gains (losses) on dedicated assets in support of our executive retirement and deferred compensation plans. These amounts are offset by corresponding changes in compensation expense related to the plans, recorded in O&M on the Consolidated Statements of Operations.
(2) Includes losses of $42 million in 2020, gains of $30 million in 2019 and losses of $3 million in 2018 from translation to U.S. dollars of a Mexican peso-denominated loan to IMG JV, which are offset by corresponding amounts included in Equity Earnings on the Consolidated Statements of Operations.
NOTE 2. NEW ACCOUNTING STANDARDS
We describe below recent accounting pronouncements that have had or may have a significant effect on our financial condition, results of operations, cash flows or disclosures.
ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”: ASU 2016-13, as amended by subsequently issued ASUs, changes how entities measure credit losses for most financial assets and certain other instruments. The standard introduces an “expected credit loss” impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan receivables and commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the credit losses. We adopted the standard on January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings. The adoption primarily impacted the expected credit losses associated with accounts receivable balances, amounts due from unconsolidated affiliates and off-balance sheet financial guarantees. There was an insignificant impact to SDG&E’s and SoCalGas’ balance sheets from adoption. The following table shows the initial (decreases) increases on Sempra Energy’s balance sheet at January 1, 2020 from adoption of ASU 2016-13.
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| IMPACT FROM ADOPTION OF ASU 2016-13 | |||||
| (Dollars in millions) | |||||
| Sempra Energy Consolidated | |||||
| Accounts receivable – trade, net | $ | (1) | |||
| Due from unconsolidated affiliates – noncurrent | (6) | ||||
| Deferred income tax assets | 4 | ||||
| Other current liabilities | 4 | ||||
| Deferred credits and other | 2 | ||||
| Retained earnings | (7) | ||||
| Other noncontrolling interests | (2) |
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”: ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will be required to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. We adopted ASU 2017-04 on January 1, 2020 and are applying the standard on a prospective basis to our goodwill impairment tests.
ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”: ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications that replace LIBOR or another reference rate affected by reference rate reform and to hedging relationships that reference LIBOR or another reference rate affected or expected to be affected by reference rate reform. ASU 2020-04 was effective March 12, 2020 and can be applied through December 31, 2022, with certain exceptions for hedging relationships that continue to exist after this date, and may be applied from January 1, 2020. For contract modifications, the standard allows entities to account for modifications as an event that does not require reassessment or remeasurement (i.e., as a continuation of the existing contract). The standard also allows entities to amend their formal designation and documentation of hedging relationships affected or expected to be affected by reference rate reform, without having to de-designate the hedging relationship. Entities may elect the optional expedients and exceptions on an individual hedging relationship basis and independently from one another. We elected the optional expedients for contract modifications. We elected the cash flow hedging expedients to disregard the potential discontinuation of a reference rate when assessing whether a hedged forecasted interest payment is probable and to disregard certain mismatches between the designated hedging instrument and the hedged item when assessing the hedge effectiveness. We are applying these expedients prospectively from January 1, 2020. Application of these expedients preserves the presentation of derivatives consistent with the past presentation.
ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”: ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. In addition to other changes, this standard amends ASC 470-20, “Debt with Conversion and Other Options,” by removing the accounting models for instruments with beneficial conversion features and cash conversion features. The standard also amends ASC 260, “Earnings Per Share,” as follows:
▪requires an entity to apply the if-converted method when calculating diluted EPS for convertible instruments and no longer use the treasury stock method, which was previously allowed for certain convertible instruments;
▪requires an entity to include the effect of potential share settlement in the diluted EPS calculation when an instrument may be settled in cash or shares, and no longer allows an entity to rebut the presumption of share settlement if it has a history or policy of cash settlement;
▪requires an entity to include equity-classified convertible preferred stock that contains down-round features whereby, if the down-round feature is triggered, its effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS;
▪clarifies that the average market price should be used to calculate the diluted EPS denominator when the exercise price or the number of shares that may be issued is variable, except for certain contingently issuable shares; and
▪clarifies that the weighted-average share count from each quarter should be used when calculating the year-to-date weighted-average share count.
For public entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods therein, with early adoption permitted for fiscal years beginning after December 15, 2020. An entity can use either a full or modified retrospective approach to adopt ASU 2020-06 and must disclose, in the period of adoption, EPS transition information about the effect of the change on affected per-share amounts. We plan to adopt the standard on January 1, 2022 and are currently evaluating the effect of the standard on our ongoing financial reporting.
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NOTE 3. REVENUES
The following table disaggregates our revenues from contracts with customers by major service line and market and provides a reconciliation to total revenues by segment. The majority of our revenue is recognized over time.
| DISAGGREGATED REVENUES | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| SDG&E | SoCalGas | Sempra Mexico | Sempra LNG | Sempra Renewables | Consolidating adjustments and Parent and other | Sempra Energy Consolidated | |||||||||||||||||||||||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| By major service line: | |||||||||||||||||||||||||||||||||||||||||
| Utilities | $ | 4,920 | $ | 4,571 | $ | 58 | $ | — | $ | — | $ | (94) | $ | 9,455 | |||||||||||||||||||||||||||
| Energy-related businesses | — | — | 834 | 92 | — | (71) | 855 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,920 | $ | 4,571 | $ | 892 | $ | 92 | $ | — | $ | (165) | $ | 10,310 | |||||||||||||||||||||||||||
| By market: | |||||||||||||||||||||||||||||||||||||||||
| Gas | $ | 692 | $ | 4,571 | $ | 603 | $ | 86 | $ | — | $ | (156) | $ | 5,796 | |||||||||||||||||||||||||||
| Electric | 4,228 | — | 289 | 6 | — | (9) | 4,514 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,920 | $ | 4,571 | $ | 892 | $ | 92 | $ | — | $ | (165) | $ | 10,310 | |||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,920 | $ | 4,571 | $ | 892 | $ | 92 | $ | — | $ | (165) | $ | 10,310 | |||||||||||||||||||||||||||
| Utilities regulatory revenues | 393 | 177 | — | — | — | — | 570 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | — | 364 | 282 | — | (156) | 490 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 5,313 | $ | 4,748 | $ | 1,256 | $ | 374 | $ | — | $ | (321) | $ | 11,370 | |||||||||||||||||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| By major service line: | |||||||||||||||||||||||||||||||||||||||||
| Utilities | $ | 4,819 | $ | 4,367 | $ | 73 | $ | — | $ | — | $ | (75) | $ | 9,184 | |||||||||||||||||||||||||||
| Energy-related businesses | — | — | 919 | 176 | 5 | (143) | 957 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,819 | $ | 4,367 | $ | 992 | $ | 176 | $ | 5 | $ | (218) | $ | 10,141 | |||||||||||||||||||||||||||
| By market: | |||||||||||||||||||||||||||||||||||||||||
| Gas | $ | 587 | $ | 4,367 | $ | 680 | $ | 170 | $ | — | $ | (208) | $ | 5,596 | |||||||||||||||||||||||||||
| Electric | 4,232 | — | 312 | 6 | 5 | (10) | 4,545 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,819 | $ | 4,367 | $ | 992 | $ | 176 | $ | 5 | $ | (218) | $ | 10,141 | |||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,819 | $ | 4,367 | $ | 992 | $ | 176 | $ | 5 | $ | (218) | $ | 10,141 | |||||||||||||||||||||||||||
| Utilities regulatory revenues | 106 | 158 | — | — | — | — | 264 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | — | 383 | 234 | 5 | (198) | 424 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 4,925 | $ | 4,525 | $ | 1,375 | $ | 410 | $ | 10 | $ | (416) | $ | 10,829 | |||||||||||||||||||||||||||
| Year ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||
| By major service line: | |||||||||||||||||||||||||||||||||||||||||
| Utilities | $ | 4,788 | $ | 3,577 | $ | 78 | $ | — | $ | — | $ | (69) | $ | 8,374 | |||||||||||||||||||||||||||
| Energy-related businesses | — | — | 941 | 232 | 46 | (146) | 1,073 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,788 | $ | 3,577 | $ | 1,019 | $ | 232 | $ | 46 | $ | (215) | $ | 9,447 | |||||||||||||||||||||||||||
| By market: | |||||||||||||||||||||||||||||||||||||||||
| Gas | $ | 491 | $ | 3,577 | $ | 711 | $ | 224 | $ | — | $ | (203) | $ | 4,800 | |||||||||||||||||||||||||||
| Electric | 4,297 | — | 308 | 8 | 46 | (12) | 4,647 | ||||||||||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,788 | $ | 3,577 | $ | 1,019 | $ | 232 | $ | 46 | $ | (215) | $ | 9,447 | |||||||||||||||||||||||||||
| Revenues from contracts with customers | $ | 4,788 | $ | 3,577 | $ | 1,019 | $ | 232 | $ | 46 | $ | (215) | $ | 9,447 | |||||||||||||||||||||||||||
| Utilities regulatory revenues | (220) | 385 | — | — | — | — | 165 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | — | 357 | 240 | 78 | (185) | 490 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 4,568 | $ | 3,962 | $ | 1,376 | $ | 472 | $ | 124 | $ | (400) | $ | 10,102 |
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REVENUES FROM CONTRACTS WITH CUSTOMERS
Our revenues from contracts with customers are primarily related to the transmission, distribution and storage of natural gas and the generation, transmission and distribution of electricity through our regulated utilities. We also provide other midstream and renewable energy-related services. We assess our revenues on a contract-by-contract basis as well as a portfolio basis to determine the nature, amount, timing and uncertainty, if any, of revenues being recognized.
We generally recognize revenues when performance of the promised commodity service is provided to our customers and we invoice our customers for an amount that reflects the consideration we are entitled to in exchange for those services. We consider the delivery and transmission of natural gas and electricity and providing of natural gas storage services as ongoing and integrated services. Generally, natural gas or electricity services are received and consumed by the customer simultaneously. Our performance obligations related to these services are satisfied over time and represent a series of distinct services that are substantially the same and that have the same pattern of transfer to the customers. We recognize revenue based on units delivered, as the satisfaction of our performance obligations can be directly measured by the amount of natural gas or electricity delivered to the customer. In most cases, the right to consideration from the customer directly corresponds to the value transferred to the customer and we recognize revenue in the amount that we have the right to invoice.
The payment terms in our customer contracts vary. Typically, we have an unconditional right to customer payments, which are due after the performance obligation to the customer is satisfied. The term between invoicing and when payment is due is typically between 10 and 90 days.
We exclude sales and usage-based taxes from revenues. In addition, the California Utilities pay franchise fees to operate in various municipalities. The California Utilities bill these franchise fees to their customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of the California Utilities’ ability to collect from the customer, are accounted for on a gross basis and reflected in utilities revenues from contracts with customers and operating expense.
Utilities Revenues
Utilities revenues represent the majority of our consolidated revenues from contracts with customers and include:
▪The transmission, distribution and storage of natural gas at:
◦SDG&E
◦SoCalGas
◦Sempra Mexico’s Ecogas
▪The generation, transmission and distribution of electricity at SDG&E.
Utilities revenues are derived from and recognized upon the delivery of natural gas or electricity services to customers. Amounts that we bill our customers are based on tariffs set by regulators within the respective state or country. For SDG&E and SoCalGas, which follow the provisions of U.S. GAAP governing rate-regulated operations as we discuss in Note 1, amounts that we bill to customers also include adjustments for previously recognized regulatory revenues.
The California Utilities and Ecogas recognize revenues based on regulator-approved revenue requirements, which allows the utilities to recover their reasonable operating costs and provides the opportunity to realize their authorized rates of return on their investments. While the California Utilities’ revenues are not affected by actual sales volumes, the pattern of their revenue recognition during the year is affected by seasonality. SoCalGas recognizes annual authorized revenue for core natural gas customers using seasonal factors established in the Triennial Cost Allocation Proceeding, resulting in a significant portion of earnings being recognized in the first and fourth quarters of each year. SDG&E’s authorized revenue recognition is also impacted by seasonal factors, resulting in higher earnings in the third quarter when electric loads are typically higher than in the other three quarters of the year.
SDG&E has an arrangement to provide the California ISO with the ability to control its high-voltage transmission lines for prices approved by the FERC. Revenue is recognized over time as access is provided to the California ISO.
Factors that can affect the amount, timing and uncertainty of revenues and cash flows include weather, seasonality and timing of customer billings, which may result in unbilled revenues that can vary significantly from month to month and generally approximate one-half month’s deliveries.
The California Utilities recognize revenues from the sale of allocated California GHG emissions allowances at quarterly auctions administered by CARB. GHG allowances are delivered to CARB in advance of the quarterly auctions, and the California Utilities have the right to payment when the GHG allowances are sold at auction. GHG revenue is recognized on a point in time basis
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within the quarter the auction is held. The California Utilities balance costs and revenues associated with the GHG program through regulatory balancing accounts.
In connection with the COVID-19 pandemic, the California Utilities and the CPUC have implemented certain measures to assist customers, including suspending service disconnections due to nonpayment for residential and small business customers, waiving late payment fees for business customers, and offering flexible payment plans to customers experiencing difficulty paying their electric or gas bills. Additional measures could be mandated or voluntarily implemented in the future. Under the regulatory compact applicable to the California Utilities, including decoupling of rates, recovery of uncollectible expenses, and other recovery mechanisms potentially available, which we discuss in Note 4, the California Utilities have continued to recognize revenues under ASC 606, “Revenue from Contracts with Customers,” in the year ended December 31, 2020.
Energy-Related Businesses Revenues
Midstream Revenues
Midstream revenues at Sempra Mexico and Sempra LNG typically represent revenues from long-term, U.S. dollar-based contracts with customers for the sale of natural gas and LNG, as well as storage and transportation of natural gas. Invoiced amounts are based on the volume of natural gas delivered and contracted prices.
Sempra Mexico’s marketing operations sell natural gas to the CFE and other customers under supply agreements. Sempra Mexico recognizes the revenue from the sale of natural gas upon transfer of the natural gas via pipelines to customers at the agreed upon delivery points, and in the case of the CFE, at its thermoelectric power plants.
Through its marketing operations, Sempra LNG has contracts to sell natural gas and LNG to Sempra Mexico that allow Sempra Mexico to satisfy its obligations under supply agreements with the CFE and other customers, and to supply Sempra Mexico’s TdM power plant. Because Sempra Mexico either immediately delivers the natural gas to its customers or consumes the benefits simultaneously (by using the gas to supply TdM), revenues from Sempra LNG’s sale of natural gas to Sempra Mexico are generally recognized over time as delivered. Revenues from LNG sales are recognized at the point when the cargo is delivered to Sempra Mexico.
Revenues from the sale of LNG and natural gas by Sempra LNG to Sempra Mexico are adjusted for indemnity payments and profit sharing. We consider these adjustments to be forms of variable consideration that are associated with the sale of LNG and natural gas to Sempra Mexico, and therefore, Sempra LNG records the related costs as an offset to revenues, with no impact to Sempra Energy’s consolidated revenues.
We recognize storage revenue from firm capacity reservation agreements, under which we collect a fee for reserving storage capacity for customers in our storage facilities. Under these firm agreements, customers pay a monthly fixed reservation fee based on the storage capacity reserved rather than the actual volumes stored. For the fixed-fee component, revenue is recognized on a straight-line basis over the term of the contract. We bill customers for any capacity used in excess of the contracted capacity and such revenues are recognized in the month of occurrence. We also recognize revenue for interruptible storage services. As we discuss in Note 5, in February 2019, Sempra LNG completed the sale of its non-utility natural gas storage assets in the southeast U.S. (comprised of Mississippi Hub and Bay Gas).
We generate pipeline transportation revenues from firm agreements, under which customers pay a fee for reserving transportation capacity. Revenue is recognized when the volumes are delivered to the customers’ agreed upon delivery point. We recognize revenues for our stand-ready obligation to provide capacity and transportation services throughout the contractual delivery period, as the benefits are received and consumed simultaneously as customers utilize pipeline capacity for the transport and receipt of natural gas and LPG. Invoiced amounts are based on a variable usage fee and a fixed capacity charge, adjusted for the Consumer Price Index, the effects of any foreign currency translation and the actual quantity of commodity transported.
Renewables Revenues
Sempra Mexico and, previously, Sempra Renewables develop, invest in and operate solar and wind facilities that have long-term PPAs to sell the electricity and the related green energy attributes they generate to customers, generally load serving entities, and also for Sempra Mexico, industrial and other customers. Load serving entities will sell electric service to their end-users and wholesale customers immediately upon receipt of our power delivery, and industrial and other customers immediately consume the electricity to run their facilities, and thus, we recognize the revenue under the PPAs as the electricity is generated and delivered. We invoice customers based on the volume of energy delivered at rates pursuant to the PPAs. As we discuss in Note 5, in December 2018, Sempra Renewables completed the sale of its U.S. operating solar assets, solar and battery storage development projects and its 50% ownership interest in a wind power generation facility. In April 2019, Sempra Renewables completed the sale of its remaining wind assets and investments.
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Sempra LNG has a contractual agreement to provide scheduling and marketing of renewable power for Sempra Mexico’s ESJ JV. Invoiced amounts are based on a fixed fee per MWh scheduled.
Other Revenues from Contracts with Customers
TdM is a natural gas-fired power plant that generates revenues from selling electricity and/or resource adequacy to the California ISO and to governmental, public utility and wholesale power marketing entities, as the power is delivered at the interconnection point.
Remaining Performance Obligations
We do not disclose information about remaining performance obligations for (a) contracts with an original expected length of one year or less, (b) variable consideration recognized at the amount at which we have the right to invoice for services performed, or (c) variable consideration allocated to wholly unsatisfied performance obligations.
For contracts greater than one year, at December 31, 2020, we expect to recognize revenue related to the fixed fee component of the consideration as shown below. Sempra Energy’s remaining performance obligations primarily relate to capacity agreements for natural gas storage and transportation at Sempra Mexico. SoCalGas did not have any remaining performance obligations at December 31, 2020.
| REMAINING PERFORMANCE OBLIGATIONS**(1)** | ||||||||
| (Dollars in millions) | ||||||||
| Sempra Energy Consolidated | SDG&E | |||||||
| 2021 | $ | 387 | $ | 4 | ||||
| 2022 | 406 | 4 | ||||||
| 2023 | 407 | 4 | ||||||
| 2024 | 348 | 4 | ||||||
| 2025 | 351 | 4 | ||||||
| Thereafter | 4,361 | 67 | ||||||
| Total revenues to be recognized | $ | 6,260 | $ | 87 |
(1) Excludes intercompany transactions.
Contract Balances from Revenues from Contracts with Customers
From time to time, we receive payments in advance of satisfying the performance obligations associated with customer contracts. We defer such revenues as contract liabilities and recognize them in earnings as the performance obligations are satisfied.
Activities within Sempra Energy’s and SDG&E’s contract liabilities are presented below. There were no contract liabilities at SDG&E in 2018 or at SoCalGas in 2020, 2019 or 2018.
| CONTRACT LIABILITIES | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Contract liabilities at January 1 | $ | (163) | $ | (70) | $ | — | |||||||||||
| Adoption of ASC 606 | — | — | (61) | ||||||||||||||
| Revenue from performance obligations satisfied during reporting period | 4 | 2 | 7 | ||||||||||||||
| Payments received in advance | (48) | (95) | (16) | ||||||||||||||
| Contract liabilities at December 31(1) | $ | (207) | $ | (163) | $ | (70) | |||||||||||
| SDG&E: | |||||||||||||||||
| Contract liabilities at January 1 | $ | (91) | $ | — | |||||||||||||
| Revenue from performance obligations satisfied during reporting period | 4 | 1 | |||||||||||||||
| Payments received in advance | — | (92) | |||||||||||||||
| Contract liabilities at December 31(2) | $ | (87) | $ | (91) |
(1) Balances at December 31, 2020 and 2019 include $52 million and $4 million, respectively, in Other Current Liabilities and $155 million and $159 million, respectively, in Deferred Credits and Other.
(2) Balances at December 31, 2020 and 2019 include $4 million and $4 million, respectively, in Other Current Liabilities and $83 million and $87 million, respectively, in Deferred Credits and Other.
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Receivables from Revenues from Contracts with Customers
The table below shows receivable balances associated with revenues from contracts with customers on the Consolidated Balance Sheets.
| RECEIVABLES FROM REVENUES FROM CONTRACTS WITH CUSTOMERS | ||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||
| Sempra Energy Consolidated: | ||||||||||||||||||||
| Accounts receivable – trade, net | $ | 1,447 | $ | 1,163 | ||||||||||||||||
| Accounts receivable – other, net | 12 | 16 | ||||||||||||||||||
| Due from unconsolidated affiliates – current(1) | 3 | 5 | ||||||||||||||||||
| Total | $ | 1,462 | $ | 1,184 | ||||||||||||||||
| SDG&E: | ||||||||||||||||||||
| Accounts receivable – trade, net | $ | 573 | $ | 398 | ||||||||||||||||
| Accounts receivable – other, net | 8 | 5 | ||||||||||||||||||
| Due from unconsolidated affiliates – current(1) | 2 | 2 | ||||||||||||||||||
| Total | $ | 583 | $ | 405 | ||||||||||||||||
| SoCalGas: | ||||||||||||||||||||
| Accounts receivable – trade, net | $ | 786 | $ | 710 | ||||||||||||||||
| Accounts receivable – other, net | 4 | 11 | ||||||||||||||||||
| Total | $ | 790 | $ | 721 |
(1) A**mount is presented net of amounts due to unconsolidated affiliates on the Consolidated Balance Sheets, when right of offset exists.
REVENUES FROM SOURCES OTHER THAN CONTRACTS WITH CUSTOMERS
Certain of our revenues are derived from sources other than contracts with customers and are accounted for under other accounting standards outside the scope of ASC 606.
Utilities Regulatory Revenues
Alternative Revenue Programs
We recognize revenues from alternative revenue programs when the regulator-specified conditions for recognition have been met and adjust these revenues as they are recovered or refunded through future utility service.
Decoupled revenues. As discussed earlier, the regulatory framework requires the California Utilities to recover authorized revenue based on estimated annual demand forecasts approved in regular proceedings before the CPUC. However, actual demand for natural gas and electricity will generally vary from CPUC-approved forecasted demand due to the impacts from weather volatility, energy efficiency programs, rooftop solar and other factors affecting consumption. The CPUC regulatory framework provides for the California Utilities to use a “decoupling” mechanism, which allows the California Utilities to record revenue shortfalls or excess revenues resulting from any difference between actual and forecasted demand to be recovered or refunded in authorized revenue in a subsequent period based on the nature of the account.
Incentive mechanisms. The CPUC applies performance-based measures and incentive mechanisms to all California IOUs, under which the California Utilities have earnings potential above authorized base margins if they achieve or exceed specific performance and operating goals. Generally, for performance-based awards, if performance is above or below specific benchmarks, the utility is eligible for financial awards or subject to financial penalties.
Incentive awards are included in revenues when we receive required CPUC approval of the award, the timing of which may not be consistent from year to year. We would record penalties for results below the specified benchmarks against revenues when we believe it is probable that the CPUC would assess a penalty.
Other Cost-Based Regulatory Recovery
The CPUC, and the FERC as it relates to SDG&E, authorize the California Utilities to collect revenue requirements for operating costs and capital related costs (such as depreciation, taxes and return on rate base) from customers, including:
▪costs to purchase natural gas and electricity;
▪costs associated with administering public purpose, demand response, and customer energy efficiency programs;
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▪other programmatic activities, such as gas distribution, gas transmission, gas storage integrity management and wildfire mitigation; and
▪costs associated with third party liability insurance premiums.
Authorized costs are recovered as the commodity or service is delivered. To the extent authorized amounts collected vary from actual costs, the differences are generally recovered or refunded within a subsequent period based on the nature of the balancing account mechanism. In general, the revenue recognition criteria for balanced costs billed to customers are met at the time the costs are incurred. Because these costs are substantially recovered in rates through a balancing account mechanism, changes in these costs are reflected as changes in revenues. The CPUC and the FERC may impose various review procedures before authorizing recovery or refund for programs authorized, including limitations on the total cost of the program, revenue requirement limits or reviews of costs for reasonableness. These procedures could result in disallowances of recovery from ratepayers.
We discuss balancing accounts and their effects further in Note 4.
Other Revenues
Sempra Mexico generates lease revenues from operating lease agreements with PEMEX and CENAGAS for the use of natural gas and ethane pipelines and LPG storage facilities. Certain PPAs at Sempra Renewables were also accounted for as operating leases prior to sale of its solar and wind assets in December 2018 and April 2019.
Sempra LNG has an agreement to supply LNG to Sempra Mexico’s ECA Regas Facility. Although the LNG sale and purchase agreement specifies a number of cargoes to be delivered annually, actual cargoes delivered by the supplier have traditionally been significantly lower than the maximum specified under the agreement. As a result, Sempra LNG is contractually required to make monthly indemnity payments to Sempra Mexico for failure to deliver the contracted LNG.
Sempra LNG also recognizes other revenues from:
▪fees related to contractual counterparty obligations for non-delivery of LNG cargoes, as described above; and
▪sales of natural gas and electricity under short-term and long-term contracts and into the spot market and other competitive markets. Revenues include the net realized gains and losses on physical and derivative settlements and net unrealized gains and losses from the change in fair values of the derivatives.
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NOTE 4. REGULATORY MATTERS
REGULATORY ASSETS AND LIABILITIES
We show the details of regulatory assets and liabilities in the following table and discuss them below.
| REGULATORY ASSETS (LIABILITIES) | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| SDG&E: | |||||||||||
| Fixed-price contracts and other derivatives | $ | (53) | $ | 8 | |||||||
| Deferred income taxes recoverable (refundable) in rates | 22 | (108) | |||||||||
| Pension and other postretirement benefit plan obligations | 50 | 103 | |||||||||
| Removal obligations | (2,121) | (2,056) | |||||||||
| Environmental costs | 56 | 45 | |||||||||
| Sunrise Powerlink fire mitigation | 121 | 121 | |||||||||
| Regulatory balancing accounts(1)(2) | |||||||||||
| Commodity – electric | 72 | 102 | |||||||||
| Gas transportation | 35 | 22 | |||||||||
| Safety and reliability | 67 | 77 | |||||||||
| Public purpose programs | (158) | (124) | |||||||||
| 2019 GRC retroactive impacts | 56 | 111 | |||||||||
| Other balancing accounts | 233 | 106 | |||||||||
| Other regulatory assets (liabilities), net(2) | 72 | (153) | |||||||||
| Total SDG&E | (1,548) | (1,746) | |||||||||
| SoCalGas: | |||||||||||
| Deferred income taxes refundable in rates | (82) | (203) | |||||||||
| Pension and other postretirement benefit plan obligations | 417 | 400 | |||||||||
| Employee benefit costs | 37 | 44 | |||||||||
| Removal obligations | (685) | (728) | |||||||||
| Environmental costs | 36 | 40 | |||||||||
| Regulatory balancing accounts(1)(2) | |||||||||||
| Commodity – gas, including transportation | (56) | (118) | |||||||||
| Safety and reliability | 335 | 295 | |||||||||
| Public purpose programs | (253) | (273) | |||||||||
| 2019 GRC retroactive impacts | 202 | 400 | |||||||||
| Other balancing accounts | (58) | (7) | |||||||||
| Other regulatory assets (liabilities), net(2) | 75 | (101) | |||||||||
| Total SoCalGas | (32) | (251) | |||||||||
| Sempra Mexico: | |||||||||||
| Deferred income taxes recoverable in rates | 80 | 83 | |||||||||
| Other regulatory assets | — | 6 | |||||||||
| Total Sempra Energy Consolidated | $ | (1,500) | $ | (1,908) |
(1) At December 31, 2020 and 2019, the noncurrent portion of regulatory balancing accounts – net undercollected for SDG&E was $139 million and $108 million, respectively, and for SoCalGas was $218 million and $500 million, respectively.
(2) Includes regulatory assets earning a return.
In the table above:
▪Regulatory assets arising from fixed-price contracts and other derivatives are offset by corresponding liabilities arising from purchased power and natural gas commodity and transportation contracts. The regulatory asset is increased/decreased based on changes in the fair market value of the contracts. It is also reduced as payments are made for commodities and services under these contracts.
▪Deferred income taxes refundable/recoverable in rates are based on current regulatory ratemaking and income tax laws. SDG&E, SoCalGas and Sempra Mexico expect to refund/recover net regulatory liabilities/assets related to deferred income
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taxes over the lives of the assets that give rise to the related accumulated deferred income tax balances. Regulatory assets and liabilities include excess deferred income taxes resulting from statutory income tax rate changes and certain income tax benefits and expenses associated with flow-through items, which we discuss in Note 8.
▪Regulatory assets/liabilities related to pension and other postretirement benefit plan obligations are offset by corresponding liabilities/assets and are being recovered in rates as the plans are funded.
▪The regulatory asset related to employee benefit costs represents our liability associated with long-term disability insurance that will be recovered from customers in future rates as expenditures are made.
▪Regulatory liabilities from removal obligations represent cumulative amounts collected in rates for future asset removal costs in excess of cumulative amounts incurred (or paid).
▪Regulatory assets related to environmental costs represent the portion of our environmental liability recognized at the end of the period in excess of the amount that has been recovered through rates charged to customers. We expect this amount to be recovered in future rates as expenditures are made.
▪The regulatory asset related to Sunrise Powerlink fire mitigation is offset by a corresponding liability for the funding of a trust to cover the mitigation costs. SDG&E expects to recover the regulatory asset in rates as the trust is funded over a remaining 49-year period.
▪Over- and undercollected regulatory balancing accounts reflect the difference between customer billings and recorded or CPUC-authorized costs, including commodity costs. Depreciation, taxes and return on rate base may also be included in certain accounts. Amounts in the balancing accounts are recoverable (receivable) or refundable (payable) in future rates, subject to CPUC approval. The adopted revenue requirements in the 2019 GRC FD associated with the period from January 1, 2019 through December 31, 2019 are being recovered in rates over a 24-month period that began in January 2020.
Amortization expense on regulatory assets for the years ended December 31, 2020, 2019 and 2018 was $9 million, $7 million and $5 million, respectively, at Sempra Energy Consolidated, $4 million, $3 million and $2 million, respectively, at SDG&E, and $5 million, $4 million and $3 million, respectively, at SoCalGas.
CALIFORNIA UTILITIES
COVID-19 Pandemic Protections
In March 2020, the CPUC required that all energy companies under its jurisdiction, including the California Utilities, take action to implement several emergency customer protection measures to support California customers in light of the COVID-19 pandemic for up to one year. Currently, the customer protection measures are mandatory for all residential and small business customers. In February 2021, the CPUC extended the customer protection measures through June 2021 and may extend them further. Each of the California Utilities was authorized to track and request recovery of incremental costs associated with complying with residential and small business customer protection measures implemented by the CPUC related to the COVID-19 pandemic, including costs associated with suspending service disconnections and uncollectible expenses that arise from these customers’ failure to pay. The California Utilities expect to pursue recovery of tracked costs in rates in a future CPUC proceeding, which recovery is not assured.
Disconnection OIR
In June 2020, the CPUC issued a decision to adopt certain customer protections to reduce residential customer disconnections and improve reconnection processes, including, among other things, imposing limitations on service disconnections, elimination of deposit requirements and reconnection fees, establishment of the AMP that provides successfully participating, income-qualified residential customers with relief from outstanding utility bill amounts, and increased outreach and marketing efforts. The decision allows each of the California Utilities to establish a two-way balancing account to record the uncollectible expenses associated with residential customers’ inability to pay their electric or gas bills, including as a result of the relief from outstanding utility bill amounts provided under the AMP.
CPUC General Rate Case
The CPUC uses GRC proceedings to set rates designed to allow the California Utilities to recover their reasonable operating costs and to provide the opportunity to realize their authorized rates of return on their investments.
2019 General Rate Case
In September 2019, the CPUC issued a final decision in the 2019 GRC approving SDG&E’s and SoCalGas’ test year revenues for 2019 and attrition year adjustments for 2020 and 2021, which was effective retroactively to January 1, 2019. This is the first GRC that includes revenues authorized for risk assessment mitigation phase activities.
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The 2019 GRC FD approved a test year 2019 revenue requirement of $1,990 million for SDG&E’s combined operations ($1,590 million for its electric operations and $400 million for its natural gas operations) and $2,770 million for SoCalGas.
The increases include separately authorized components for O&M and capital-related costs, as follows:
| AUTHORIZED REVENUE REQUIREMENT INCREASES FOR 2020 AND 2021 | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| 2020 increase from 2019 | 2021 increase from 2020 | ||||||||||||||||||||||
| Revenue increase | Percent increase | Revenue increase | Percent increase | ||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| O&M | $ | 20 | 2.64 | % | $ | 19 | 2.47 | % | |||||||||||||||
| Capital-related costs | 114 | 9.74 | 83 | 6.47 | |||||||||||||||||||
| Total increase | $ | 134 | 6.74 | $ | 102 | 4.83 | |||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| O&M | $ | 36 | 2.64 | % | $ | 34 | 2.40 | % | |||||||||||||||
| Capital-related costs | 184 | 14.36 | 116 | 7.93 | |||||||||||||||||||
| Total increase | $ | 220 | 7.92 | $ | 150 | 5.00 |
In January 2020, the CPUC issued a final decision implementing a four-year GRC cycle for California IOUs. The California Utilities were directed to file a petition for modification to revise their 2019 GRC to add two additional attrition years, resulting in a transitional five-year GRC period (2019-2023). The California Utilities filed the petition in April 2020 and requested authorization of their post-test year ratemaking mechanism for two additional years. We subsequently requested an updated increase in the revenue requirement for SDG&E and SoCalGas of approximately $91 million and $150 million, respectively, for 2022, and $104 million and $131 million, respectively, for 2023, reflecting certain adjustments. These amounts include revenues for both O&M and capital cost attrition. In June 2020, the CPUC issued a ruling to further clarify the issues for review in the California Utilities’ petition, which are mainly whether the proposed revenue requirements and mechanisms for the two proposed additional attrition years are just and reasonable. In September 2020, the California Utilities filed a status report to summarize positions on how impacts of the COVID-19 pandemic should be incorporated into the proposed attrition rates. The California Utilities proposed to continue with the adopted attrition mechanism using the second quarter 2020 Global Insight utility cost forecast, which incorporates impacts of the COVID-19 pandemic. Intervenors have proposed other alternatives, including using escalation factors based on the Consumer Price Index. We expect a proposed decision in the first quarter of 2021.
The 2019 GRC FD approved the California Utilities’ establishment of two-way liability insurance premium balancing accounts, including wildfire insurance premium costs based on a specific level of coverage. The 2019 GRC FD also permits the California Utilities to seek recovery of additional liability insurance coverage.
The 2019 GRC FD clarified that differences between incurred and forecasted income tax expense due to forecasting differences are not subject to tracking in the income tax expense memorandum account beginning in 2019. SDG&E and SoCalGas previously recorded regulatory liabilities, inclusive of interest, associated with the 2016 through 2018 tracked forecasting differences of $86 million and $89 million, respectively. In April 2020, the CPUC confirmed treatment of the two-way income tax expense memorandum account for these 2016 through 2018 balances, at which time the California Utilities released these regulatory liability balances to revenues and regulatory interest.
CPUC Cost of Capital
In December 2019, the CPUC approved the cost of capital and rate structures (shown in the table below) for SDG&E and SoCalGas that became effective on January 1, 2020 and will remain in effect through December 31, 2022. SDG&E did not propose a 2020 cost of preferred equity in this proceeding. In January 2020, SDG&E filed an advice letter to continue the cost of preferred equity for test year 2020 at 6.22%, which the CPUC approved in March 2020.
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| CPUC AUTHORIZED COST OF CAPITAL AND RATE STRUCTURE | ||||||||||||||||||||
| SDG&E | SoCalGas | |||||||||||||||||||
| Authorized weighting | Return on rate base | Weighted return on rate base | Authorized weighting | Return on rate base | Weighted return on rate base | |||||||||||||||
| 45.25 | % | 4.59 | % | 2.08 | % | Long-Term Debt | 45.60 | % | 4.23 | % | 1.93 | % | ||||||||
| 2.75 | 6.22 | 0.17 | Preferred Equity | 2.40 | 6.00 | 0.14 | ||||||||||||||
| 52.00 | 10.20 | 5.30 | Common Equity | 52.00 | 10.05 | 5.23 | ||||||||||||||
| 100.00 | % | 7.55 | % | 100.00 | % | 7.30 | % |
The CCM was reauthorized in the 2020 cost of capital proceeding to continue through 2022. SDG&E’s CCM benchmark rate is 4.498%, based on Moody’s Baa- utility bond index, and SoCalGas’ CCM benchmark rate is 4.029%, based on Moody’s A- utility bond index. The index applicable to each utility is based on each utility’s credit rating. The CCM benchmark rates for SDG&E and SoCalGas are the basis of comparison to determine if future measurement periods “trigger” the CCM. For the 12 months ended September 2020, the first “CCM Period,” the trigger did not occur for SDG&E or SoCalGas. The next CCM Period is from October 2020 to September 2021. The CCM, if triggered in 2021, would be effective January 1, 2022, and would automatically update the authorized cost of debt based on actual costs and update the authorized ROE upward or downward by one-half of the difference between the CCM benchmark and the applicable 12-month average Moody’s utility bond index.
SDG&E
FERC Rate Matters and Cost of Capital
SDG&E files separately with the FERC for its authorized ROE on FERC-regulated electric transmission operations and assets.
SDG&E’s TO4 ROE of 10.05% was the basis of SDG&E’s FERC-related revenue recognition until March 2020, when the FERC approved the settlement terms that SDG&E and all settling parties reached in October 2019 on SDG&E’s TO5 filing. The settlement agreement provided for a ROE of 10.60%, consisting of a base ROE of 10.10% plus an additional 50 bps for participation in the California ISO. If the FERC issues an order ruling that California IOUs are no longer eligible for the additional California ISO ROE, SDG&E would refund the additional 50 bps of ROE associated with the California ISO as of the refund effective date (June 1, 2019) in this proceeding. The TO5 term is effective June 1, 2019 and shall remain in effect indefinitely, with parties having the annual right to terminate the agreement beginning in 2022. In 2020, SDG&E recorded retroactive revenues of $12 million related to 2019, and additional FERC revenues of $17 million to conclude a rate base matter, net of certain refunds to be paid to CPUC-jurisdictional customers.
Energy Efficiency Program Inquiry
In January 2020, the CPUC issued a ruling seeking comments on a report prepared by its consultant regarding SDG&E’s Upstream Lighting Program for the program year 2017. The CPUC subsequently expanded the scope of the comments to cover the program year 2018. The Upstream Lighting Program was one of SDG&E’s Energy Efficiency programs designed to produce energy efficiency savings for which SDG&E could earn a performance-based incentive.
Pursuant to the CPUC ruling, intervenors representing ratepayers have questioned SDG&E’s management of the program and alleged that certain program expenditures did not benefit the purpose of the program. As a result of the inquiry, SDG&E voluntarily expanded its review to include the program year 2019. Based on this review and discussions with intervenors, SDG&E concluded that some concessions were appropriate, which include refunding certain costs and certain performance-based incentives to customers and incurring a fine. Accordingly, in the year ended December 31, 2020, SDG&E reduced revenues by $51 million and recorded a fine of $6 million in Other (Expense) Income, Net, on the SDG&E and Sempra Energy Consolidated Statements of Operations. The after-tax impact for the year ended December 31, 2020 was $44 million. In October 2020, SDG&E executed a settlement agreement with intervenors consistent with these concessions. We expect CPUC approval of the settlement agreement in 2021.
SOCALGAS
OSCs – Energy Efficiency and Advocacy
In October 2019, the CPUC issued an OSC to determine whether SoCalGas should be sanctioned for violation of certain CPUC code sections and orders. The OSC stemmed from approximately 40 days and $9,000 of transitional energy efficiency (EE) codes
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and standards advocacy activities undertaken by SoCalGas in 2018, following a CPUC decision disallowing SoCalGas’ future engagement in EE statewide codes and standards advocacy.
In December 2019, the CPUC issued a second OSC to determine whether SoCalGas is entitled to the EE program’s shareholder incentives for codes and standards advocacy in 2016 and 2017, whether its shareholders should bear the costs of those advocacy activities, and to address whether any other remedies are appropriate. The scope of this OSC was later expanded to include EE program years 2014 and 2015, and SoCalGas’ engagement with local governments on proposed reach codes.
Intervenors in these OSCs have suggested the CPUC order various financial and non-financial penalties. If the CPUC were to assess fines or penalties on SoCalGas associated with these OSCs, they could be material. We expect CPUC decisions on these OSCs in the first half of 2021.
Billing Practices OII
In May 2017, the CPUC issued an OII to determine whether SoCalGas violated any provisions of the California Public Utilities Code, General Orders, CPUC decisions, or other requirements pertaining to billing practices from 2014 through 2016. The CPUC examined the timeliness of monthly bills, extending the billing period for customers, and issuing estimated bills, including an examination of SoCalGas’ gas tariff rules. In January 2019, the CPUC ordered SoCalGas to pay $8 million in penalties, including $3 million that was paid in July 2019 to California’s general fund and $5 million to be credited to customers that received delayed bills (greater than 45 days) in the form of a $100 bill credit.
NOTE 5. ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS
We consolidate assets acquired and liabilities assumed as of the purchase date and include earnings from acquisitions in consolidated earnings after the purchase date.
ACQUISITIONS
Sempra Texas Utilities
TTHC
In February 2020, STIH acquired an additional indirect, 0.1975% interest in Oncor through its acquisition of a 1% interest in TTHC from Hunt Strategic Utility Investment, L.L.C. (Hunt), including notes receivable due from TTHC with an aggregate outstanding balance of approximately $6 million, for a total purchase price of approximately $23 million in cash, bringing Sempra Energy’s indirect ownership interest in Oncor to approximately 80.45%. TTHC indirectly owns 100% of TTI, which owns 19.75% of Oncor’s outstanding membership interests. At the acquisition date, we determined the fair value of the notes receivable was $7 million based on a discounted cash flow model, and attributed $16 million to the investment in TTHC, which we recorded as an equity method investment.
STIH’s acquisition of the 1% interest was the subject of a lawsuit filed in the Delaware Court of Chancery by the owners of the remaining 99% ownership interest in TTHC. STIH purchased its 1% interest in TTHC in February 2020 after the Delaware Court of Chancery decided, among other things, that STIH’s right to purchase the 1% interest was superior to that of the remaining owners of TTHC. The remaining owners appealed that decision and, in May 2020, the Delaware Supreme Court reversed the Delaware Court of Chancery’s ruling and remanded the case back to the Delaware Court of Chancery. In September 2020, the Delaware Court of Chancery ordered, among other things, the rescission of STIH’s purchase of the 1% interest in TTHC. The parties have complied with the court’s order and Sempra Energy’s indirect ownership in Oncor has returned to 80.25%. We received a full refund of the purchase price from Hunt in September 2020 and have fully unwound the acquisition.
Oncor Holdings
In March 2018, Sempra Energy completed the acquisition of an indirect, 100% interest in Oncor Holdings, which owned 80.03% of Oncor, and other EFH assets and liabilities unrelated to Oncor. We paid consideration of $9.45 billion in cash and an additional $31 million representing an adjustment for dividends and payments pursuant to a tax sharing agreement with Oncor and Oncor Holdings. Also in March 2018, in a separate transaction, Sempra Energy, through its interest in Oncor Holdings, acquired an additional 0.22% of the outstanding membership interests in Oncor from Oncor Management Investment LLC for $26 million in
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cash, bringing Sempra Energy’s indirect ownership in Oncor to 80.25%. TTI continues to own 19.75% of Oncor’s outstanding membership interest.
Due to ring-fencing measures, existing governance mechanisms and commitments in effect, we do not have the power to direct the significant activities of Oncor Holdings and Oncor. Consequently, we account for our 100% ownership interest in Oncor Holdings as an equity method investment. See Note 6 for additional information about our equity method investment in Oncor Holdings and related ring-fencing measures.
The total purchase price paid was comprised of the following:
▪$9,450 million of merger consideration;
▪$31 million adjustment for dividends and payments pursuant to a tax sharing agreement with Oncor and Oncor Holdings;
▪$26 million paid in a separate transaction to acquire an additional 0.22% of the outstanding membership interests in Oncor from Oncor Management Investment LLC; and
▪$59 million of transaction costs included in the basis of our investment in Oncor Holdings.
We accounted for the merger as an asset acquisition, as the equity method investment in Oncor Holdings represents substantially all of the fair value of the gross assets acquired. Other EFH assets and liabilities unrelated to Oncor that were acquired have been subsumed into our parent organization, Parent and other. The following table sets forth the allocation of the total purchase price paid to the identifiable assets acquired and liabilities assumed.
| PURCHASE PRICE ALLOCATION | ||||||||
| (Dollars in millions) | ||||||||
| At March 9, 2018(1) | ||||||||
| Assets acquired: | ||||||||
| Accounts receivable – other, net | $ | 1 | ||||||
| Due from unconsolidated affiliates | 46 | |||||||
| Investment in Oncor Holdings | 9,227 | |||||||
| Deferred income tax assets | 287 | |||||||
| Other noncurrent assets | 109 | |||||||
| Total assets acquired | 9,670 | |||||||
| Liabilities assumed: | ||||||||
| Other current liabilities | 23 | |||||||
| Pension and other postretirement benefit plan obligations | 21 | |||||||
| Deferred credits and other | 58 | |||||||
| Total liabilities assumed | 102 | |||||||
| Net assets acquired | $ | 9,568 | ||||||
| Total purchase price paid | $ | 9,568 |
(1) As adjusted for post-closing items.
The fair value of the equity method investment in Oncor Holdings is primarily attributable to Oncor’s business. Therefore, we considered the underlying assets and liabilities of Oncor when determining the fair value of our equity method investment. As a regulated entity, Oncor’s rates are set and approved by the PUCT, and are designed to recover the cost of providing service and the opportunity to earn a reasonable return on its investments. Accordingly, Oncor applies the guidance under the provisions of U.S. GAAP governing rate-regulated operations. Under U.S. GAAP, regulation is viewed as being a characteristic (restriction) of a regulated entity’s assets and liabilities, and the impact of regulation is considered a fundamental input to measuring the fair value of Oncor’s assets and liabilities. Under this premise, we concluded that the carrying values of all assets and liabilities recoverable through rates are representative of their fair values.
In May 2019, Oncor completed the acquisition of 100% of the issued and outstanding shares of InfraREIT and 100% of the limited partnership units of its subsidiary, InfraREIT Partners, LP. Oncor paid consideration of $1,275 million, or $21 per share, plus certain transaction costs incurred by InfraREIT and its subsidiaries and paid by Oncor on their behalf, including $40 million for a management agreement termination fee. Oncor received a total of $1,330 million in capital contributions from Sempra Energy and certain indirect equity holders of TTI, proportionate to their respective ownership interest in Oncor, to fund the purchase price and certain expenses.
As part of Oncor’s acquisition of interests in InfraREIT, immediately prior to closing the InfraREIT acquisition, SDTS accepted and assumed certain assets and liabilities of Sharyland Utilities, LP in exchange for certain SDTS assets. SDTS received real
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property and other assets used in the electric transmission and distribution business in Central, North and West Texas, as well as the equity interests in GS Project Entity, LLC (a wholly owned subsidiary of Sharyland Utilities, LP), and Sharyland Utilities, LP received real property and other assets used in the electric transmission and distribution business near the Texas-Mexico border. Immediately prior to the completion of the exchange, SDTS became a wholly owned, indirect subsidiary of InfraREIT Partners, LP.
Sharyland Holdings
In May 2019, Sempra Energy acquired an indirect, 50% interest in Sharyland Holdings for $95 million (net of $7 million in post-closing adjustments). In connection with and prior to the consummation of the acquisition, Sharyland Holdings owned 100% of the membership interests in Sharyland Utilities, LP and Sharyland Utilities, LP converted into a limited liability company, named Sharyland Utilities, L.L.C. We account for our indirect, 50% interest in Sharyland Holdings as an equity method investment.
Sempra South American Utilities
Compañía Transmisora del Norte Grande S.A.
In December 2018, Chilquinta Energía acquired a 100% interest in Compañía Transmisora del Norte Grande S.A. through a sales and purchase agreement with AES Gener S.A. and its subsidiary Sociedad Eléctrica Angamos S.A. We completed the acquisition for a purchase price of $226 million and paid $208 million (net of $18 million cash acquired) with available cash on hand at our former Sempra South American Utilities segment, which is presented in and was included as part of the sale of discontinued operations.
We accounted for this business combination using the acquisition method of accounting. At the acquisition date, we allocated the $208 million in cash paid to the identifiable assets acquired ($231 million) and liabilities assumed ($43 million) based on their respective fair values, with the excess recognized as goodwill ($38 million), which are included below in the “Assets Held for Sale in Discontinued Operations” table.
PENDING ACQUISITION
Sempra Mexico
ESJ
In February 2021, IEnova agreed to acquire Saavi Energía’s 50% interest in ESJ for approximately $83 million. At December 31, 2020, IEnova owned a 50% interest in ESJ, which is accounted for as an equity method investment. Upon completion of the acquisition, IEnova will own 100% of ESJ and will consolidate it. ESJ owns a fully operating wind power generation facility with a nameplate capacity of 155 MW that is fully contracted by SDG&E. ESJ is constructing a second wind power generation facility, which we expect will be completed in late 2021 or in the first quarter of 2022 and will have a nameplate capacity of 108 MW. We expect to complete the acquisition in the first half of 2021, subject to various closing conditions, including authorizations from the FERC and COFECE.
DIVESTITURES
In June 2018, our board of directors approved a plan to divest certain non-utility natural gas storage assets in the southeast U.S., and all our U.S. wind and U.S. solar assets (collectively, the Assets). As a result, we recorded impairment charges totaling $1.5 billion ($900 million after tax and NCI) in June 2018, which included $1.3 billion ($755 million after tax and NCI) at Sempra LNG, included in Impairment Losses on Sempra Energy’s Consolidated Statements of Operations, and $200 million ($145 million after tax) at Sempra Renewables, included in Equity Earnings on Sempra Energy’s Consolidated Statements of Operations. In December 2018, we reduced the impairment of $1.3 billion recorded at Sempra LNG in June 2018 by $183 million ($126 million after tax and NCI) as a result of the sales agreement for certain storage assets described below, resulting in a total impairment charge of $1.1 billion ($629 million after tax and NCI) for the year ended December 31, 2018. These impairment charges primarily represented an adjustment of the related assets’ carrying values to estimated fair values, less costs to sell when applicable, which we discuss in Notes 6 and 12.
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Sempra LNG
In February 2019, Sempra LNG completed the sale of its non-utility natural gas storage assets in the southeast U.S. (comprised of Mississippi Hub and Bay Gas), which we classified as held for sale at December 31, 2018, and received cash proceeds of $322 million, net of transaction costs. In January 2019, Sempra LNG completed the sale of other non-utility assets for $5 million.
Sempra Renewables
In December 2018, Sempra Renewables completed the sale of the following assets for cash proceeds of $1.6 billion:
▪its operating solar assets, including assets that we owned through JVs or through tax equity arrangements (other than those interests held by tax equity investors);
▪its solar and battery storage development projects; and
▪its 50% interest in the Broken Bow 2 wind generation facility.
In 2018, we recognized a pretax gain of $513 million ($367 million after tax) in Gain on Sale of Assets on Sempra Energy’s Consolidated Statement of Operations.
The following table summarizes the deconsolidation of these subsidiaries in 2018.
| DECONSOLIDATION OF SUBSIDIARIES | ||||||||
| (Dollars in millions) | ||||||||
| Certain subsidiaries of Sempra Renewables | ||||||||
| At December 13, 2018 | ||||||||
| Proceeds from sale, net of transaction costs | $ | 1,585 | ||||||
| Cash | (7) | |||||||
| Restricted cash | (7) | |||||||
| Other current assets | (14) | |||||||
| Property, plant and equipment, net | (1,303) | |||||||
| Other investments | (329) | |||||||
| Other long-term assets | (24) | |||||||
| Current liabilities | 8 | |||||||
| Long-term debt | 70 | |||||||
| Asset retirement obligations | 52 | |||||||
| Other long-term liabilities | 5 | |||||||
| Noncontrolling interests | 486 | |||||||
| Accumulated other comprehensive income | (9) | |||||||
| Gain on sale | $ | 513 |
In April 2019, Sempra Renewables completed the sale of its remaining wind assets and investments for $569 million, net of transaction costs, and recorded a $61 million ($45 million after tax and NCI) gain, which is included in Gain on Sale of Assets on the Sempra Energy Consolidated Statements of Operations. Upon completion of the sale, remaining nominal business activities at Sempra Renewables were subsumed into Parent and other and the Sempra Renewables segment ceased to exist.
DISCONTINUED OPERATIONS
In January 2019, our board of directors approved a plan to sell our South American businesses. We present these businesses, which previously constituted the Sempra South American Utilities segment, and certain activities associated with those businesses as discontinued operations.
In April 2020, we completed the sale of our equity interests in our Peruvian businesses, including our 83.6% interest in Luz del Sur and our interest in Tecsur, to an affiliate of China Yangtze Power International (Hongkong) Co., Limited for cash proceeds of $3,549 million, net of transaction costs and as adjusted for post-closing adjustments, and recorded a pretax gain of $2,271 million ($1,499 million after tax).
In June 2020, we completed the sale of our equity interests in our Chilean businesses, including our 100% interest in Chilquinta Energía and Tecnored and our 50% interest in Eletrans, to State Grid International Development Limited for cash proceeds of $2,216 million, net of transaction costs and as adjusted for post-closing adjustments, and recorded a pretax gain of $628 million ($248 million after tax).
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In the year ended December 31, 2020, the pretax gains from the sales of our South American businesses are included in Gain on Sale of Discontinued Operations in the table below and the after-tax gains are included in Income from Discontinued Operations, Net of Income Tax, on the Sempra Energy Consolidated Statements of Operations.
Summarized results from discontinued operations were as follows:
| DISCONTINUED OPERATIONS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020(1) | 2019 | 2018 | |||||||||||||||
| Revenues | $ | 570 | $ | 1,614 | $ | 1,585 | |||||||||||
| Cost of sales | (364) | (1,012) | (1,041) | ||||||||||||||
| Gain on sale of discontinued operations | 2,899 | — | — | ||||||||||||||
| Operating expenses | (66) | (159) | (206) | ||||||||||||||
| Interest and other | (3) | (11) | (6) | ||||||||||||||
| Income before income taxes and equity earnings | 3,036 | 432 | 332 | ||||||||||||||
| Income tax expense | (1,186) | (72) | (145) | ||||||||||||||
| Equity earnings | — | 3 | 1 | ||||||||||||||
| Income from discontinued operations, net of income tax | 1,850 | 363 | 188 | ||||||||||||||
| Earnings attributable to noncontrolling interests | (10) | (35) | (32) | ||||||||||||||
| Earnings from discontinued operations attributable to common shares | $ | 1,840 | $ | 328 | $ | 156 |
(1) Results include activity until deconsolidation of our Peruvian businesses on April 24, 2020 and Chilean businesses on June 24, 2020 and post-closing adjustments related to the sales of these businesses.
The following table summarizes the carrying amounts of the major classes of assets and related liabilities classified as held for sale in discontinued operations.
| ASSETS HELD FOR SALE IN DISCONTINUED OPERATIONS | |||||
| (Dollars in millions) | |||||
| December 31, 2019 | |||||
| Cash and cash equivalents | $ | 74 | |||
| Restricted cash(1) | 1 | ||||
| Accounts receivable, net | 303 | ||||
| Due from unconsolidated affiliates | 2 | ||||
| Inventories | 36 | ||||
| Other current assets | 29 | ||||
| Current assets | $ | 445 | |||
| Due from unconsolidated affiliates | $ | 54 | |||
| Goodwill and other intangible assets | 801 | ||||
| Property, plant and equipment, net | 2,618 | ||||
| Other noncurrent assets | 40 | ||||
| Noncurrent assets | $ | 3,513 | |||
| Short-term debt | $ | 52 | |||
| Accounts payable | 201 | ||||
| Current portion of long-term debt and finance leases | 85 | ||||
| Other current liabilities | 106 | ||||
| Current liabilities | $ | 444 | |||
| Long-term debt and finance leases | $ | 702 | |||
| Deferred income taxes | 284 | ||||
| Other noncurrent liabilities | 66 | ||||
| Noncurrent liabilities | $ | 1,052 |
(1) Primarily represents funds held in accordance with Peruvian tax law.
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As a result of the sales of our South American businesses, in 2020, we reclassified $645 million of cumulative foreign currency translation losses from AOCI to Gain on Sale of Discontinued Operations, which is included in Income from Discontinued Operations, Net of Income Tax, on the Sempra Energy Consolidated Statements of Operations.
NOTE 6. 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. 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 Statements of Operations. Our foreign equity method investees are generally corporations whose operations are 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, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sempra Texas Utilities: | |||||||||||||||||||||||
| Oncor Holdings(1) | 100 | % | 100 | % | $ | 12,440 | $ | 11,519 | |||||||||||||||
| Sempra Texas Utilities: | |||||||||||||||||||||||
| Sharyland Holdings(2) | 50 | 50 | $ | 102 | $ | 100 | |||||||||||||||||
| Sempra Mexico: | |||||||||||||||||||||||
| ESJ(3) | 50 | 50 | 34 | 39 | |||||||||||||||||||
| IMG JV(4) | 40 | 40 | 440 | 337 | |||||||||||||||||||
| TAG JV(5) | 50 | 50 | 378 | 365 | |||||||||||||||||||
| Sempra LNG: | |||||||||||||||||||||||
| Cameron LNG JV(6) | 50.2 | 50.2 | 433 | 1,256 | |||||||||||||||||||
| Total other equity method investments | 1,387 | 2,097 | |||||||||||||||||||||
| Other | 1 | 6 | |||||||||||||||||||||
| Total other investments | $ | 1,388 | $ | 2,103 |
(1) The carrying value of our equity method investment is $2,833 million and $2,823 million higher than the underlying equity in the net assets of the investee at December 31, 2020 and 2019, respectively, due to $2,868 million of equity method goodwill and $69 million in basis differences in AOCI, offset by $104 million at December 31, 2020 and $114 million at December 31, 2019 due to a tax sharing liability to TTI under a 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 is $259 million and $263 million higher than the underlying equity in the net assets of the investee at December 31, 2020 and 2019, 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.
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| EARNINGS (LOSSES) FROM EQUITY METHOD INVESTMENTS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| EARNINGS (LOSSES) RECORDED BEFORE INCOME TAX(1): | |||||||||||||||||
| Sempra Texas Utilities: | |||||||||||||||||
| Sharyland Holdings | $ | 3 | $ | 2 | $ | — | |||||||||||
| Sempra LNG: | |||||||||||||||||
| Cameron LNG JV | 391 | 24 | — | ||||||||||||||
| Sempra Renewables: | |||||||||||||||||
| Wind: | |||||||||||||||||
| Auwahi Wind | — | — | 3 | ||||||||||||||
| Broken Bow 2 Wind | — | — | (2) | ||||||||||||||
| Cedar Creek 2 Wind | — | — | (1) | ||||||||||||||
| Flat Ridge 2 Wind(2) | — | (3) | (178) | ||||||||||||||
| Fowler Ridge 2 Wind | — | 5 | 3 | ||||||||||||||
| Mehoopany Wind(2) | — | 1 | (30) | ||||||||||||||
| Solar: | |||||||||||||||||
| California solar partnership | — | — | 8 | ||||||||||||||
| Copper Mountain Solar 2 | — | — | 5 | ||||||||||||||
| Copper Mountain Solar 3 | — | — | 8 | ||||||||||||||
| Mesquite Solar 1 | — | — | 18 | ||||||||||||||
| Other | — | 2 | (3) | ||||||||||||||
| Parent and other: | |||||||||||||||||
| RBS Sempra Commodities(2) | (100) | — | (67) | ||||||||||||||
| Other | — | (1) | — | ||||||||||||||
| 294 | 30 | (236) | |||||||||||||||
| EARNINGS RECORDED NET OF INCOME TAX: | |||||||||||||||||
| Sempra Texas Utilities: | |||||||||||||||||
| Oncor Holdings | 577 | 526 | 371 | ||||||||||||||
| Sempra Mexico: | |||||||||||||||||
| ESJ | 5 | 2 | 2 | ||||||||||||||
| IMG JV | 103 | 9 | 29 | ||||||||||||||
| TAG JV | 36 | 13 | 9 | ||||||||||||||
| 721 | 550 | 411 | |||||||||||||||
| Total | $ | 1,015 | $ | 580 | $ | 175 |
(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, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Texas Utilities | $ | 286 | $ | 246 | $ | 149 | |||||||||||
| Sempra Mexico | 8 | 2 | — | ||||||||||||||
| Sempra LNG | 1,168 | — | — | ||||||||||||||
| Sempra Renewables | — | 1 | 63 | ||||||||||||||
| Parent and other | — | 7 | — | ||||||||||||||
| Total | $ | 1,462 | $ | 256 | $ | 212 |
At December 31, 2020 and 2019, our share of the undistributed earnings of equity method investments was $1.1 billion and $634 million, respectively, including $792 million at December 31, 2020 in undistributed earnings from investments for which we have more than 50% equity interests.
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SEMPRA TEXAS UTILITIES
Oncor Holdings
As we discuss in Note 5, in March 2018, we completed the acquisition of an indirect, 100% interest in Oncor Holdings, which 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, | March 9 - December 31, | ||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating revenues | $ | 4,511 | $ | 4,347 | $ | 3,347 | |||||||||||
| Operating expense | (3,224) | (3,135) | (2,434) | ||||||||||||||
| Income from operations | 1,287 | 1,212 | 913 | ||||||||||||||
| Interest expense | (405) | (375) | (285) | ||||||||||||||
| Income tax expense | (146) | (131) | (119) | ||||||||||||||
| Net income | 703 | 643 | 455 | ||||||||||||||
| Noncontrolling interest held by TTI | (141) | (129) | (94) | ||||||||||||||
| Earnings attributable to Sempra Energy | 562 | 514 | 360 | ||||||||||||||
| At December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Current assets | $ | 1,045 | $ | 913 | |||||||||||||
| Noncurrent assets | 28,022 | 26,012 | |||||||||||||||
| Current liabilities | 1,120 | 1,626 | |||||||||||||||
| Noncurrent liabilities | 15,611 | 14,125 | |||||||||||||||
| Noncontrolling interest held by TTI | 2,737 | 2,473 |
In 2020 and 2019, Sempra Energy contributed $632 million and $1,587 million, respectively, to Oncor Holdings, including $1,067 million in 2019 to fund Oncor’s May 2019 acquisition of interests in InfraREIT and certain acquisition-related expenses. In 2018, Sempra Energy contributed $230 million in cash to Oncor Holdings.
Sharyland Holdings
As we discuss in Note 5, in May 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.
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SEMPRA MEXICO
ESJ
As we discuss in Note 5, in February 2021, IEnova agreed to acquire Saavi Energía’s 50% interest in ESJ for approximately $83 million. At December 31, 2020, IEnova owned a 50% interest in ESJ, which is accounted for as an equity method investment. Upon completion of the acquisition, IEnova will own 100% of ESJ and will consolidate it. We expect to complete the acquisition in the first half of 2021, subject to various closing conditions, including authorizations from the FERC and COFECE.
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, Sempra Mexico invested cash of $80 million in IMG JV.
SEMPRA LNG
Cameron LNG JV
Cameron LNG JV was formed in October 2014 among Sempra Energy and three project partners, TOTAL SE, 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 operates a three-train natural gas liquefaction export facility with a nameplate capacity of 13.9 Mtpa of LNG, with an export capacity of 12 Mtpa of LNG, or approximately 1.7 Bcf per day. Cameron LNG JV achieved commercial operations of Train 1, Train 2 and Train 3 under its tolling agreements in August 2019, February 2020 and August 2020, respectively. Prior to commencing full commercial operation, Sempra LNG capitalized interest of $33 million in 2019 and $47 million in 2018 related to this equity method investment. In 2020, 2019 and 2018, Sempra LNG contributed $54 million, $77 million and $228 million, respectively, to 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 were 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 the commercial bank portion of the Loan Facility Agreements not covered by NEXI with $3.0 billion of senior secured notes issued in a private placement bond offering. The senior secured notes bear interest at a weighted-average fixed rate of 3.39% at December 31, 2020 with a weighted-average tenor of 15.4 years.
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.
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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 liquefaction project, which is subject to satisfaction of certain conditions, including all three trains achieving commercial operations and meeting certain operational performance tests that are currently underway. We expect the project to achieve financial completion and the guarantees to be terminated in the first half of 2021, but this timing could be delayed, perhaps substantially, if these operational performance tests are not completed due to weather-related events, other events or other factors beyond our control. 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, with an associated carrying value of $1 million at December 31, 2020, 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 decreasing 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 that results in failure to achieve financial completion by September 30, 2021 would result in an event of default under Cameron LNG JV’s financing agreements and a potential demand of up to $4.0 billion on Sempra Energy’s guarantees. Further, pursuant to the financing agreements, Cameron LNG JV is restricted from making distributions to its project owners, including Sempra LNG, from January 1, 2021 until the earlier of September 30, 2021 and the achievement of financial completion.
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).
Sempra Energy Support Agreement for CFIN
In July 2020, CFIN entered into a financing arrangement with Cameron LNG JV’s four project owners and received aggregate proceeds of $1.5 billion from two project owners and from external lenders on behalf of the other two project owners (collectively, the affiliate loans), based on their proportionate ownership interest in Cameron LNG JV. CFIN used the proceeds from the affiliate loans to provide a loan to Cameron LNG JV. The affiliate loans mature in 2039. Principal and interest will be
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paid from Cameron LNG JV’s project cash flows from its three-train natural gas liquefaction facility. Cameron LNG JV used the proceeds from its loan to return equity to its project owners. Sempra Energy used its $753 million share of the proceeds for working capital and other general corporate purposes, including the repayment of indebtedness.
Sempra Energy’s $753 million proportionate share of the affiliate loans, based on its 50.2% ownership interest in Cameron LNG JV, was funded by external lenders comprised of a syndicate of eight banks (the bank debt) to whom Sempra Energy has provided a guarantee pursuant to a Support Agreement. Under the terms of the Support Agreement, Sempra Energy has severally guaranteed repayment of the bank debt plus accrued and unpaid interest if CFIN fails to pay the external lenders. Additionally, the external lenders may exercise an option to put the bank debt to Sempra Energy on every one-year anniversary of the closing of the affiliate loans, as well as upon the occurrence of certain events, including a failure by CFIN to meet its payment obligations under the bank debt. In addition, some or all of the bank debt will be transferred by each external lender back to Sempra Energy on the five-year anniversary of the affiliate loans, unless the external lenders elect to waive their transfer rights six months prior to the five-year anniversary of the affiliate loans. Sempra Energy also has a right to call the bank debt back from, or to refinance the bank debt with, the external lenders at any time. The Support Agreement will terminate upon full repayment of the bank debt, including repayment following an event in which the bank debt is put to Sempra Energy. In exchange for this guarantee, the external lenders will pay a guarantee fee that is based on the credit rating of Sempra Energy’s long-term senior unsecured non-credit enhanced debt rating, which guarantee fee Sempra LNG will recognize as interest income as earned. Sempra Energy’s maximum exposure to loss is the bank debt plus any accrued and unpaid interest and related fees, subject to a liability cap of 130% of the bank debt, or $979 million. We measure the Support Agreement at fair value, net of related guarantee fees, on a recurring basis (see Note 12). At December 31, 2020, the fair value of the Support Agreement was $3 million, of which $7 million is included in Other Current Assets offset by $4 million included in Deferred Credits and Other on the Sempra Energy Consolidated Balance Sheet.
SEMPRA RENEWABLES
As a result of the plan of sale, Sempra Renewables recorded an other-than-temporary impairment on certain of its 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.
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. In 2020, we recorded a charge of $100 million in Equity Earnings on Sempra Energy’s Consolidated Statement of Operations for losses from our investment in RBS Sempra Commodities. We recognized a corresponding liability of $25 million in Other Current Liabilities and $75 million in Deferred Credits and Other for our share of estimated losses in excess of the carrying value of our equity method investment. 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.
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| SUMMARIZED FINANCIAL INFORMATION – OTHER EQUITY METHOD INVESTMENTS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019(1) | 2018(2) | |||||||||||||||
| Gross revenues | $ | 2,341 | $ | 798 | $ | 706 | |||||||||||
| Operating expense | (706) | (372) | (609) | ||||||||||||||
| Income from operations | 1,635 | 426 | 97 | ||||||||||||||
| Interest expense | (514) | (401) | (322) | ||||||||||||||
| Net income (loss)/Earnings (losses)(3) | 1,132 | 85 | (36) |
| At December 31, | |||||||||||||||||
| 2020 | 2019(1) | ||||||||||||||||
| Current assets | $ | 1,035 | $ | 1,124 | |||||||||||||
| Noncurrent assets | 15,304 | 15,039 | |||||||||||||||
| Current liabilities | 1,342 | 1,232 | |||||||||||||||
| Noncurrent liabilities | 12,863 | 11,438 |
(1) On April 22, 2019, Sempra Renewables sold its remaining wind assets and investments. 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. As of December 13, 2018, the solar equity method investments and Broken Bow 2 are no longer equity method investments.
(3) Except for our investments in Mexico, there was no income tax recorded by the entities, as they are primarily domestic partnerships.
NOTE 7. DEBT AND CREDIT FACILITIES
LINES OF CREDIT
Primary U.S. Committed Lines of Credit
At December 31, 2020, Sempra Energy Consolidated had an aggregate capacity of $6.7 billion in four primary U.S. committed lines of credit, which provide liquidity and support commercial paper.
| PRIMARY U.S. COMMITTED LINES OF CREDIT | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| At December 31, 2020 | |||||||||||||||||||||||
| Total facility | Commercial paper outstanding(1) | Available unused credit | |||||||||||||||||||||
| Sempra Energy(2) | $ | 1,250 | $ | — | 1,250 | ||||||||||||||||||
| Sempra Global | 3,185 | — | 3,185 | ||||||||||||||||||||
| SDG&E(3) | 1,500 | — | 1,500 | ||||||||||||||||||||
| SoCalGas(3)(4) | 750 | (113) | 637 | ||||||||||||||||||||
| Total | $ | 6,685 | $ | (113) | $ | 6,572 |
(1) Because the commercial paper programs are supported by these lines, we reflect the amount of commercial paper outstanding as a reduction to the available unused credit.
(2) The facility also provides for issuance of $200 million of letters of credit on behalf of Sempra Energy with the amount of borrowings otherwise available under the facility reduced by the amount of outstanding letters of credit. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, Sempra Energy has the right to increase the letter of credit commitment up to $500 million. No letters of credit were outstanding at December 31, 2020.
(3) The facility also provides for issuance of $100 million of letters of credit on behalf of the borrowing utility with the amount of borrowings otherwise available under the facility reduced by the amount of outstanding letters of credit. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, the borrowing utility has the right to increase the letter of credit commitment up to $250 million. No letters of credit were outstanding at December 31, 2020.
(4) Commercial paper outstanding is before reductions of a negligible amount of unamortized discount.
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The principal terms of the primary U.S. committed lines of credit in the table above include the following:
▪Each is a 5-year syndicated revolving credit agreement expiring in May 2024.
▪Citibank N.A. serves as administrative agent for the Sempra Energy and Sempra Global facilities and JPMorgan Chase Bank, N.A. serves as administrative agent for the SDG&E and SoCalGas facilities.
▪Each facility has a syndicate of 23 lenders. No single lender has greater than a 6% share in any facility.
▪Borrowings bear interest at benchmark rates plus a margin that varies with Sempra Energy’s credit ratings in the case of the Sempra Energy and Sempra Global lines of credit, and with the borrowing utility’s credit rating in the case of SDG&E’s and SoCalGas’ lines of credit.
▪Sempra Energy, SDG&E and SoCalGas each must maintain a ratio of indebtedness to total capitalization (as defined in each of the applicable credit facilities) of no more than 65% at the end of each quarter. At December 31, 2020, each entity was in compliance with this ratio and all other financial covenants under its respective credit facility.
▪Sempra Energy guarantees Sempra Global’s obligations under its credit facility.
Foreign Committed Lines of Credit
Our foreign operations in Mexico have additional committed lines of credit aggregating $1.8 billion at December 31, 2020. The principal terms of these credit facilities are described below.
| FOREIGN COMMITTED LINES OF CREDIT | |||||||||||||||||||||||
| (U.S. dollar equivalent in millions) | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Expiration date of facility | Total facility | Amounts outstanding | Available unused credit | ||||||||||||||||||||
| February 2024(1) | $ | 1,500 | $ | (392) | $ | 1,108 | |||||||||||||||||
| September 2021(2) | 280 | (280) | — | ||||||||||||||||||||
| Total | $ | 1,780 | $ | (672) | $ | 1,108 |
(1) Five-year revolving credit facility with a syndicate of 10 lenders. Borrowings bear interest at a per annum rate equal to 3-month LIBOR plus 80 bps.
(2) Two-year revolving credit facility with The Bank of Nova Scotia. Borrowings may be made for up to two years from September 23, 2019 in U.S. dollars. Borrowings bear interest at a per annum rate equal to 3-month LIBOR plus 54 bps.
In addition to its committed lines of credit, in October 2020, IEnova entered into a three-year $20 million uncommitted revolving credit facility with Scotiabank Inverlat S.A. (borrowings may be made in either U.S. dollars or Mexican pesos) and a three-year $100 million uncommitted revolving credit facility with The Bank of Nova Scotia (borrowings may only be made in U.S. dollars). At December 31, 2020, available unused credit on these lines was $20 million.
Letters of Credit
Outside of our domestic and foreign committed credit facilities, we have bilateral unsecured standby letter of credit capacity with select lenders that is uncommitted and supported by reimbursement agreements. At December 31, 2020, we had approximately $508 million in standby letters of credit outstanding under these agreements.
TERM LOAN
In March 2020 and April 2020, Sempra Energy borrowed a total of $1,599 million, net of $1 million of debt discounts and issuance costs, under a 364-day term loan, which had a maturity date of March 16, 2021 with an option to extend the maturity date to September 16, 2021, subject to receiving the consent of the lenders. Sempra Energy used the proceeds from the term loan to repay borrowings on its committed lines of credit and for other general corporate purposes. This term loan was repaid in full in September 2020.
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WEIGHTED-AVERAGE INTEREST RATES
The weighted-average interest rates on the total short-term debt at December 31, 2020 and 2019 were as follows:
| WEIGHTED-AVERAGE INTEREST RATES | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Sempra Energy Consolidated | 0.83 | % | 2.31 | % | |||||||||||||
| SDG&E | — | 1.97 | |||||||||||||||
| SoCalGas | 0.14 | 1.86 |
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LONG-TERM DEBT
The following tables show the detail and maturities of long-term debt outstanding:
| LONG-TERM DEBT AND FINANCE LEASES | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| SDG&E: | |||||||||||
| First mortgage bonds (collateralized by plant assets): | |||||||||||
| 3% August 15, 2021 | $ | 350 | $ | 350 | |||||||
| 1.914% payable 2015 through February 2022 | 53 | 89 | |||||||||
| 3.6% September 1, 2023 | 450 | 450 | |||||||||
| 2.5% May 15, 2026 | 500 | 500 | |||||||||
| 6% June 1, 2026 | 250 | 250 | |||||||||
| 1.7% October 1, 2030 | 800 | — | |||||||||
| 5.875% January and February 2034(1) | — | 176 | |||||||||
| 5.35% May 15, 2035 | 250 | 250 | |||||||||
| 6.125% September 15, 2037 | 250 | 250 | |||||||||
| 4% May 1, 2039(1) | — | 75 | |||||||||
| 6% June 1, 2039 | 300 | 300 | |||||||||
| 5.35% May 15, 2040 | 250 | 250 | |||||||||
| 4.5% August 15, 2040 | 500 | 500 | |||||||||
| 3.95% November 15, 2041 | 250 | 250 | |||||||||
| 4.3% April 1, 2042 | 250 | 250 | |||||||||
| 3.75% June 1, 2047 | 400 | 400 | |||||||||
| 4.15% May 15, 2048 | 400 | 400 | |||||||||
| 4.1% June 15, 2049 | 400 | 400 | |||||||||
| 3.32% April 15, 2050 | 400 | — | |||||||||
| 6,053 | 5,140 | ||||||||||
| Other long-term debt (uncollateralized): | |||||||||||
| Variable rate (0.95% at December 31, 2020) 364-day term loan March 18, 2021(1) | 200 | — | |||||||||
| Finance lease obligations: | |||||||||||
| Purchased-power contracts | 1,237 | 1,255 | |||||||||
| Other | 39 | 15 | |||||||||
| 1,476 | 1,270 | ||||||||||
| 7,529 | 6,410 | ||||||||||
| Current portion of long-term debt | (611) | (56) | |||||||||
| Unamortized discount on long-term debt | (13) | (12) | |||||||||
| Unamortized debt issuance costs | (39) | (36) | |||||||||
| Total SDG&E | 6,866 | 6,306 | |||||||||
| SoCalGas: | |||||||||||
| First mortgage bonds (collateralized by plant assets): | |||||||||||
| 3.15% September 15, 2024 | $ | 500 | $ | 500 | |||||||
| 3.2% June 15, 2025 | 350 | 350 | |||||||||
| 2.6% June 15, 2026 | 500 | 500 | |||||||||
| 2.55% February 1, 2030 | 650 | — | |||||||||
| 5.75% November 15, 2035 | 250 | 250 | |||||||||
| 5.125% November 15, 2040 | 300 | 300 | |||||||||
| 3.75% September 15, 2042 | 350 | 350 | |||||||||
| 4.45% March 15, 2044 | 250 | 250 | |||||||||
| 4.125% June 1, 2048 | 400 | 400 | |||||||||
| 4.3% January 15, 2049 | 550 | 550 | |||||||||
| 3.95% February 15, 2050 | 350 | 350 | |||||||||
| 4,450 | 3,800 | ||||||||||
| Other long-term debt (uncollateralized): | |||||||||||
| Notes at variable rates (0.57% at December 31, 2020) September 14, 2023(1) | 300 | — | |||||||||
| 1.875% Notes May 14, 2026(1) | 4 | 4 | |||||||||
| 5.67% Notes January 18, 2028 | 5 | 5 | |||||||||
| Finance lease obligations | 54 | 19 | |||||||||
| 363 | 28 | ||||||||||
| 4,813 | 3,828 | ||||||||||
| Current portion of long-term debt | (10) | (6) | |||||||||
| Unamortized discount on long-term debt | (8) | (7) | |||||||||
| Unamortized debt issuance costs | (32) | (27) | |||||||||
| Total SoCalGas | 4,763 | 3,788 |
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| LONG-TERM DEBT AND FINANCE LEASES (CONTINUED) | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy: | |||||||||||
| Other long-term debt (uncollateralized): | |||||||||||
| 2.4% Notes February 1, 2020 | — | 500 | |||||||||
| 2.4% Notes March 15, 2020 | — | 500 | |||||||||
| 2.85% Notes November 15, 2020 | — | 400 | |||||||||
| Notes at variable rates (2.50% at December 31, 2019) January 15, 2021(1) | — | 700 | |||||||||
| Notes at variable rates (3.069% after floating-to-fixed rate swaps effective 2019) March 15, 2021 | 850 | 850 | |||||||||
| 2.875% Notes October 1, 2022 | 500 | 500 | |||||||||
| 2.9% Notes February 1, 2023 | 500 | 500 | |||||||||
| 4.05% Notes December 1, 2023 | 500 | 500 | |||||||||
| 3.55% Notes June 15, 2024 | 500 | 500 | |||||||||
| 3.75% Notes November 15, 2025 | 350 | 350 | |||||||||
| 3.25% Notes June 15, 2027 | 750 | 750 | |||||||||
| 3.4% Notes February 1, 2028 | 1,000 | 1,000 | |||||||||
| 3.8% Notes February 1, 2038 | 1,000 | 1,000 | |||||||||
| 6% Notes October 15, 2039 | 750 | 750 | |||||||||
| 4% Notes February 1, 2048 | 800 | 800 | |||||||||
| 5.75% Junior Subordinated Notes July 1, 2079(1) | 758 | 758 | |||||||||
| Sempra Mexico | |||||||||||
| Other long-term debt (uncollateralized unless otherwise noted): | |||||||||||
| 6.3% Notes February 2, 2023 (4.124% after cross-currency swap effective 2013) | 197 | 207 | |||||||||
| Notes at variable rates (4.88% after floating-to-fixed rate swaps effective 2014), payable 2016 through December 2026, collateralized by plant assets | 196 | 237 | |||||||||
| 3.75% Notes January 14, 2028 | 300 | 300 | |||||||||
| Bank loans including $234 at a weighted-average fixed rate of 6.87%, $130 at variable rates (weighted-average rate of 6.54% after floating-to-fixed rate swaps effective 2014) and $34 at variable rates (3.45% at December 31, 2020), payable 2016 through March 2032, collateralized by plant assets | 398 | 423 | |||||||||
| 4.875% Notes January 14, 2048 | 540 | 540 | |||||||||
| Loan at variable rates (5.75% at December 31, 2019) July 31, 2028(1) | — | 11 | |||||||||
| Loan at variable rates (4.0275% after floating-to-fixed rate swap effective 2019) payable 2022 through November 2034(1) | 200 | 200 | |||||||||
| 4.75% notes January 15, 2051 | 800 | — | |||||||||
| Loan at variable rates (2.38% after floating-to-fixed rate swap effective 2020) payable November 2034(1) | 100 | — | |||||||||
| 2.90% loan November 15, 2034(1) | 241 | — | |||||||||
| Sempra LNG | |||||||||||
| Other long-term debt (uncollateralized): | |||||||||||
| Notes at 2.87% to 3.51% October 1, 2026(1) | — | 22 | |||||||||
| Loan at variable rates (2.82% at December 31, 2020) December 9, 2025(1) | 17 | — | |||||||||
| 11,247 | 12,298 | ||||||||||
| Current portion of long-term debt | (919) | (1,464) | |||||||||
| Unamortized discount on long-term debt | (55) | (35) | |||||||||
| Unamortized debt issuance costs | (121) | (108) | |||||||||
| Total other Sempra Energy | 10,152 | 10,691 | |||||||||
| Total Sempra Energy Consolidated | $ | 21,781 | $ | 20,785 |
(1) Callable long-term debt not subject to make-whole provisions.
| MATURITIES OF LONG-TERM DEBT**(1)** | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| SDG&E | SoCalGas | Other Sempra Energy | Total Sempra Energy Consolidated | ||||||||||||||||||||
| 2021 | $ | 585 | $ | — | $ | 919 | $ | 1,504 | |||||||||||||||
| 2022 | 18 | — | 583 | 601 | |||||||||||||||||||
| 2023 | 450 | 300 | 1,281 | 2,031 | |||||||||||||||||||
| 2024 | — | 500 | 564 | 1,064 | |||||||||||||||||||
| 2025 | — | 350 | 461 | 811 | |||||||||||||||||||
| Thereafter | 5,200 | 3,609 | 7,439 | 16,248 | |||||||||||||||||||
| Total | $ | 6,253 | $ | 4,759 | $ | 11,247 | $ | 22,259 |
(1) Excludes finance lease obligations, discounts, and debt issuance costs.
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Various long-term obligations totaling $11.2 billion at Sempra Energy Consolidated at December 31, 2020 are unsecured. This includes unsecured long-term obligations totaling $200 million at SDG&E and $309 million at SoCalGas.
Callable Long-Term Debt
At the option of Sempra Energy, SDG&E and SoCalGas, certain debt at December 31, 2020 is callable subject to premiums:
| CALLABLE LONG-TERM DEBT | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| SDG&E | SoCalGas | Other Sempra Energy | Total Sempra Energy Consolidated | ||||||||||||||||||||
| Not subject to make-whole provisions | $ | 200 | $ | 304 | $ | 1,299 | $ | 1,803 | |||||||||||||||
| Subject to make-whole provisions | 6,053 | 4,450 | 8,503 | 19,006 |
First Mortgage Bonds
The California Utilities issue first mortgage bonds secured by a lien on utility plant assets. The California Utilities may issue additional first mortgage bonds if in compliance with the provisions of their bond agreements (indentures). These indentures require, among other things, the satisfaction of pro forma earnings-coverage tests on first mortgage bond interest and the availability of sufficient mortgaged property to support the additional bonds, after giving effect to prior bond redemptions. The most restrictive of these tests (the property test) would permit the issuance, subject to CPUC authorization, of additional first mortgage bonds of $6.5 billion at SDG&E and $1.2 billion at SoCalGas at December 31, 2020.
SDG&E
In September 2020, SDG&E issued $800 million of 1.70% first mortgage bonds maturing in 2030 and received proceeds of $792 million (net of debt discount, underwriting discounts and debt issuance costs of $8 million). SDG&E used a portion of the proceeds from the offering to redeem $176 million, prior to a scheduled maturity in 2034, and $75 million, prior to a scheduled maturity in 2039, of tax-exempt industrial development revenue refunding bonds in December 2020. SDG&E used the remaining proceeds for general corporate purposes, including repayment of commercial paper.
In April 2020, SDG&E issued $400 million of 3.32% first mortgage bonds maturing in 2050 and received proceeds of $395 million (net of debt discount, underwriting discounts and debt issuance costs of $5 million). SDG&E used $200 million of the proceeds from the offering to repay line of credit borrowings, and the remaining proceeds for working capital and other general corporate purposes.
SoCalGas
In January 2020, SoCalGas issued $650 million of 2.55% first mortgage bonds maturing in 2030 and received proceeds of $643 million (net of debt discount, underwriting discounts and debt issuance costs of $7 million). SoCalGas used the proceeds from the offering to repay outstanding commercial paper and for other general corporate purposes.
Other Long-Term Debt
Sempra Energy
In October 2020, Sempra Energy redeemed $700 million of floating-rate notes, prior to a scheduled maturity in January 2021, utilizing a portion of the proceeds received from the sales of our South American businesses.
SDG&E
In March 2020, SDG&E borrowed $200 million under a 364-day term loan, which has a maturity date of March 18, 2021 with an option to extend the maturity date to September 17, 2021, subject to receiving the consent of the lenders. Borrowings bear interest at benchmark rates plus 80 bps (0.95% at December 31, 2020). The term loan provides SDG&E with additional liquidity outside of its committed line of credit. SDG&E classified this term loan as long-term debt based on management’s intent and ability to maintain this level of borrowing on a long-term basis by issuing long-term debt. At December 31, 2020, this term loan was included in Current Portion of Long-Term Debt and Finance Leases on SDG&E’s and Sempra Energy’s Consolidated Balance Sheets.
In the first quarter of 2020, SDG&E borrowed $200 million from its line of credit and classified it as long-term debt based on management’s intent and ability to maintain this level of borrowing on a long-term basis either supported by this credit facility or
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by issuing long-term debt. In the second quarter of 2020, SDG&E repaid these borrowings with proceeds from the issuance of first mortgage bonds, which we discuss above.
SoCalGas
In September 2020, SoCalGas issued $300 million of senior unsecured floating rate notes maturing in 2023 and received proceeds of $298 million (net of underwriting discounts and debt issuance costs of $2 million). The notes bear interest at a per annum rate equal to the 3-month LIBOR rate (or, under certain circumstances, a benchmark replacement rate), reset quarterly, plus 35 bps. SoCalGas may, at its option, redeem some or all of the floating rate notes at any time on or after March 14, 2021 at a redemption price equal to 100% of the principal amount of, plus accrued and unpaid interest on, the notes being redeemed. SoCalGas used the proceeds from the offering for general corporate purposes, including repayment of commercial paper.
Sempra Mexico
In September 2020, IEnova offered and sold in a private placement $800 million of 4.75% senior unsecured notes maturing in 2051 and received proceeds of $770 million (net of debt discount, underwriting discounts and debt issuance costs of $30 million). IEnova used the proceeds from the offering to repay line of credit borrowings and for other general corporate purposes.
In November 2019, IEnova entered into a financing agreement with International Finance Corporation and North American Development Bank to finance and/or refinance the construction of solar generation projects in Mexico. Under this agreement, in April 2020, IEnova borrowed $100 million from Japan International Cooperation Agency, with loan proceeds of $98 million (net of debt issuance costs of $2 million). The loan matures in November 2034 and bears interest based on 6-month LIBOR plus 150 bps. In April 2020, IEnova entered into a floating-to-fixed interest rate swap, resulting in a fixed rate of 2.38%. Also under the financing agreement, in June 2020, IEnova borrowed $241 million from U.S. International Development Finance Corporation, with loan proceeds of $236 million (net of debt issuance costs of $5 million). The loan matures in November 2034 and bears interest at a fixed rate of 2.90%.
Sempra LNG
In December 2020, ECA LNG Phase 1 entered into a five-year loan agreement with a syndicate of nine banks for an aggregate principal amount of up to $1.6 billion, of which $17 million was outstanding as of December 31, 2020. Proceeds from the loan are being used to finance the cost of development and construction of a one-train natural gas liquefaction export facility with a name-plate capacity of 3.25 Mtpa and initial offtake capacity of approximately 2.5 Mtpa. The loan matures in December 2025 and bears interest at a weighted-average blended rate of 2.70% plus a benchmark interest rate per annum equal to (a) the LIBOR for such interest period divided by (b) one minus the Eurodollar Reserve Percentage; provided that in no event shall the benchmark at any time be less than 0% per annum. ECA LNG Phase 1 may elect for each calendar quarter (i) three successive interest periods of one month or (ii) a single interest period of three months. Sempra Energy, IEnova and TOTAL SE have provided guarantees for repayment of the loans plus accrued and unpaid interest based on their proportionate ownership interest in ECA LNG Phase 1 of 41.7%, 41.7% and 16.6%, respectively. The effective interest rate of the loan is based on the interest payments made to external lenders and guarantee payments made to TOTAL SE as a guarantor.
As we discuss in “Shareholders’ Equity and Noncontrolling Interests – Other Noncontrolling Interests – Sempra LNG” in Note 14, notes payable totaling $22 million due October 1, 2026 were converted to equity by the minority partner in Liberty Gas Storage LLC and are no longer outstanding.
NOTE 8. INCOME TAXES
We provide our calculations of ETRs in the following table.
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| INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Income tax expense (benefit) from continuing operations | $ | 249 | $ | 315 | $ | (49) | |||||||||||
| Income from continuing operations before income taxes and equity earnings | $ | 1,489 | $ | 1,734 | $ | 714 | |||||||||||
| Equity earnings (losses), before income tax(1) | 294 | 30 | (236) | ||||||||||||||
| Pretax income | $ | 1,783 | $ | 1,764 | $ | 478 | |||||||||||
| Effective income tax rate | 14 | % | 18 | % | (10) | % | |||||||||||
| SDG&E: | |||||||||||||||||
| Income tax expense | $ | 190 | $ | 171 | $ | 173 | |||||||||||
| Income before income taxes | $ | 1,014 | $ | 945 | $ | 849 | |||||||||||
| Effective income tax rate | 19 | % | 18 | % | 20 | % | |||||||||||
| SoCalGas: | |||||||||||||||||
| Income tax expense | $ | 96 | $ | 120 | $ | 92 | |||||||||||
| Income before income taxes | $ | 601 | $ | 762 | $ | 493 | |||||||||||
| Effective income tax rate | 16 | % | 16 | % | 19 | % |
(1) We discuss how we recognize equity earnings in Note 6.
For SDG&E and SoCalGas, the CPUC requires flow-through rate-making treatment for the current income tax benefit or expense arising from certain property-related and other temporary differences between the treatment for financial reporting and income tax, which will reverse over time. Under the regulatory accounting treatment required for these flow-through temporary differences, deferred income tax assets and liabilities are not recorded to deferred income tax expense, but rather to a regulatory asset or liability, which impacts the ETR. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the ETR. The following items are subject to flow-through treatment:
▪repairs expenditures related to a certain portion of utility plant fixed assets
▪the equity portion of AFUDC, which is non-taxable
▪a portion of the cost of removal of utility plant assets
▪utility self-developed software expenditures
▪depreciation on a certain portion of utility plant assets
▪state income taxes
The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico has similar flow-through treatment.
We record income tax (expense) benefit from the transactional effects of foreign currency and inflation. Such effects are offset by net gains (losses) from foreign currency derivatives that are hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.
We present in the table below reconciliations of net U.S. statutory federal income tax rates to our ETRs.
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| RECONCILIATION OF FEDERAL INCOME TAX RATES TO EFFECTIVE INCOME TAX RATES | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| U.S. federal statutory income tax rate | 21 | % | 21 | % | 21 | % | |||||||||||
| Utility depreciation | 3 | 3 | 12 | ||||||||||||||
| Non-U.S. earnings taxed at rates different from the U.S. statutory income tax rate(1) | 2 | 3 | 10 | ||||||||||||||
| State income taxes, net of federal income tax benefit | 1 | 2 | (8) | ||||||||||||||
| Impairment losses | 1 | — | (32) | ||||||||||||||
| Effects of the TCJA | — | — | 9 | ||||||||||||||
| Unrecognized income tax benefits | — | — | 4 | ||||||||||||||
| Noncontrolling interests in tax equity arrangements | — | — | 3 | ||||||||||||||
| Resolution of prior years’ income tax items | — | — | (1) | ||||||||||||||
| Excess deferred income taxes outside of ratemaking | — | (4) | — | ||||||||||||||
| Compensation-related items | (1) | — | 3 | ||||||||||||||
| Valuation allowances | (1) | — | — | ||||||||||||||
| Allowance for equity funds used during construction | (1) | (1) | (4) | ||||||||||||||
| Amortization of excess deferred income taxes | (1) | (1) | (4) | ||||||||||||||
| Tax credits | (1) | (2) | (10) | ||||||||||||||
| Foreign exchange and inflation effects(2) | (3) | 4 | 6 | ||||||||||||||
| Utility self-developed software expenditures | (3) | (2) | (7) | ||||||||||||||
| Utility repairs expenditures | (4) | (3) | (13) | ||||||||||||||
| Other, net | 1 | (2) | 1 | ||||||||||||||
| Effective income tax rate | 14 | % | 18 | % | (10) | % | |||||||||||
| SDG&E: | |||||||||||||||||
| U.S. federal statutory income tax rate | 21 | % | 21 | % | 21 | % | |||||||||||
| State income taxes, net of federal income tax benefit | 5 | 6 | 5 | ||||||||||||||
| Depreciation | 3 | 3 | 3 | ||||||||||||||
| Excess deferred income taxes outside of ratemaking | — | (3) | — | ||||||||||||||
| Amortization of excess deferred income taxes | (1) | (1) | (1) | ||||||||||||||
| Allowance for equity funds used during construction | (2) | (1) | (2) | ||||||||||||||
| Repairs expenditures | (3) | (3) | (3) | ||||||||||||||
| Self-developed software expenditures | (4) | (3) | (2) | ||||||||||||||
| Other, net | — | (1) | (1) | ||||||||||||||
| Effective income tax rate | 19 | % | 18 | % | 20 | % | |||||||||||
| SoCalGas: | |||||||||||||||||
| U.S. federal statutory income tax rate | 21 | % | 21 | % | 21 | % | |||||||||||
| Depreciation | 5 | 4 | 7 | ||||||||||||||
| State income taxes, net of federal income tax benefit | 2 | 4 | 2 | ||||||||||||||
| Nondeductible expenditures | 2 | — | — | ||||||||||||||
| Unrecognized income tax benefits | — | — | 4 | ||||||||||||||
| Compensation-related items | — | — | 1 | ||||||||||||||
| Resolution of prior years’ income tax items | — | — | (1) | ||||||||||||||
| Excess deferred income taxes outside of ratemaking | — | (5) | — | ||||||||||||||
| Allowance for equity funds used during construction | (1) | (1) | (2) | ||||||||||||||
| Amortization of excess deferred income taxes | (1) | (1) | (2) | ||||||||||||||
| Self-developed software expenditures | (4) | (2) | (3) | ||||||||||||||
| Repairs expenditures | (7) | (4) | (7) | ||||||||||||||
| Other, net | (1) | — | (1) | ||||||||||||||
| Effective income tax rate | 16 | % | 16 | % | 19 | % |
(1) Related to operations in Mexico.
(2) Due to fluctuation of the Mexican peso against the U.S. dollar. We record income tax expense (benefit) from the transactional effects of foreign currency and inflation because of appreciation (depreciation) of the Mexican peso. We also recognize gains (losses) in Other Income, Net, on the Consolidated Statements of Operations from foreign currency derivatives that are partially hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.
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In January 2019, our board of directors approved a plan to sell our South American businesses and we completed the sales in the second quarter of 2020, as we discuss in Note 5. Prior to this decision, our repatriation estimate excluded post-2017 earnings and other basis differences related to our South American businesses. Because of our decision to sell our South American businesses, we no longer assert indefinite reinvestment of these basis differences. Accordingly, we recorded the following income tax impacts from changes in outside basis differences in our discontinued operations in South America:
▪$89 million income tax benefit in 2019 primarily related to outside basis differences existing as of the January 25, 2019 approval of our plan to sell our South American businesses; and
▪$7 million income tax benefit in 2020 compared to $51 million income tax expense in 2019 related to changes in outside basis differences from earnings and foreign currency effects since January 25, 2019.
We expect to repatriate approximately $1.3 billion of foreign undistributed earnings in the foreseeable future, and have accrued $58 million of U.S. state deferred income tax liability as of December 31, 2020 for repatriations that we expect will begin in 2021 as cash is generated. We repatriated approximately $4.7 billion, $254 million and $338 million to the U.S. in 2020, 2019 and 2018, respectively.
We have not recorded deferred income taxes with respect to remaining basis differences of approximately $1.1 billion between financial statement and income tax investment amounts in our non-U.S. subsidiaries because we consider them to be indefinitely reinvested as of December 31, 2020. The remaining basis differences are calculated pursuant to U.S. federal tax law, which may differ from tax law in California and foreign jurisdictions. It is currently not practicable to determine the hypothetical amount of tax that might be payable if the underlying basis differences were realized.
The remeasurement of deferred income tax balances at SDG&E and SoCalGas in December 2017, as a result of the TCJA, resulted in excess deferred income taxes that previously had been collected from ratepayers at the higher rate. In a January 2019 decision, the CPUC directed certain excess deferred income tax balances generated by activities outside of ratemaking be allocated to shareholders rather than ratepayers. As a result, in 2019, SDG&E and SoCalGas recorded income tax benefits of $31 million and $38 million, respectively, from the release of a portion of the regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances.
The table below presents the geographic components of pretax income.
| PRETAX INCOME – SEMPRA ENERGY CONSOLIDATED | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| By geographic components: | |||||||||||||||||
| U.S. | $ | 1,461 | $ | 1,191 | $ | (102) | |||||||||||
| Non-U.S. | 322 | 573 | 580 | ||||||||||||||
| Total(1) | $ | 1,783 | $ | 1,764 | $ | 478 |
(1) See the Income Tax Expense (Benefit) and Effective Income Tax Rates table above for the calculation of pretax income.
U.S. pretax income was lower in 2018 compared to 2020 and 2019 due to the 2018 impairment of certain assets at Sempra LNG and Sempra Renewables (discussed in Notes 5 and 12), offset by the 2018 gain on the sale of assets at Sempra Renewables (discussed in Note 5).
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The components of income tax expense are as follows.
| INCOME TAX EXPENSE (BENEFIT) | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Current: | |||||||||||||||||
| U.S. federal | $ | — | $ | — | $ | (1) | |||||||||||
| U.S. state | (22) | (14) | 67 | ||||||||||||||
| Non-U.S. | 112 | 140 | 127 | ||||||||||||||
| Total | 90 | 126 | 193 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. federal | 157 | 87 | (121) | ||||||||||||||
| U.S. state | 36 | 21 | (183) | ||||||||||||||
| Non-U.S. | (34) | 84 | 66 | ||||||||||||||
| Total | 159 | 192 | (238) | ||||||||||||||
| Deferred investment tax credits | — | (3) | (4) | ||||||||||||||
| Total income tax expense (benefit) | $ | 249 | $ | 315 | $ | (49) | |||||||||||
| SDG&E: | |||||||||||||||||
| Current: | |||||||||||||||||
| U.S. federal | $ | 121 | $ | 35 | $ | 104 | |||||||||||
| U.S. state | 34 | 31 | 30 | ||||||||||||||
| Total | 155 | 66 | 134 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. federal | 11 | 75 | 17 | ||||||||||||||
| U.S. state | 25 | 32 | 24 | ||||||||||||||
| Total | 36 | 107 | 41 | ||||||||||||||
| Deferred investment tax credits | (1) | (2) | (2) | ||||||||||||||
| Total income tax expense | $ | 190 | $ | 171 | $ | 173 | |||||||||||
| SoCalGas: | |||||||||||||||||
| Current: | |||||||||||||||||
| U.S. federal | $ | 163 | $ | 8 | $ | 4 | |||||||||||
| U.S. state | 45 | 24 | 10 | ||||||||||||||
| Total | 208 | 32 | 14 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. federal | (85) | 79 | 78 | ||||||||||||||
| U.S. state | (28) | 10 | 2 | ||||||||||||||
| Total | (113) | 89 | 80 | ||||||||||||||
| Deferred investment tax credits | 1 | (1) | (2) | ||||||||||||||
| Total income tax expense | $ | 96 | $ | 120 | $ | 92 |
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The tables below present the components of deferred income taxes:
| DEFERRED INCOME TAXES – SEMPRA ENERGY CONSOLIDATED | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Deferred income tax liabilities: | |||||||||||
| Differences in financial and tax bases of fixed assets, investments and other assets(1) | $ | 4,891 | $ | 4,052 | |||||||
| U.S. state and non-U.S. withholding tax on repatriation of foreign earnings | 46 | 153 | |||||||||
| Regulatory balancing accounts | 587 | 468 | |||||||||
| Right-of-use assets – operating leases | 144 | 131 | |||||||||
| Property taxes | 51 | 44 | |||||||||
| Other deferred income tax liabilities | 40 | 93 | |||||||||
| Total deferred income tax liabilities | 5,759 | 4,941 | |||||||||
| Deferred income tax assets: | |||||||||||
| Tax credits | 1,161 | 1,136 | |||||||||
| Net operating losses | 1,299 | 911 | |||||||||
| Postretirement benefits | 162 | 200 | |||||||||
| Compensation-related items | 169 | 161 | |||||||||
| Operating lease liabilities | 125 | 131 | |||||||||
| Other deferred income tax assets | 152 | 72 | |||||||||
| Accrued expenses not yet deductible | 130 | 52 | |||||||||
| Deferred income tax assets before valuation allowances | 3,198 | 2,663 | |||||||||
| Less: valuation allowances | 174 | 144 | |||||||||
| Total deferred income tax assets | 3,024 | 2,519 | |||||||||
| Net deferred income tax liability(2) | $ | 2,735 | $ | 2,422 |
(1) In addition to the financial over tax basis differences in fixed assets, the amount also includes financial over tax basis differences in various interests in partnerships and certain subsidiaries.
(2) At December 31, 2020 and 2019, includes $136 million and $155 million, respectively, recorded as a noncurrent asset and $2,871 million and $2,577 million, respectively, recorded as a noncurrent liability on the Consolidated Balance Sheets.
| DEFERRED INCOME TAXES – SDG&E AND SOCALGAS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| SDG&E | SoCalGas | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Deferred income tax liabilities: | |||||||||||||||||||||||
| Differences in financial and tax bases of utility plant and other assets | $ | 1,833 | $ | 1,735 | $ | 1,322 | $ | 1,246 | |||||||||||||||
| Regulatory balancing accounts | 224 | 141 | 362 | 327 | |||||||||||||||||||
| Right-of-use assets – operating leases | 28 | 32 | 21 | 22 | |||||||||||||||||||
| Property taxes | 34 | 30 | 17 | 14 | |||||||||||||||||||
| Other | 2 | 14 | 1 | 1 | |||||||||||||||||||
| Total deferred income tax liabilities | 2,121 | 1,952 | 1,723 | 1,610 | |||||||||||||||||||
| Deferred income tax assets: | |||||||||||||||||||||||
| Tax credits | 5 | 6 | 3 | 3 | |||||||||||||||||||
| Postretirement benefits | 14 | 37 | 123 | 120 | |||||||||||||||||||
| Compensation-related items | 12 | 6 | 36 | 25 | |||||||||||||||||||
| Operating lease liabilities | 28 | 32 | 21 | 22 | |||||||||||||||||||
| Bad debt allowance | 18 | 3 | 15 | 1 | |||||||||||||||||||
| State income taxes | 8 | 7 | 11 | 8 | |||||||||||||||||||
| Accrued expenses not yet deductible | 14 | 9 | 93 | 15 | |||||||||||||||||||
| Other | 3 | 4 | 15 | 13 | |||||||||||||||||||
| Total deferred income tax assets | 102 | 104 | 317 | 207 | |||||||||||||||||||
| Net deferred income tax liability | $ | 2,019 | $ | 1,848 | $ | 1,406 | $ | 1,403 |
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The following table summarizes our unused NOLs and tax credit carryforwards.
| NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS | ||||||||
| (Dollars in millions) | ||||||||
| Unused amount at December 31, 2020 | Year expiration begins | |||||||
| Sempra Energy Consolidated: | ||||||||
| U.S. federal: | ||||||||
| NOLs(1) | $ | 5,284 | 2031 | |||||
| General business tax credits(1) | 428 | 2032 | ||||||
| Foreign tax credits(2) | 694 | 2024 | ||||||
| U.S. state(2): | ||||||||
| NOLs | 3,047 | 2021 | ||||||
| General business tax credits | 39 | 2021 | ||||||
| Non-U.S.(2) – NOLs | 126 | 2021 | ||||||
(1) We have recorded deferred income tax benefits on these NOLs and tax credits, in total, because we currently believe they will be realized on a more-likely-than-not-basis.
(2) We have not recorded deferred income tax benefits on a portion of these NOLs and tax credits because we currently believe they will not be realized on a more-likely-than-not-basis, as discussed below.
A valuation allowance is recorded when, based on more-likely-than-not criteria, negative evidence outweighs positive evidence with regard to our ability to realize a deferred income tax asset in the future. Of the valuation allowances recorded to date, the negative evidence outweighs the positive evidence primarily due to cumulative pretax losses in various U.S. state and non-U.S. jurisdictions resulting in deferred income tax assets that we currently do not believe will be realized on a more-likely-than-not basis. The following table provides the valuation allowances that we recorded against a portion of our total deferred income tax assets shown above in the “Deferred Income Taxes – Sempra Energy Consolidated” table.
| VALUATION ALLOWANCES | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| U.S. federal | $ | 118 | $ | 90 | |||||||
| U.S. state | 32 | 33 | |||||||||
| Non-U.S. | 24 | 21 | |||||||||
| $ | 174 | $ | 144 |
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Following is a reconciliation of the changes in unrecognized income tax benefits and the potential effect on our ETR for the years ended December 31:
| RECONCILIATION OF UNRECOGNIZED INCOME TAX BENEFITS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Balance at January 1 | $ | 93 | $ | 119 | $ | 89 | |||||||||||
| Increase in prior period tax positions | 3 | 5 | 7 | ||||||||||||||
| Decrease in prior period tax positions | (1) | — | (1) | ||||||||||||||
| Increase in current period tax positions | 4 | 2 | 24 | ||||||||||||||
| Settlements with taxing authorities | — | (32) | — | ||||||||||||||
| Expiration of statutes of limitations | — | (1) | — | ||||||||||||||
| Balance at December 31 | $ | 99 | $ | 93 | $ | 119 | |||||||||||
| Of December 31 balance, amounts related to tax positions that if recognized in future years would | |||||||||||||||||
| decrease the effective tax rate(1) | $ | (87) | $ | (81) | $ | (107) | |||||||||||
| increase the effective tax rate(1) | 31 | 27 | 24 | ||||||||||||||
| SDG&E: | |||||||||||||||||
| Balance at January 1 | $ | 12 | $ | 11 | $ | 10 | |||||||||||
| Increase in prior period tax positions | 1 | 1 | 1 | ||||||||||||||
| Balance at December 31 | $ | 13 | $ | 12 | $ | 11 | |||||||||||
| Of December 31 balance, amounts related to tax positions that if recognized in future years would | |||||||||||||||||
| decrease the effective tax rate(1) | $ | (10) | $ | (9) | $ | (9) | |||||||||||
| increase the effective tax rate(1) | 1 | 1 | 1 | ||||||||||||||
| SoCalGas: | |||||||||||||||||
| Balance at January 1 | $ | 64 | $ | 61 | $ | 35 | |||||||||||
| Increase in prior period tax positions | 1 | 1 | 2 | ||||||||||||||
| Increase in current period tax positions | 3 | 2 | 24 | ||||||||||||||
| Balance at December 31 | $ | 68 | $ | 64 | $ | 61 | |||||||||||
| Of December 31 balance, amounts related to tax positions that if recognized in future years would | |||||||||||||||||
| decrease the effective tax rate(1) | $ | (59) | $ | (55) | $ | (51) | |||||||||||
| increase the effective tax rate(1) | 30 | 26 | 23 |
(1) Includes temporary book and tax differences that are treated as flow-through for ratemaking purposes, as discussed above.
It is reasonably possible that within the next 12 months, unrecognized income tax benefits could decrease due to the following:
| POSSIBLE DECREASES IN UNRECOGNIZED INCOME TAX BENEFITS WITHIN 12 MONTHS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| At December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Expiration of statutes of limitations on tax assessments | $ | — | $ | — | $ | (1) | |||||||||||
| Potential resolution of audit issues with various U.S. federal, state and local and non-U.S. taxing authorities | (8) | (8) | (40) | ||||||||||||||
| $ | (8) | $ | (8) | $ | (41) | ||||||||||||
| SDG&E: | |||||||||||||||||
| Potential resolution of audit issues with various U.S. federal, state and local taxing authorities | $ | (6) | $ | (6) | $ | (6) | |||||||||||
| SoCalGas: | |||||||||||||||||
| Potential resolution of audit issues with various U.S. federal, state and local taxing authorities | $ | (2) | $ | (2) | $ | (2) |
Amounts accrued for interest and penalties associated with unrecognized income tax benefits are included in Income Tax Expense on the Consolidated Statements of Operations. Sempra Energy Consolidated accrued negligible amounts and $1 million for
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interest expense and penalties at December 31, 2020 and 2019, respectively, on the Consolidated Balance Sheets, and recorded $1 million of interest expense and penalties in 2018 and negligible amounts in each of 2020 and 2019 on the Consolidated Statements of Operations. SDG&E and SoCalGas each accrued negligible amounts for interest expense and penalties at December 31, 2020 and 2019 on the Consolidated Balance Sheets, and recorded negligible amounts of interest expense and penalties in each of 2020, 2019 and 2018 on the Consolidated Statements of Operations.
INCOME TAX AUDITS
Sempra Energy is subject to U.S. federal income tax as well as income tax of multiple state and non-U.S. jurisdictions. We remain subject to examination for U.S. federal tax years after 2016. We are subject to examination by major state tax jurisdictions for tax years after 2012. Certain major non-U.S. income tax returns for tax years 2013 through the present are open to examination. We are also open to examination for non-U.S. income tax returns related to our prior interest in our commodities business, which we divested in 2010, for years 1999 through 2010.
SDG&E and SoCalGas are subject to U.S. federal income tax and state income tax. They remain subject to examination for U.S. federal tax years after 2016 and state tax years after 2012.
In addition, Sempra Energy has filed protests to contest proposed state audit adjustments for tax years 2009 through 2012. The pre-2013 tax years for our major state tax jurisdictions are closed to new issues; therefore, no additional tax may be assessed by the taxing authorities for these tax years.
NOTE 9. EMPLOYEE BENEFIT PLANS
For our employee benefit plans, we:
▪recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the balance sheet;
▪measure a plan’s assets and its obligations that determine its funded status as of the end of the fiscal year; and
▪recognize changes in the funded status of pension and PBOP plans in the year in which the changes occur. Generally, those changes are reported in OCI and as a separate component of shareholders’ equity.
The detailed information presented below covers the employee benefit plans of primarily Sempra Energy and its consolidated subsidiaries.
Sempra Energy has funded and unfunded noncontributory traditional defined benefit and cash balance plans, including separate plans for SDG&E and SoCalGas, which collectively cover all eligible employees, including a member of the Sempra Energy board of directors who was a participant in a predecessor plan on or before June 1, 1998. Pension benefits under the traditional defined benefit plans are based on service and final average earnings, while the cash balance plans provide benefits using a career average earnings methodology.
IEnova has an unfunded noncontributory defined benefit plan covering all employees that provides defined benefits to retirees based on date of hire, years of service and final average earnings.
Sempra Energy also has PBOP plans, including separate plans for SDG&E and SoCalGas, which collectively cover all domestic and certain foreign employees. The life insurance plans are both contributory and noncontributory, and the health care plans are contributory. Participants’ contributions are adjusted annually. Other postretirement benefits include medical benefits for retirees’ spouses.
Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. We review these assumptions on an annual basis and update them as appropriate. We consider current market conditions, including interest rates, in making these assumptions. We use a December 31 measurement date for all of our plans.
RABBI TRUST
In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $512 million and $488 million at December 31, 2020 and 2019, respectively.
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PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Benefit Plan Amendments Affecting 2019
In 2019, certain executive participants in a company nonqualified pension plan became eligible in this same plan for Supplemental Executive Retirement Plan benefits. This was treated as a plan amendment and increased the recorded pension liability by $5 million at Sempra Energy, $3 million at SDG&E and $2 million at SoCalGas in 2019.
Settlement Accounting for Lump Sum Payments
When applicable, we record settlement charges for lump sum payments from our nonqualified pension plans that are in excess of the respective plan’s service cost plus interest cost. Sempra Energy Consolidated recorded settlement charges of $22 million and $24 million in 2020 and 2019, respectively, and Sempra Energy Consolidated and SDG&E recorded settlement charges of $12 million and $4 million, respectively, in 2018.
Sale of Qualified Pension Plan Annuity Contracts
In March 2018, an insurance company purchased annuities for certain current annuitants in the SDG&E and SoCalGas qualified pension plans and assumed the obligation for payment of these annuities. At SDG&E in the first quarter of 2018 and at SoCalGas in the second quarter of 2018, the liability transferred for these annuities, plus the total year-to-date lump-sum payments, exceeded the settlement threshold, which triggered settlement accounting. This resulted in settlement charges in net periodic benefit cost of $54 million at Sempra Energy Consolidated, including $22 million at SDG&E and $32 million at SoCalGas. The settlement charges were recorded as regulatory assets on the Consolidated Balance Sheets.
Special Termination Benefits Affecting 2018
In 2018, certain nonrepresented employees age 62 or older with 5 years of service or age 55 to 61 with 10 years of service that retired under the Voluntary Retirement Enhancement Program offered that year received an additional postretirement health benefit in the form of a $100,000 Health Reimbursement Account. We treated the benefit obligation attributable to the Health Reimbursement Account as a special termination benefit. This resulted in increases to the recorded liability for PBOP and net periodic benefit cost of $5 million for Sempra Energy Consolidated, $3 million for SDG&E and $2 million for SoCalGas in 2018.
Oncor
In 2020 and in each of 2019 and 2018, we had $11 million and $27 million, respectively, in AOCI representing an actuarial loss related to Oncor’s pension plan.
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Benefit Obligations and Assets
The following three tables provide a reconciliation of the changes in the plans’ projected benefit obligations and the fair value of assets during 2020 and 2019, and a statement of the funded status at December 31, 2020 and 2019:
| PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS | |||||||||||||||||||||||
| SEMPRA ENERGY CONSOLIDATED | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| CHANGE IN PROJECTED BENEFIT OBLIGATION | |||||||||||||||||||||||
| Net obligation at January 1 | $ | 3,768 | $ | 3,339 | $ | 913 | $ | 868 | |||||||||||||||
| Service cost | 129 | 110 | 18 | 17 | |||||||||||||||||||
| Interest cost | 129 | 139 | 33 | 36 | |||||||||||||||||||
| Contributions from plan participants | — | — | 22 | 21 | |||||||||||||||||||
| Actuarial loss | 351 | 445 | 79 | 45 | |||||||||||||||||||
| Plan amendments | — | 5 | — | — | |||||||||||||||||||
| Benefit payments | (93) | (93) | (74) | (72) | |||||||||||||||||||
| Settlements | (207) | (177) | (2) | (2) | |||||||||||||||||||
| Net obligation at December 31 | 4,077 | 3,768 | 989 | 913 | |||||||||||||||||||
| CHANGE IN PLAN ASSETS | |||||||||||||||||||||||
| Fair value of plan assets at January 1 | 2,662 | 2,160 | 1,281 | 1,108 | |||||||||||||||||||
| Actual return on plan assets | 350 | 496 | 164 | 218 | |||||||||||||||||||
| Employer contributions | 290 | 276 | 8 | 8 | |||||||||||||||||||
| Contributions from plan participants | — | — | 22 | 21 | |||||||||||||||||||
| Benefit payments | (93) | (93) | (74) | (72) | |||||||||||||||||||
| Settlements | (207) | (177) | (2) | (2) | |||||||||||||||||||
| Fair value of plan assets at December 31 | 3,002 | 2,662 | 1,399 | 1,281 | |||||||||||||||||||
| Funded status at December 31 | $ | (1,075) | $ | (1,106) | $ | 410 | $ | 368 | |||||||||||||||
| Net recorded (liability) asset at December 31 | $ | (1,075) | $ | (1,106) | $ | 410 | $ | 368 |
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| PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS | |||||||||||||||||||||||
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| CHANGE IN PROJECTED BENEFIT OBLIGATION | |||||||||||||||||||||||
| Net obligation at January 1 | $ | 895 | $ | 814 | $ | 177 | $ | 170 | |||||||||||||||
| Service cost | 31 | 30 | 4 | 4 | |||||||||||||||||||
| Interest cost | 30 | 34 | 6 | 7 | |||||||||||||||||||
| Contributions from plan participants | — | — | 8 | 7 | |||||||||||||||||||
| Actuarial loss | 37 | 61 | 17 | 7 | |||||||||||||||||||
| Plan amendments | — | 3 | — | — | |||||||||||||||||||
| Benefit payments | (18) | (18) | (20) | (18) | |||||||||||||||||||
| Settlements | (52) | (39) | — | — | |||||||||||||||||||
| Transfer of liability from other plans | (10) | 10 | 1 | — | |||||||||||||||||||
| Net obligation at December 31 | 913 | 895 | 193 | 177 | |||||||||||||||||||
| CHANGE IN PLAN ASSETS | |||||||||||||||||||||||
| Fair value of plan assets at January 1 | 739 | 600 | 197 | 172 | |||||||||||||||||||
| Actual return on plan assets | 94 | 135 | 26 | 36 | |||||||||||||||||||
| Employer contributions | 52 | 52 | 1 | — | |||||||||||||||||||
| Contributions from plan participants | — | — | 8 | 7 | |||||||||||||||||||
| Benefit payments | (18) | (18) | (20) | (18) | |||||||||||||||||||
| Settlements | (52) | (39) | — | — | |||||||||||||||||||
| Transfer of assets from other plans | 4 | 9 | 1 | — | |||||||||||||||||||
| Fair value of plan assets at December 31 | 819 | 739 | 213 | 197 | |||||||||||||||||||
| Funded status at December 31 | $ | (94) | $ | (156) | $ | 20 | $ | 20 | |||||||||||||||
| Net recorded (liability) asset at December 31 | $ | (94) | $ | (156) | $ | 20 | $ | 20 |
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| PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS | |||||||||||||||||||||||
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| CHANGE IN PROJECTED BENEFIT OBLIGATION | |||||||||||||||||||||||
| Net obligation at January 1 | $ | 2,526 | $ | 2,148 | $ | 688 | $ | 646 | |||||||||||||||
| Service cost | 86 | 68 | 14 | 12 | |||||||||||||||||||
| Interest cost | 88 | 91 | 25 | 27 | |||||||||||||||||||
| Contributions from plan participants | — | — | 14 | 13 | |||||||||||||||||||
| Actuarial loss | 282 | 345 | 57 | 39 | |||||||||||||||||||
| Plan amendments | — | 2 | — | — | |||||||||||||||||||
| Benefit payments | (60) | (59) | (49) | (49) | |||||||||||||||||||
| Settlements | (105) | (65) | — | — | |||||||||||||||||||
| Transfer of liability to other plans | 12 | (4) | — | — | |||||||||||||||||||
| Net obligation at December 31 | 2,829 | 2,526 | 749 | 688 | |||||||||||||||||||
| CHANGE IN PLAN ASSETS | |||||||||||||||||||||||
| Fair value of plan assets at January 1 | 1,737 | 1,385 | 1,059 | 916 | |||||||||||||||||||
| Actual return on plan assets | 243 | 320 | 134 | 178 | |||||||||||||||||||
| Employer contributions | 152 | 152 | 1 | 1 | |||||||||||||||||||
| Contributions from plan participants | — | — | 14 | 13 | |||||||||||||||||||
| Benefit payments | (60) | (59) | (49) | (49) | |||||||||||||||||||
| Settlements | (105) | (65) | — | — | |||||||||||||||||||
| Transfer of assets from other plans | 2 | 4 | — | — | |||||||||||||||||||
| Fair value of plan assets at December 31 | 1,969 | 1,737 | 1,159 | 1,059 | |||||||||||||||||||
| Funded status at December 31 | $ | (860) | $ | (789) | $ | 410 | $ | 371 | |||||||||||||||
| Net recorded (liability) asset at December 31 | $ | (860) | $ | (789) | $ | 410 | $ | 371 |
Actuarial losses (gains) fluctuate based on changes in assumptions that we describe below in “Assumptions for Pension and Other Postretirement Benefit Plans” and updates to census data. In 2020, 2019 and 2018, the Society of Actuaries released updated mortality improvement projection scales, reflecting changes to projected observed longevity improvements in its mortality tables. We have incorporated these assumptions, adjusted for the Sempra Energy companies’ actual mortality experience, in our calculations for each of those years.
▪Actuarial losses in pension plans at Sempra Energy Consolidated in 2020 were driven primarily by a decrease in discount rates at Sempra Energy, SDG&E and SoCalGas and a decrease in the lump-sum conversion rate at SoCalGas, along with updated census data at Sempra Energy and SoCalGas. These actuarial losses were offset by actuarial gains at Sempra Energy, SDG&E and SoCalGas due to a decrease in the interest crediting rate for the cash balance plans.
▪Actuarial losses in PBOP plans at Sempra Energy Consolidated in 2020 were driven primarily by a decrease in discount rates at Sempra Energy, SDG&E and SoCalGas and updated census data at SoCalGas. These actuarial losses were offset by a reduction in the 2021 expected health care costs at SoCalGas.
Net Assets and Liabilities
The assets and liabilities of the pension and PBOP plans are affected by changing market conditions as well as when actual plan experience is different than assumed. Such events result in investment gains and losses, which we defer and recognize in pension and other postretirement benefit costs over a period of years. Our funded pension and PBOP plans use the asset smoothing method, except for those at SDG&E. This method develops an asset value that recognizes realized and unrealized investment gains and losses over a three-year period. This adjusted asset value, known as the market-related value of assets, is used in conjunction with an expected long-term rate of return to determine the expected return-on-assets component of net periodic benefit cost. SDG&E does not use the asset smoothing method, but rather recognizes realized and unrealized investment gains and losses during the current year.
The 10% corridor accounting method is used at Sempra Energy Consolidated, SDG&E and SoCalGas. Under the corridor accounting method, if as of the beginning of a year unrecognized net gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets, the excess is amortized over the average remaining service period of
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active participants. The asset smoothing and 10% corridor accounting methods help mitigate volatility of net periodic benefit costs from year to year.
Defined benefit pension and other postretirement plans with an aggregated overfunded status are recognized as an asset and with an aggregated underfunded status are recognized as a liability; unrecognized changes in these assets and/or liabilities are normally recorded in AOCI on the balance sheet. The California Utilities record regulatory assets and liabilities that offset the funded pension and other postretirement plans’ assets or liabilities, as these costs are expected to be recovered in future utility rates based on decisions by regulatory agencies.
The California Utilities record annual pension and other postretirement net periodic benefit costs equal to the contributions to their qualified plans as authorized by the CPUC. The annual contributions to the pension plans are the greater of:
▪a minimum required funding amount as required by the IRS;
▪the amount required to maintain an 85% Adjusted Funding Target Attainment Percentage as defined by the Pension Protection Act of 2006, as amended; or
▪beginning January 1, 2019 and for the duration of the 2019 GRC cycle, a fixed amount equal to the estimated annual service cost as defined by U.S. GAAP plus one year of a 14-year amortization of the unfunded projected benefit obligation of the pension plan as of January 1, 2019, and limited to an annual amount that keeps the fair value of the pension plan assets from exceeding 110% of the pension benefit obligation of the plan.
The annual contributions to PBOP plans are equal to the lesser of the maximum tax deductible amount or the net periodic cost calculated in accordance with U.S. GAAP for pension and PBOP plans. Any differences between booked net periodic benefit cost and amounts contributed to the pension and other postretirement plans for the California Utilities are disclosed as regulatory adjustments in accordance with U.S. GAAP for rate-regulated entities.
The net (liability) asset is included in the following categories on the Consolidated Balance Sheets at December 31:
| PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS, NET OF PLAN ASSETS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Noncurrent assets | $ | — | $ | — | $ | 430 | $ | 391 | |||||||||||||||
| Current liabilities | (35) | (59) | (1) | (3) | |||||||||||||||||||
| Noncurrent liabilities | (1,040) | (1,047) | (19) | (20) | |||||||||||||||||||
| Net recorded (liability) asset | $ | (1,075) | $ | (1,106) | $ | 410 | $ | 368 | |||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Noncurrent assets | $ | — | $ | — | $ | 20 | $ | 20 | |||||||||||||||
| Current liabilities | (2) | (3) | — | — | |||||||||||||||||||
| Noncurrent liabilities | (92) | (153) | — | — | |||||||||||||||||||
| Net recorded (liability) asset | $ | (94) | $ | (156) | $ | 20 | $ | 20 | |||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Noncurrent assets | $ | — | $ | — | $ | 410 | $ | 371 | |||||||||||||||
| Current liabilities | (7) | (4) | — | — | |||||||||||||||||||
| Noncurrent liabilities | (853) | (785) | — | — | |||||||||||||||||||
| Net recorded (liability) asset | $ | (860) | $ | (789) | $ | 410 | $ | 371 |
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Amounts recorded in AOCI at December 31, net of income tax effects and amounts recorded as regulatory assets, are as follows:
| AMOUNTS IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sempra Energy Consolidated**(1)****:** | |||||||||||||||||||||||
| Net actuarial (loss) gain | $ | (102) | $ | (113) | $ | 8 | $ | 10 | |||||||||||||||
| Prior service cost | (11) | (14) | — | — | |||||||||||||||||||
| Total | $ | (113) | $ | (127) | $ | 8 | $ | 10 | |||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Net actuarial loss | $ | (8) | $ | (9) | |||||||||||||||||||
| Prior service cost | (2) | (7) | |||||||||||||||||||||
| Total | $ | (10) | $ | (16) | |||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Net actuarial loss | $ | (14) | $ | (7) | |||||||||||||||||||
| Prior service cost | (4) | (3) | |||||||||||||||||||||
| Total | $ | (18) | $ | (10) |
(1) Includes discontinued operations.
Sempra Energy, SDG&E and SoCalGas each have a funded pension plan. The following table shows the obligations of funded pension plans with benefit obligations in excess of plan assets at December 31:
| OBLIGATIONS OF FUNDED PENSION PLANS | |||||||||||
| (Dollars in millions) | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Projected benefit obligation | $ | 3,679 | $ | 3,578 | |||||||
| Accumulated benefit obligation | 3,265 | 3,229 | |||||||||
| Fair value of plan assets | 2,788 | 2,662 | |||||||||
| SDG&E: | |||||||||||
| Projected benefit obligation | $ | 887 | $ | 861 | |||||||
| Accumulated benefit obligation | 834 | 818 | |||||||||
| Fair value of plan assets | 819 | 739 | |||||||||
| SoCalGas: | |||||||||||
| Projected benefit obligation | $ | 2,792 | $ | 2,505 | |||||||
| Accumulated benefit obligation | 2,431 | 2,208 | |||||||||
| Fair value of plan assets | 1,969 | 1,737 |
We also have unfunded pension plans at Sempra Energy, SDG&E, SoCalGas and IEnova. The following table shows the obligations of unfunded pension plans at December 31:
| OBLIGATIONS OF UNFUNDED PENSION PLANS | |||||||||||
| (Dollars in millions) | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Projected benefit obligation | $ | 184 | $ | 190 | |||||||
| Accumulated benefit obligation | 146 | 158 | |||||||||
| SDG&E: | |||||||||||
| Projected benefit obligation | $ | 26 | $ | 34 | |||||||
| Accumulated benefit obligation | 22 | 27 | |||||||||
| SoCalGas: | |||||||||||
| Projected benefit obligation | $ | 37 | $ | 21 | |||||||
| Accumulated benefit obligation | 31 | 17 |
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Sempra Energy, SDG&E and SoCalGas each have a funded other postretirement benefit plan. The following table shows the obligations of funded other postretirement benefit plans with accumulated postretirement benefit obligations in excess of plan assets at December 31:
| OBLIGATIONS OF FUNDED OTHER POSTRETIREMENT BENEFIT PLANS | |||||||||||
| (Dollars in millions) | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Accumulated postretirement benefit obligation | $ | 33 | $ | 32 | |||||||
| Fair value of plan assets | 27 | 25 |
We also have unfunded other postretirement benefit plans at Sempra Energy. The following table shows the obligations of unfunded other postretirement benefit plans at December 31:
| OBLIGATIONS OF UNFUNDED OTHER POSTRETIREMENT BENEFIT PLANS | |||||||||||
| (Dollars in millions) | |||||||||||
| 2020 | 2019 | ||||||||||
| Sempra Energy Consolidated: | |||||||||||
| Accumulated postretirement benefit obligation | $ | 14 | $ | 16 |
Net Periodic Benefit Cost
The following tables provide the components of net periodic benefit cost and pretax amounts recognized in OCI for the years ended December 31:
| NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI | |||||||||||||||||||||||||||||||||||
| SEMPRA ENERGY CONSOLIDATED | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| NET PERIODIC BENEFIT COST | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 129 | $ | 110 | $ | 124 | $ | 18 | $ | 17 | $ | 21 | |||||||||||||||||||||||
| Interest cost | 129 | 139 | 140 | 33 | 36 | 36 | |||||||||||||||||||||||||||||
| Expected return on assets | (169) | (144) | (157) | (55) | (71) | (70) | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | 12 | 12 | 11 | (2) | — | 1 | |||||||||||||||||||||||||||||
| Actuarial loss (gain) | 35 | 36 | 22 | (10) | (10) | (6) | |||||||||||||||||||||||||||||
| Settlement charges | 22 | 28 | 66 | — | — | — | |||||||||||||||||||||||||||||
| Special termination benefits | — | — | — | — | — | 5 | |||||||||||||||||||||||||||||
| Net periodic benefit cost (credit) | 158 | 181 | 206 | (16) | (28) | (13) | |||||||||||||||||||||||||||||
| Regulatory adjustment | 91 | 77 | (30) | 16 | 29 | 17 | |||||||||||||||||||||||||||||
| Total expense recognized | 249 | 258 | 176 | — | 1 | 4 | |||||||||||||||||||||||||||||
| CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OCI (1) | |||||||||||||||||||||||||||||||||||
| Net loss (gain) | 28 | 17 | 56 | 1 | (3) | (4) | |||||||||||||||||||||||||||||
| Prior service cost | — | 5 | 12 | — | — | — | |||||||||||||||||||||||||||||
| Amortization of actuarial (loss) gain | (14) | (13) | (12) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service cost | (4) | (3) | (2) | — | — | — | |||||||||||||||||||||||||||||
| Settlements | (22) | (28) | (12) | — | — | — | |||||||||||||||||||||||||||||
| Total recognized in OCI | (12) | (22) | 42 | 1 | (3) | (4) | |||||||||||||||||||||||||||||
| Total recognized in net periodic benefit cost and OCI | $ | 237 | $ | 236 | $ | 218 | $ | 1 | $ | (2) | $ | — |
(1) Includes discontinued operations.
F-98
| NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI | |||||||||||||||||||||||||||||||||||
| SAN DIEGO GAS & ELECTRIC COMPANY | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| NET PERIODIC BENEFIT COST | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 31 | $ | 30 | $ | 30 | $ | 4 | $ | 4 | $ | 5 | |||||||||||||||||||||||
| Interest cost | 30 | 34 | 35 | 6 | 7 | 7 | |||||||||||||||||||||||||||||
| Expected return on assets | (49) | (38) | (47) | (10) | (11) | (13) | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service cost | 2 | 3 | 2 | — | 2 | 3 | |||||||||||||||||||||||||||||
| Actuarial loss (gain) | 3 | 11 | 1 | (3) | (2) | (3) | |||||||||||||||||||||||||||||
| Settlement charges | — | — | 26 | — | — | — | |||||||||||||||||||||||||||||
| Special termination benefits | — | — | — | — | — | 3 | |||||||||||||||||||||||||||||
| Net periodic benefit cost | 17 | 40 | 47 | (3) | — | 2 | |||||||||||||||||||||||||||||
| Regulatory adjustment | 38 | 14 | (8) | 3 | — | — | |||||||||||||||||||||||||||||
| Total expense recognized | 55 | 54 | 39 | — | — | 2 | |||||||||||||||||||||||||||||
| CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OCI | |||||||||||||||||||||||||||||||||||
| Net loss (gain) | 6 | 5 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Prior service cost | — | 2 | 8 | — | — | — | |||||||||||||||||||||||||||||
| Transfer of actuarial loss | (7) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Transfer of prior service cost | (5) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Amortization of actuarial loss | (1) | — | (1) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service cost | (1) | (1) | — | — | — | — | |||||||||||||||||||||||||||||
| Settlements | — | — | (4) | — | — | — | |||||||||||||||||||||||||||||
| Total recognized in OCI | (8) | 6 | 2 | — | — | — | |||||||||||||||||||||||||||||
| Total recognized in net periodic benefit cost and OCI | $ | 47 | $ | 60 | $ | 41 | $ | — | $ | — | $ | 2 |
| NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI | |||||||||||||||||||||||||||||||||||
| SOUTHERN CALIFORNIA GAS COMPANY | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| NET PERIODIC BENEFIT COST | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 86 | $ | 68 | $ | 81 | $ | 14 | $ | 12 | $ | 15 | |||||||||||||||||||||||
| Interest cost | 88 | 91 | 92 | 25 | 27 | 27 | |||||||||||||||||||||||||||||
| Expected return on assets | (107) | (94) | (98) | (43) | (58) | (56) | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | 8 | 8 | 8 | (2) | (2) | (3) | |||||||||||||||||||||||||||||
| Actuarial loss (gain) | 26 | 16 | 13 | (7) | (8) | (2) | |||||||||||||||||||||||||||||
| Settlement charges | — | — | 32 | — | — | — | |||||||||||||||||||||||||||||
| Special termination benefits | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||
| Net periodic benefit cost (credit) | 101 | 89 | 128 | (13) | (29) | (17) | |||||||||||||||||||||||||||||
| Regulatory adjustment | 53 | 63 | (22) | 13 | 29 | 17 | |||||||||||||||||||||||||||||
| Total expense recognized | 154 | 152 | 106 | — | — | — | |||||||||||||||||||||||||||||
| CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OCI | |||||||||||||||||||||||||||||||||||
| Net loss | 6 | 2 | 1 | — | — | — | |||||||||||||||||||||||||||||
| Prior service cost | — | 3 | — | — | — | — | |||||||||||||||||||||||||||||
| Transfer of actuarial loss | 5 | (4) | — | — | — | — | |||||||||||||||||||||||||||||
| Transfer of prior service cost | 3 | (1) | — | — | — | — | |||||||||||||||||||||||||||||
| Amortization of actuarial loss | (1) | (1) | — | — | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service cost | (1) | — | (1) | — | — | — | |||||||||||||||||||||||||||||
| Total recognized in OCI | 12 | (1) | — | — | — | — | |||||||||||||||||||||||||||||
| Total recognized in net periodic benefit cost and OCI | $ | 166 | $ | 151 | $ | 106 | $ | — | $ | — | $ | — |
F-99
Assumptions for Pension and Other Postretirement Benefit Plans
Benefit Obligation and Net Periodic Benefit Cost
Except for the IEnova plans, we develop the discount rate assumptions using a bond selection-settlement portfolio approach. This approach develops a discount rate by selecting a portfolio of high quality corporate bonds that generate sufficient cash flows to provide for projected benefit payments of the plan. The selected bond portfolio is derived from a universe of corporate bonds with a Bloomberg Composite of AA or higher. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plans’ projected benefit payments discounted at this rate with the market value of the bonds selected.
We develop the discount rate assumptions for the plans at IEnova by constructing a synthetic government zero coupon bond yield curve from the available market data, based on duration matching, and we add a risk spread to allow for the yields of high-quality corporate bonds. Such method is required when there is no deep market for high quality corporate bonds.
Long-term return on assets is based on the weighted-average of the plans’ investment allocation as of the measurement date and the expected returns for those asset types.
Interest crediting rate is based on an average 30-year Treasury bond from the month of November of the preceding year.
We amortize prior service cost using straight line amortization over average future service (or average expected lifetime for plans where participants are substantially inactive employees), which is an alternative method allowed under U.S. GAAP.
The significant assumptions affecting benefit obligation and net periodic benefit cost are as follows:
| WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATION | |||||||||||||||||||||||
| AT DECEMBER 31 | |||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Discount rate | 2.78 | % | 3.49 | % | 2.88 | % | 3.54 | % | |||||||||||||||
| Interest crediting rate(1)(2) | 1.62 | 2.28 | 1.62 | 2.28 | |||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 | |||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Discount rate | 2.73 | % | 3.44 | % | 2.85 | % | 3.55 | % | |||||||||||||||
| Interest crediting rate(1)(2) | 1.62 | 2.28 | 1.62 | 2.28 | |||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 | |||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Discount rate | 2.79 | % | 3.50 | % | 2.90 | % | 3.55 | % | |||||||||||||||
| Interest crediting rate(1)(2) | 1.62 | 2.28 | 1.62 | 2.28 | |||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 | 2.70-10.00 |
(1) Interest crediting rate for pension benefits applies only to funded cash balance plans.
(2) Interest crediting rate for other postretirement benefits applies only to interest bearing health retirement accounts at SDG&E and SoCalGas.
F-100
| WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST | |||||||||||||||||||||||||||||||||||
| YEARS ENDED DECEMBER 31 | |||||||||||||||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||||||||||||||
| Discount rate | 3.49 | % | 4.29 | % | 3.64 | % | 3.54 | % | 4.29 | % | 3.68 | % | |||||||||||||||||||||||
| Expected return on plan assets | 7.00 | 7.00 | 7.00 | 4.64 | 6.48 | 6.49 | |||||||||||||||||||||||||||||
| Interest crediting rate(1)(2) | 2.28 | 3.36 | 2.80 | 2.28 | 3.36 | 2.80 | |||||||||||||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 | |||||||||||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||||||||||||||
| Discount rate | 3.44 | % | 4.29 | % | 3.64 | % | 3.55 | % | 4.30 | % | 3.65 | % | |||||||||||||||||||||||
| Expected return on plan assets | 7.00 | 7.00 | 7.00 | 5.51 | 6.92 | 6.94 | |||||||||||||||||||||||||||||
| Interest crediting rate(1)(2) | 2.28 | 3.36 | 2.80 | 2.28 | 3.36 | 2.80 | |||||||||||||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 | |||||||||||||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||||||||||||||
| Discount rate | 3.50 | % | 4.30 | % | 3.65 | % | 3.55 | % | 4.30 | % | 3.70 | % | |||||||||||||||||||||||
| Expected return on plan assets | 7.00 | 7.00 | 7.00 | 4.41 | 6.38 | 6.38 | |||||||||||||||||||||||||||||
| Interest crediting rate(1)(2) | 2.28 | 3.36 | 2.80 | 2.28 | 3.36 | 2.80 | |||||||||||||||||||||||||||||
| Rate of compensation increase | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 | 2.70-10.00 | 2.00-10.00 | 2.00-10.00 |
(1) Interest crediting rate for pension benefits applies only to funded cash balance plans.
(2) Interest crediting rate for other postretirement benefits applies only to interest bearing health retirement accounts at SDG&E and SoCalGas.
Health Care Cost Trend Rates
Assumed health care cost trend rates have a significant effect on the amounts that we report for the health care plan costs. Following are the health care cost trend rates applicable to our postretirement benefit plans:
| ASSUMED HEALTH CARE COST TREND RATES | |||||||||||||||||||||||||||||||||||
| AT DECEMBER 31 | |||||||||||||||||||||||||||||||||||
| Other postretirement benefit plans | |||||||||||||||||||||||||||||||||||
| Pre-65 retirees | Retirees aged 65 years and older | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Health care cost trend rate assumed for next year | 6.00 | % | 6.25 | % | 6.50 | % | 4.75 | % | 4.75 | % | 4.75 | % | |||||||||||||||||||||||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend) | 4.75 | % | 4.75 | % | 4.75 | % | 4.50 | % | 4.50 | % | 4.50 | % | |||||||||||||||||||||||
| Year the rate reaches the ultimate trend | 2025 | 2025 | 2025 | 2022 | 2022 | 2022 |
Plan Assets
Investment Allocation Strategy for Sempra Energy’s Pension Master Trust
Sempra Energy’s pension master trust holds the investments for our pension plans and a portion of the investments for our PBOP plans. We maintain additional trusts, as we discuss below, for certain of the California Utilities’ PBOP plans. Other than through indexing strategies, the trusts do not invest in securities of Sempra Energy.
The current asset allocation objective for the pension master trust is to protect the funded status of the plans while generating sufficient returns to cover future benefit payments and accruals. We assess the portfolio performance by comparing actual returns with relevant benchmarks. Currently, the pension plans’ target asset allocations are:
▪33% domestic equity
▪22% international equity
▪21% long credit
▪10% diversified real assets
▪7% return-seeking credit
▪5% ultra-long duration government securities
▪2% other diversifying assets
F-101
The asset allocation of the plans is reviewed by our Plan Funding Committee and our Pension and Benefits Investment Committee (the Committees) on a regular basis. When evaluating strategic asset allocations, the Committees consider many variables, including:
▪long-term cost
▪variability and level of contributions
▪funded status
▪a range of expected outcomes over varying confidence levels
This allocation results in a 74% target allocation to return-seeking assets and a 26% target allocation to risk-mitigating assets. We maintain asset allocations at strategic levels with reasonable bands of variance.
In accordance with the Sempra Energy pension investment guidelines, derivative financial instruments may be used by the pension master trust’s equity and fixed income portfolio investment managers to equitize cash, hedge certain exposures, and as substitutes for certain types of fixed income securities.
Rate of Return Assumption
The expected return on assets in our pension and PBOP plans is based on the weighted-average of the plans’ investment allocations to specific asset classes as of the measurement date. We arrive at a 6.75% expected return on assets by considering both the historical and forecasted long-term rates of return on those asset classes. We expect a return of between 4% and 12% on return-seeking assets and between 1% and 4% for risk-mitigating assets. Certain trusts that hold assets for the SDG&E other postretirement benefit plan are subject to taxation, which impacts the expected after-tax return on assets in the plan.
Concentration of Risk
Plan assets are diversified across global equity and bond markets, and concentration of risk in any one economic, industry, maturity or geographic sector is limited.
Investment Strategy for SDG&E’s and SoCalGas’ Other Postretirement Benefit Plans
SDG&E’s and SoCalGas’ PBOP plans are funded by cash contributions from SDG&E and SoCalGas and their current retirees. The assets of these plans are placed into the pension master trust and other Voluntary Employee Beneficiary Association trusts. Certain assets of SDG&E’s and SoCalGas’ PBOP plans are held in the pension master trust, which invests a portion of the assets in completion portfolios that aim to reduce interest rate risk, thereby resulting in an overall target allocation of 38% to return-seeking assets and 62% to risk-mitigating assets for these well-funded plans. Certain of SoCalGas’ PBOP plans are held in a Voluntary Employee Benefit Association trust that also utilizes a completion portfolio, resulting in a target allocation of 30% to return-seeking assets and 70% to risk-mitigating assets. SDG&E’s and SoCalGas’ assets held in other Voluntary Employee Beneficiary Association trusts are invested in accordance with a de-risking glidepath that reduces the assets’ exposure to risk as the trusts become better funded. These specific allocations are periodically reviewed to help ensure that plan assets are best positioned to meet plan obligations.
Fair Value of Pension and Other Postretirement Benefit Plan Assets
We classify the investments in Sempra Energy’s pension master trust and the trusts for the California Utilities’ PBOP plans based on the fair value hierarchy, except for certain investments measured at NAV.
The following are descriptions of the valuation methods and assumptions we use to estimate the fair values of investments held by pension and other postretirement benefit plan trusts.
Equity Securities – Equity securities are valued using quoted prices listed on nationally recognized securities exchanges.
Fixed Income Securities – Certain fixed income securities are valued at the closing price reported in the active market in which the security is traded. Other fixed income securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the security is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Certain high yield fixed-income securities are valued by applying a price adjustment to the bid side to calculate a mean and ask value. Adjustments can vary based on maturity, credit standing, and reported trade frequencies. The bid to ask spread is determined by the investment manager based on the review of the available market information.
Registered Investment Companies – Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices. Where the value is a quoted price in an active market, the investment is classified within
F-102
Level 1 of the fair value hierarchy. Investments in certain fixed income securities are valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks for the remaining fixed income securities.
Common/Collective Trusts – Investments in common/collective trust funds are valued based on the NAV of units owned, which is based on the current fair value of the funds’ underlying assets.
Private Equity Funds – These funds consist of investments in private equities that are held by limited partnerships following various strategies, including private equity and corporate finance. These partnerships generally have limited lives of 10 years, after which liquidating distributions will be received. The value is determined based on the NAV of the proportionate share of an ownership interest in partners’ capital. Holdings in these types of private equity funds are negligible, as the funds are well past their expected investment term and have distributed the bulk of proceeds from investment sales.
Derivative Financial Instruments – Futures contracts that are publicly traded in active markets are valued at closing prices as of the last business day of the year. Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies, and unrealized gain (loss) is recorded daily. Fixed income futures and options are marked to market daily. Equity index futures contracts are valued at the last sales price quoted on the exchange on which they primarily trade.
While management believes the valuation methods described above are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
We provide more discussion of fair value measurements in Notes 1 and 12. The following tables set forth by level within the fair value hierarchy a summary of the investments in our pension and other postretirement benefit plan trusts measured at fair value on a recurring basis.
F-103
SDG&E and SoCalGas each hold a proportionate share of investment assets in the pension master trust at Sempra Energy Consolidated. The fair values of our pension plan assets by asset category are as follows:
| FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF PENSION PLANS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Fair value at December 31, 2020 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Cash and cash equivalents | $ | 7 | $ | — | $ | 7 | |||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 931 | — | 931 | ||||||||||||||
| International | 563 | — | 563 | ||||||||||||||
| Registered investment companies | 183 | — | 183 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 238 | 34 | 272 | ||||||||||||||
| International government bonds | — | 13 | 13 | ||||||||||||||
| Domestic corporate bonds | — | 418 | 418 | ||||||||||||||
| International corporate bonds | — | 61 | 61 | ||||||||||||||
| Registered investment companies | — | 37 | 37 | ||||||||||||||
| Other | 2 | (1) | 1 | ||||||||||||||
| Total investment assets in the fair value hierarchy | $ | 1,924 | $ | 562 | 2,486 | ||||||||||||
| Accounts receivable/payable, net | 13 | ||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||
| Common/collective trusts | 493 | ||||||||||||||||
| Private equity funds | 10 | ||||||||||||||||
| Total investment assets | $ | 3,002 | |||||||||||||||
| SDG&E’s proportionate share of investment assets | $ | 819 | |||||||||||||||
| SoCalGas’ proportionate share of investment assets | $ | 1,969 | |||||||||||||||
| Fair value at December 31, 2019 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Cash and cash equivalents | $ | 17 | $ | — | $ | 17 | |||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 923 | — | 923 | ||||||||||||||
| International | 555 | 1 | 556 | ||||||||||||||
| Registered investment companies | 96 | — | 96 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 228 | 39 | 267 | ||||||||||||||
| International government bonds | — | 9 | 9 | ||||||||||||||
| Domestic corporate bonds | — | 346 | 346 | ||||||||||||||
| International corporate bonds | — | 62 | 62 | ||||||||||||||
| Registered investment companies | — | 2 | 2 | ||||||||||||||
| Total investment assets in the fair value hierarchy | $ | 1,819 | $ | 459 | 2,278 | ||||||||||||
| Accounts receivable/payable, net | (38) | ||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||
| Common/collective trusts | 417 | ||||||||||||||||
| Private equity funds | 5 | ||||||||||||||||
| Total investment assets | $ | 2,662 | |||||||||||||||
| SDG&E’s proportionate share of investment assets | $ | 739 | |||||||||||||||
| SoCalGas’ proportionate share of investment assets | $ | 1,737 |
F-104
The fair values by asset category of the PBOP plan assets held in the pension master trust and in the additional trusts for SoCalGas’ PBOP plans and SDG&E’s PBOP plan trusts are as follows:
| FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Fair value at December 31, 2020 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| SDG&E: | |||||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | $ | 17 | $ | — | $ | 17 | |||||||||||
| International | 11 | — | 11 | ||||||||||||||
| Registered investment companies | 80 | — | 80 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 38 | 2 | 40 | ||||||||||||||
| Domestic corporate bonds | — | 8 | 8 | ||||||||||||||
| International corporate bonds | — | 1 | 1 | ||||||||||||||
| Registered investment companies | — | 7 | 7 | ||||||||||||||
| Total investment assets in the fair value hierarchy | 146 | 18 | 164 | ||||||||||||||
| Accounts receivable/payable, net | (2) | ||||||||||||||||
| Investments measured at NAV – Common/collective trusts | 51 | ||||||||||||||||
| Total investment assets | 213 | ||||||||||||||||
| SoCalGas: | |||||||||||||||||
| Cash and cash equivalents | 1 | — | 1 | ||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 76 | — | 76 | ||||||||||||||
| International | 46 | — | 46 | ||||||||||||||
| Registered investment companies | 61 | — | 61 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 273 | 25 | 298 | ||||||||||||||
| International government bonds | 1 | 14 | 15 | ||||||||||||||
| Domestic corporate bonds | — | 349 | 349 | ||||||||||||||
| International corporate bonds | — | 42 | 42 | ||||||||||||||
| Registered investment companies | — | 81 | 81 | ||||||||||||||
| Derivative financial instruments | 1 | — | 1 | ||||||||||||||
| Total investment assets in the fair value hierarchy | 459 | 511 | 970 | ||||||||||||||
| Investments measured at NAV: | |||||||||||||||||
| Common/collective trusts | 188 | ||||||||||||||||
| Venture capital funds and real estate funds | 1 | ||||||||||||||||
| Total investment assets | 1,159 | ||||||||||||||||
| Other Sempra Energy: | |||||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 10 | — | 10 | ||||||||||||||
| International | 6 | — | 6 | ||||||||||||||
| Registered investment companies | 1 | — | 1 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 2 | — | 2 | ||||||||||||||
| Domestic corporate bonds | — | 4 | 4 | ||||||||||||||
| International corporate bonds | — | 1 | 1 | ||||||||||||||
| Registered investment companies | — | (1) | (1) | ||||||||||||||
| Total investment assets in the fair value hierarchy | 19 | 4 | 23 | ||||||||||||||
| Investments measured at NAV – Common/collective trusts | 4 | ||||||||||||||||
| Total other Sempra Energy investment assets | 27 | ||||||||||||||||
| Total Sempra Energy Consolidated investment assets in the fair value hierarchy | $ | 624 | $ | 533 | |||||||||||||
| Total Sempra Energy Consolidated investment assets | $ | 1,399 |
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| FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Fair value at December 31, 2019 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| SDG&E: | |||||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | $ | 21 | $ | — | $ | 21 | |||||||||||
| International | 13 | — | 13 | ||||||||||||||
| Registered investment companies | 68 | — | 68 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 32 | 1 | 33 | ||||||||||||||
| Domestic corporate bonds | — | 8 | 8 | ||||||||||||||
| International corporate bonds | — | 1 | 1 | ||||||||||||||
| Registered investment companies | — | 8 | 8 | ||||||||||||||
| Total investment assets in the fair value hierarchy | 134 | 18 | 152 | ||||||||||||||
| Accounts receivable/payable, net | (2) | ||||||||||||||||
| Investments measured at NAV – Common/collective trusts | 47 | ||||||||||||||||
| Total investment assets | 197 | ||||||||||||||||
| SoCalGas: | |||||||||||||||||
| Cash and cash equivalents | 3 | — | 3 | ||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 78 | — | 78 | ||||||||||||||
| International | 48 | — | 48 | ||||||||||||||
| Registered investment companies | 52 | — | 52 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 267 | 21 | 288 | ||||||||||||||
| International government bonds | 1 | 10 | 11 | ||||||||||||||
| Domestic corporate bonds | — | 309 | 309 | ||||||||||||||
| International corporate bonds | — | 40 | 40 | ||||||||||||||
| Registered investment companies | — | 75 | 75 | ||||||||||||||
| Derivative financial instruments | 3 | — | 3 | ||||||||||||||
| Total investment assets in the fair value hierarchy | 452 | 455 | 907 | ||||||||||||||
| Accounts receivable/payable, net | (5) | ||||||||||||||||
| Investments measured at NAV – Common/collective trusts | 157 | ||||||||||||||||
| Total investment assets | 1,059 | ||||||||||||||||
| Other Sempra Energy: | |||||||||||||||||
| Equity securities: | |||||||||||||||||
| Domestic | 9 | — | 9 | ||||||||||||||
| International | 4 | — | 4 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Domestic government and government agencies | 3 | 1 | 4 | ||||||||||||||
| Domestic corporate bonds | — | 3 | 3 | ||||||||||||||
| International corporate bonds | — | 1 | 1 | ||||||||||||||
| Total investment assets in the fair value hierarchy | 16 | 5 | 21 | ||||||||||||||
| Investments measured at NAV – Common/collective trusts | 4 | ||||||||||||||||
| Total other Sempra Energy investment assets | 25 | ||||||||||||||||
| Total Sempra Energy Consolidated investment assets in the fair value hierarchy | $ | 602 | $ | 478 | |||||||||||||
| Total Sempra Energy Consolidated investment assets | $ | 1,281 |
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Future Payments
We expect to contribute the following amounts to our pension and PBOP plans in 2021:
| EXPECTED CONTRIBUTIONS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||
| Pension plans | $ | 246 | $ | 53 | $ | 157 | |||||||||||
| Other postretirement benefit plans | 5 | 1 | 1 |
The following table shows the total benefits we expect to pay for the next 10 years to current employees and retirees from the plans or from company assets.
| EXPECTED BENEFIT PAYMENTS | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| Pension benefits | Other postretirement benefits | Pension benefits | Other postretirement benefits | Pension benefits | Other postretirement benefits | ||||||||||||||||||||||||||||||
| 2021 | $ | 389 | $ | 47 | $ | 112 | $ | 10 | $ | 226 | $ | 34 | |||||||||||||||||||||||
| 2022 | 268 | 47 | 68 | 10 | 172 | 34 | |||||||||||||||||||||||||||||
| 2023 | 255 | 48 | 65 | 10 | 166 | 35 | |||||||||||||||||||||||||||||
| 2024 | 246 | 48 | 61 | 10 | 159 | 35 | |||||||||||||||||||||||||||||
| 2025 | 239 | 47 | 60 | 10 | 157 | 35 | |||||||||||||||||||||||||||||
| 2026-2030 | 1,130 | 235 | 263 | 47 | 752 | 172 |
SAVINGS PLANS
Sempra Energy Consolidated, SDG&E and SoCalGas offer trusteed savings plans to all employees. Employee participation, employee contributions and employer matching contributions are subject to the provisions of the respective plans, and for employee contributions, limits imposed by the respective governmental authorities.
Employer contributions to the savings plans were as follows:
| EMPLOYER CONTRIBUTIONS TO SAVINGS PLANS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | $ | 47 | $ | 44 | $ | 43 | |||||||||||
| SDG&E | 16 | 15 | 15 | ||||||||||||||
| SoCalGas | 25 | 24 | 23 |
The market value of Sempra Energy common stock held by the savings plans was $1.1 billion and $1.3 billion at December 31, 2020 and 2019, respectively.
NOTE 10. SHARE-BASED COMPENSATION
SEMPRA ENERGY EQUITY COMPENSATION PLANS
Sempra Energy has share-based compensation plans intended to align employee and shareholder objectives related to the long-term growth of Sempra Energy. The plans permit a wide variety of share-based awards, including:
▪nonqualified stock options
▪incentive stock options
▪restricted stock awards
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▪restricted stock units
▪stock appreciation rights
▪performance awards
▪stock payments
▪dividend equivalents
Eligible employees, including those from the California Utilities, participate in Sempra Energy’s share-based compensation plans as a component of their compensation package.
In the three years ended December 31, 2020, Sempra Energy had the following types of equity awards outstanding:
▪Nonqualified Stock Options: Options to purchase common stock have an exercise price equal to the market price of the common stock at the date of grant, are service-based, become exercisable over a three-year period (for awards granted in 2020 and 2019) or over a four-year period (for awards granted in 2010 or earlier), and expire 10 years from the date of grant. Vesting and/or the ability to exercise may be accelerated upon a change in control, in accordance with severance pay agreements or in accordance with the terms of the grant. Options are subject to forfeiture or earlier expiration following termination of employment, subject to certain exceptions.
▪Performance-Based Restricted Stock Units: These RSU awards generally vest in Sempra Energy common stock at the end of three-year (for awards granted during or after 2015) or four-year performance periods (for awards granted prior to 2015) based on Sempra Energy’s total return to shareholders relative to that of specified market indices or based on the compound annual growth rate of Sempra Energy’s EPS. The comparative market indices for the awards that vest based on total return to shareholders are the S&P 500 Utilities Index (excluding water companies) and the S&P 500 Index. We use long-term analyst consensus growth estimates for S&P 500 Utilities Index peer companies (excluding water companies) to develop our targets for awards that vest based on EPS growth.
◦For awards granted during or after 2014, up to an additional 100% of the granted RSUs may be issued if total return to shareholders or EPS growth exceeds target levels.
◦For awards granted in 2015 and 2016 and certain awards granted in 2017 and 2018 that vest based on Sempra Energy’s total return to shareholders, a modifier adds 20% to the award’s payout (as initially calculated based on total return to shareholders relative to that of specified market indices) for total shareholder return performance in the top quartile relative to historical benchmark data for Sempra Energy and reduces the award’s payout by 20% for performance in the bottom quartile. However, in no event will more than an additional 100% of the granted RSUs be issued. If performance falls within the second or third quartiles, the modifier is not triggered, and the payout is based solely on total return to shareholders relative to that of specified market indices.
If Sempra Energy’s total return to shareholders or EPS growth is below the target levels but above threshold performance levels, shares are subject to partial vesting on a pro rata basis.
▪Other Performance-Based Restricted Stock Units: RSUs were granted in 2015 in connection with the creation of Cameron LNG JV. The 2015 awards vested in 2019 as both of the following were achieved: (a) the Compensation and Talent Committee of Sempra Energy’s board of directors determined that Sempra Energy achieved positive cumulative net income for fiscal years 2015 through 2017 and (b) Cameron LNG JV commenced commercial operations of the first train.
▪Service-Based Restricted Stock Units: RSUs may also be service-based; these generally vest ratably over three-year service periods (for awards granted in 2019), or at the end of three-year (for awards granted during 2015 through 2018) or four-year service periods (for awards granted prior to 2015).
For RSU awards, vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable LTIP, in accordance with severance pay agreements, or at the discretion of the Compensation and Talent Committee of Sempra Energy’s board of directors. Dividend equivalents on shares subject to RSUs are reinvested to purchase additional common shares that become subject to the same vesting conditions as the RSUs to which the dividends relate.
SHARE-BASED AWARDS AND COMPENSATION EXPENSE
At December 31, 2020, 6,927,284 common shares were authorized and available for future grants of share-based awards. Our practice is to satisfy share-based awards by issuing new shares rather than by open-market purchases.
We measure and recognize compensation expense for all share-based payment awards made to our employees and directors based on estimated fair values on the date of grant. We recognize compensation costs net of an estimated forfeiture rate (based on historical experience) and recognize the compensation costs for nonqualified stock options and RSUs on a straight-line basis over the requisite service period of the award, which is generally three or four years. However, for awards granted to retirement-
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eligible participants, the expense is recognized over the initial year in which the award was granted as the award requires service through the end of the year in which it was granted. For awards granted to participants who become eligible for retirement during the requisite service period, the expense is recognized over the period between the date of grant and the later of the end of the year in which the award was granted or the date the participant first becomes eligible for retirement. Substantially all awards outstanding are classified as equity instruments; therefore, we recognize additional paid in capital as we recognize the compensation expense associated with the awards. We recognize in earnings the tax benefits (or deficiencies) resulting from tax deductions that are in excess of (or less than) tax benefits related to compensation cost recognized for share-based payments.
Sempra Energy subsidiaries record an expense for the plans to the extent that subsidiary employees participate in the plans and/or the subsidiaries are allocated a portion of the Sempra Energy plans’ corporate staff costs. Total share-based compensation expense for all of Sempra Energy’s share-based awards was comprised as follows:
| SHARE-BASED COMPENSATION EXPENSE | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Share-based compensation expense, before income taxes(1) | $ | 62 | $ | 66 | $ | 76 | |||||||||||
| Income tax benefit(1) | (17) | (18) | (21) | ||||||||||||||
| $ | 45 | $ | 48 | $ | 55 | ||||||||||||
| Capitalized share-based compensation cost | $ | 11 | $ | 11 | $ | 10 | |||||||||||
| Excess income tax deficiency | $ | 19 | $ | 4 | $ | 15 | |||||||||||
| SDG&E: | |||||||||||||||||
| Share-based compensation expense, before income taxes | $ | 11 | $ | 10 | $ | 12 | |||||||||||
| Income tax benefit | (3) | (3) | (3) | ||||||||||||||
| $ | 8 | $ | 7 | $ | 9 | ||||||||||||
| Capitalized share-based compensation cost | $ | 7 | $ | 6 | $ | 6 | |||||||||||
| Excess income tax deficiency | $ | 3 | $ | 1 | $ | 3 | |||||||||||
| SoCalGas: | |||||||||||||||||
| Share-based compensation expense, before income taxes | $ | 14 | $ | 15 | $ | 16 | |||||||||||
| Income tax benefit | (4) | (4) | (5) | ||||||||||||||
| $ | 10 | $ | 11 | $ | 11 | ||||||||||||
| Capitalized share-based compensation cost | $ | 4 | $ | 5 | $ | 4 | |||||||||||
| Excess income tax deficiency | $ | 3 | $ | 1 | $ | 2 |
(1) Includes activity of awards issued from the IEnova 2013 LTIP, which settle in cash upon vesting based on the price of IEnova’s common stock.
SEMPRA ENERGY NONQUALIFIED STOCK OPTIONS
We use a Black-Scholes option-pricing model to estimate the fair value of each nonqualified stock option grant. The use of a valuation model requires us to make certain assumptions about selected model inputs. Expected volatility is calculated based on a blend of the historical and implied volatility of Sempra Energy’s common stock price. The average expected term for options is based on the vesting schedule, contractual term of the option, expected employee exercise and post-termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term estimated at the date of the grant. In 2020 and 2019, Sempra Energy’s board of directors granted 154,860 and 261,075 nonqualified stock options, respectively, that are exercisable over a three-year period. There were no stock options granted in 2018. The weighted-average per-share fair value for options granted was $19.76 and $13.20 in 2020 and 2019, respectively. To calculate this fair value, we used the Black-Scholes model with the following weighted-average assumptions:
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| KEY ASSUMPTIONS FOR STOCK OPTIONS GRANTED | |||||||||||
| Years ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Stock price volatility | 18.78 | % | 18.63 | % | |||||||
| Expected term | 5.34 years | 5.34 years | |||||||||
| Risk-free rate of return | 1.68 | % | 2.49 | % | |||||||
| Annual dividend yield | 2.60 | % | 3.35 | % |
The following table shows a summary of nonqualified stock options at December 31, 2020 and activity for the year then ended:
| NONQUALIFIED STOCK OPTIONS | |||||||||||||||||||||||
| Common shares under options | Weighted- average exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value (in millions) | ||||||||||||||||||||
| Outstanding at January 1, 2020 | 247,577 | $ | 105.86 | ||||||||||||||||||||
| Granted | 154,860 | $ | 149.12 | ||||||||||||||||||||
| Exercised | (4,400) | $ | 55.90 | ||||||||||||||||||||
| Forfeited/canceled | (32,642) | $ | 149.12 | ||||||||||||||||||||
| Outstanding at December 31, 2020 | 365,395 | $ | 120.93 | 8.34 | $ | 2 | |||||||||||||||||
| Vested or expected to vest at December 31, 2020 | 349,596 | $ | 120.28 | 8.32 | $ | 2 | |||||||||||||||||
| Exercisable at December 31, 2020 | 81,061 | $ | 106.76 | 8.00 | $ | 2 |
The aggregate intrinsic value at December 31, 2020 is the total of the difference between Sempra Energy’s closing common stock price and the exercise price for all in-the-money options. The aggregate intrinsic value for nonqualified stock options exercised in the last three years was:
▪$0.4 million in 2020
▪$4 million in 2019
▪$9 million in 2018
We expect a negligible amount of total compensation cost related to nonvested stock options not yet recognized as of December 31, 2020 to be recognized over a weighted-average period of 1.3 years. The weighted-average per-share fair value for nonqualified stock options granted in 2019 was $106.76.
We received cash of $0.2 million and $3 million from stock option exercises during 2020 and 2019, respectively.
SEMPRA ENERGY RESTRICTED STOCK UNITS
We use a Monte-Carlo simulation model to estimate the fair value of our RSUs that vest based on Sempra Energy’s total return to shareholders. Our determination of fair value is affected by the historical volatility of the common stock price for Sempra Energy and its peer group companies. The valuation also is affected by the risk-free rates of return and a number of other variables. Below are key assumptions for RSUs granted in the last three years:
| KEY ASSUMPTIONS FOR RSUs GRANTED | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Stock price volatility | 16.35 | % | 17.74 | % | 17.46 | % | |||||||||||
| Risk-free rate of return | 1.55 | % | 2.46 | % | 2.00 | % |
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The following table shows a summary of RSUs at December 31, 2020 and activity for the year then ended:
| RESTRICTED STOCK UNITS | |||||||||||||||||||||||
| Performance-based restricted stock units | Service-based restricted stock units | ||||||||||||||||||||||
| Units | Weighted- average grant-date fair value | Units | Weighted- average grant-date fair value | ||||||||||||||||||||
| Nonvested at January 1, 2020 | 1,086,981 | $ | 109.85 | 415,787 | $ | 119.96 | |||||||||||||||||
| Granted | 265,236 | $ | 155.62 | 165,847 | $ | 138.91 | |||||||||||||||||
| Vested | (403,302) | $ | 110.45 | (230,612) | $ | 112.11 | |||||||||||||||||
| Forfeited | (54,954) | $ | 134.90 | (7,445) | $ | 140.18 | |||||||||||||||||
| Nonvested at December 31, 2020(1) | 893,961 | $ | 121.61 | 343,577 | $ | 121.59 | |||||||||||||||||
| Expected to vest at December 31, 2020 | 882,903 | $ | 121.45 | 339,025 | $ | 121.46 |
(1) Each RSU represents the right to receive one share of our common stock if applicable performance conditions are satisfied. For all performance-based RSUs, up to an additional 100% of the shares represented by the RSUs may be issued if Sempra Energy exceeds target performance conditions.
In 2020, 2019 and 2018, the total fair value of RSU shares vested during the year was $70 million, $36 million and $32 million, respectively.
We expect $28 million of total compensation cost related to nonvested RSUs not yet recognized as of December 31, 2020 to be recognized over a weighted-average period of 1.7 years. The weighted-average per-share fair values for performance-based RSUs granted were $113.54 and $105.03 in 2019 and 2018, respectively. The weighted-average per-share fair values for service-based RSUs granted were $112.50 and $107.60 in 2019 and 2018, respectively.
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments primarily to manage exposures arising in the normal course of business. Our principal exposures are commodity market risk, benchmark interest rate risk and foreign exchange rate exposures. Our use of derivatives for these risks is integrated into the economic management of our anticipated revenues, anticipated expenses, assets and liabilities. Derivatives may be effective in mitigating these risks (1) that could lead to declines in anticipated revenues or increases in anticipated expenses, or (2) that could cause our asset values to fall or our liabilities to increase. Accordingly, our derivative activity summarized below generally represents an impact that is intended to offset associated revenues, expenses, assets or liabilities that are not included in the tables below.
In certain cases, we apply the normal purchase or sale exception to derivative instruments and have other commodity contracts that are not derivatives. These contracts are not recorded at fair value and are therefore excluded from the disclosures below.
In all other cases, we record derivatives at fair value on the Consolidated Balance Sheets. We have derivatives that are (1) cash flow hedges, (2) fair value hedges, or (3) undesignated. Depending on the applicability of hedge accounting and, for the California Utilities and other operations subject to regulatory accounting, the requirement to pass impacts through to customers, the impact of derivative instruments may be offset in OCI (cash flow hedges), on the balance sheet (regulatory offsets), or recognized in earnings (fair value hedges and undesignated derivatives not subject to rate recovery). We classify cash flows from the principal settlements of cross-currency swaps that hedge exposure related to Mexican peso-denominated debt as financing activities and settlements of other derivative instruments as operating activities on the Consolidated Statements of Cash Flows.
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HEDGE ACCOUNTING
We may designate a derivative as a cash flow hedging instrument if it effectively converts anticipated cash flows associated with revenues or expenses to a fixed dollar amount. We may utilize cash flow hedge accounting for derivative commodity instruments, foreign currency instruments and interest rate instruments. Designating cash flow hedges is dependent on the business context in which the instrument is being used, the effectiveness of the instrument in offsetting the risk that the future cash flows of a given revenue or expense item may vary, and other criteria.
ENERGY DERIVATIVES
Our market risk is primarily related to natural gas and electricity price volatility and the specific physical locations where we transact. We use energy derivatives to manage these risks. The use of energy derivatives in our various businesses depends on the particular energy market, and the operating and regulatory environments applicable to the business, as follows:
▪The California Utilities use natural gas and electricity derivatives, for the benefit of customers, with the objective of managing price risk and basis risks, and stabilizing and lowering natural gas and electricity costs. These derivatives include fixed-price natural gas and electricity positions, options, and basis risk instruments, which are either exchange-traded or over-the-counter financial instruments, or bilateral physical transactions. This activity is governed by risk management and transacting activity plans that have been filed with and approved by the CPUC. Natural gas and electricity derivative activities are recorded as commodity costs that are offset by regulatory account balances and are recovered in rates. Net commodity cost impacts on the Consolidated Statements of Operations are reflected in Cost of Electric Fuel and Purchased Power or in Cost of Natural Gas.
▪SDG&E is allocated and may purchase CRRs, which serve to reduce the regional electricity price volatility risk that may result from local transmission capacity constraints. Unrealized gains and losses do not impact earnings, as they are offset by regulatory account balances. Realized gains and losses associated with CRRs, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations.
▪Sempra Mexico and Sempra LNG may use natural gas and electricity derivatives, as appropriate, in an effort to optimize the earnings of their assets which support the following businesses: LNG, natural gas transportation and storage, and power generation. Gains and losses associated with undesignated derivatives are recognized in Energy-Related Businesses Revenues or in Energy-Related Businesses Cost of Sales on the Consolidated Statements of Operations. Certain of these derivatives may also be designated as cash flow hedges. Sempra Mexico may also use natural gas energy derivatives with the objective of managing price risk and lowering natural gas prices at its distribution operations. These derivatives, which are recorded as commodity costs that are offset by regulatory account balances and recovered in rates, are recognized in Cost of Natural Gas on the Consolidated Statements of Operations.
▪From time to time, our various businesses, including the California Utilities, may use other energy derivatives to hedge exposures such as the price of vehicle fuel and GHG allowances.
The following table summarizes net energy derivative volumes.
| NET ENERGY DERIVATIVE VOLUMES | |||||||||||||||||
| (Quantities in millions) | |||||||||||||||||
| December 31, | |||||||||||||||||
| Commodity | Unit of measure | 2020 | 2019 | ||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||
| Natural gas | MMBtu | 5 | 32 | ||||||||||||||
| Electricity | MWh | 1 | 2 | ||||||||||||||
| Congestion revenue rights | MWh | 43 | 48 | ||||||||||||||
| SDG&E: | |||||||||||||||||
| Natural gas | MMBtu | 16 | 37 | ||||||||||||||
| Electricity | MWh | 1 | 2 | ||||||||||||||
| Congestion revenue rights | MWh | 43 | 48 | ||||||||||||||
| SoCalGas: | |||||||||||||||||
| Natural gas | MMBtu | 1 | 2 | ||||||||||||||
In addition to the amounts noted above, we use commodity derivatives to manage risks associated with the physical locations of contractual obligations and assets, such as natural gas purchases and sales.
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INTEREST RATE DERIVATIVES
We are exposed to interest rates primarily as a result of our current and expected use of financing. The California Utilities, as well as Sempra Energy and its other subsidiaries and JVs, periodically enter into interest rate derivative agreements intended to moderate our exposure to interest rates and to lower our overall costs of borrowing. In addition, we may utilize interest rate swaps, typically designated as cash flow hedges, to lock in interest rates on outstanding debt or in anticipation of future financings.
The following table presents the net notional amounts of our interest rate derivatives, excluding JVs.
| INTEREST RATE DERIVATIVES | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Notional debt | Maturities | Notional debt | Maturities | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Cash flow hedges | $ | 1,486 | 2021-2034 | $ | 1,445 | 2020-2034 | |||||||||||||||||
FOREIGN CURRENCY DERIVATIVES
We utilize cross-currency swaps to hedge exposure related to Mexican peso-denominated debt at our Mexican subsidiaries and JVs. These cash flow hedges exchange our Mexican peso-denominated principal and interest payments into the U.S. dollar and swap Mexican variable interest rates for U.S. fixed interest rates. From time to time, Sempra Mexico and its JVs may use other foreign currency derivatives to hedge exposures related to cash flows associated with revenues from contracts denominated in Mexican pesos that are indexed to the U.S. dollar.
We are also exposed to exchange rate movements at our Mexican subsidiaries and JVs, which have U.S. dollar-denominated cash balances, receivables, payables and debt (monetary assets and liabilities) that give rise to Mexican currency exchange rate movements for Mexican income tax purposes. They also have deferred income tax assets and liabilities denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities and certain nonmonetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes. We utilize foreign currency derivatives as a means to manage the risk of exposure to significant fluctuations in our income tax expense and equity earnings from these impacts; however, we generally do not hedge our deferred income tax assets and liabilities or for inflation.
We also utilized foreign currency derivatives to hedge exposure to fluctuations in the Peruvian sol and Chilean peso related to the sales of our operations in Peru and Chile, respectively.
The following table presents the net notional amounts of our foreign currency derivatives, excluding JVs.
| FOREIGN CURRENCY DERIVATIVES | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Notional amount | Maturities | Notional amount | Maturities | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Cross-currency swaps | $ | 306 | 2021-2023 | $ | 306 | 2020-2023 | |||||||||||||||||
| Other foreign currency derivatives | 1,764 | 2021-2022 | 1,796 | 2020-2021 |
FINANCIAL STATEMENT PRESENTATION
The Consolidated Balance Sheets reflect the offsetting of net derivative positions and cash collateral with the same counterparty when a legal right of offset exists. The following tables provide the fair values of derivative instruments on the Consolidated Balance Sheets, including the amount of cash collateral receivables that were not offset because the cash collateral was in excess of liability positions.
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| DERIVATIVE INSTRUMENTS ON THE CONSOLIDATED BALANCE SHEETS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Other current assets(1) | Other long-term assets | Other current liabilities | Deferred credits and other | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate and foreign exchange instruments | $ | — | $ | 1 | $ | (26) | $ | (160) | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange instruments | 24 | — | — | — | |||||||||||||||||||
| Commodity contracts not subject to rate recovery | 82 | 17 | (95) | (16) | |||||||||||||||||||
| Associated offsetting commodity contracts | (82) | (13) | 82 | 13 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 35 | 95 | (35) | (25) | |||||||||||||||||||
| Associated offsetting commodity contracts | (2) | — | 2 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 57 | 100 | (72) | (188) | |||||||||||||||||||
| Additional cash collateral for commodity contracts not subject to rate recovery | 21 | — | — | — | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 30 | — | — | — | |||||||||||||||||||
| Total(2) | $ | 108 | $ | 100 | $ | (72) | $ | (188) | |||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 32 | $ | 95 | $ | (28) | $ | (25) | |||||||||||||||
| Associated offsetting commodity contracts | (1) | — | 1 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 31 | 95 | (27) | (25) | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 24 | — | — | — | |||||||||||||||||||
| Total(2) | $ | 55 | $ | 95 | $ | (27) | $ | (25) | |||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 3 | $ | — | $ | (7) | $ | — | |||||||||||||||
| Associated offsetting commodity contracts | (1) | — | 1 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 2 | — | (6) | — | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 6 | — | — | — | |||||||||||||||||||
| Total | $ | 8 | $ | — | $ | (6) | $ | — |
(1) Included in Current Assets: Fixed-Price Contracts and Other Derivatives for SDG&E.
(2) Normal purchase contracts previously measured at fair value are excluded.
F-114
| DERIVATIVE INSTRUMENTS ON THE CONSOLIDATED BALANCE SHEETS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Other current assets(1) | Other long-term assets | Other current liabilities | Deferred credits and other | ||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate and foreign exchange instruments | $ | — | $ | 3 | $ | (17) | $ | (140) | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange instruments | 41 | — | (20) | — | |||||||||||||||||||
| Associated offsetting foreign exchange instruments | (20) | — | 20 | — | |||||||||||||||||||
| Commodity contracts not subject to rate recovery | 34 | 11 | (41) | (10) | |||||||||||||||||||
| Associated offsetting commodity contracts | (32) | (2) | 32 | 2 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 41 | 76 | (47) | (47) | |||||||||||||||||||
| Associated offsetting commodity contracts | (6) | (3) | 6 | 3 | |||||||||||||||||||
| Associated offsetting cash collateral | — | — | 14 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 58 | 85 | (53) | (192) | |||||||||||||||||||
| Additional cash collateral for commodity contracts not subject to rate recovery | 43 | — | — | — | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 25 | — | — | — | |||||||||||||||||||
| Total(2) | $ | 126 | $ | 85 | $ | (53) | $ | (192) | |||||||||||||||
| SDG&E: | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | 30 | 76 | (41) | (47) | |||||||||||||||||||
| Associated offsetting commodity contracts | (4) | (3) | 4 | 3 | |||||||||||||||||||
| Associated offsetting cash collateral | — | — | 14 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 26 | 73 | (23) | (44) | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 16 | — | — | — | |||||||||||||||||||
| Total(2) | $ | 42 | $ | 73 | $ | (23) | $ | (44) | |||||||||||||||
| SoCalGas: | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 11 | $ | — | $ | (6) | $ | — | |||||||||||||||
| Associated offsetting commodity contracts | (2) | — | 2 | — | |||||||||||||||||||
| Net amounts presented on the balance sheet | 9 | — | (4) | — | |||||||||||||||||||
| Additional cash collateral for commodity contracts subject to rate recovery | 9 | — | — | — | |||||||||||||||||||
| Total | $ | 18 | $ | — | $ | (4) | $ | — |
(1) Included in Current Assets: Fixed-Price Contracts and Other Derivatives for SDG&E.
(2) Normal purchase contracts previously measured at fair value are excluded.
F-115
The table below includes the effects of derivative instruments designated as cash flow hedges on the Consolidated Statements of Operations and in OCI and AOCI.
| CASH FLOW HEDGE IMPACTS | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Pretax (loss) gain recognized in OCI | Pretax (loss) gain reclassified from AOCI into earnings | ||||||||||||||||||||||||||||||||||||||||
| Years ended December 31, | Years ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | Location | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate instruments | $ | — | $ | — | $ | — | (Loss) Gain on Sale of Assets | $ | — | $ | (10) | $ | (9) | ||||||||||||||||||||||||||||
| Interest rate instruments(1) | (34) | (24) | 17 | Interest Expense(1) | (10) | (3) | (1) | ||||||||||||||||||||||||||||||||||
| Interest rate instruments | (185) | (164) | 44 | Equity Earnings | (46) | (3) | (9) | ||||||||||||||||||||||||||||||||||
| Foreign exchange instruments | (4) | (8) | (4) | Revenues: Energy- Related Businesses | 1 | (2) | 1 | ||||||||||||||||||||||||||||||||||
| Interest rate and foreign exchange instruments | (6) | 19 | 14 | Interest Expense | (1) | — | 1 | ||||||||||||||||||||||||||||||||||
| Other (Expense) Income, Net | (11) | 9 | 2 | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange instruments | (3) | (10) | (3) | Equity Earnings | — | (2) | 2 | ||||||||||||||||||||||||||||||||||
| Total | $ | (232) | $ | (187) | $ | 68 | $ | (67) | $ | (11) | $ | (13) | |||||||||||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate instruments(1) | $ | — | $ | (1) | $ | 1 | Interest Expense(1) | $ | — | $ | (3) | $ | (7) | ||||||||||||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate instruments | $ | — | $ | — | $ | — | Interest Expense | $ | — | $ | (1) | $ | (1) |
(1) Amounts include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE. On August 14, 2019, OMEC LLC paid in full its variable-rate loan and terminated its interest rate swaps.
For Sempra Energy Consolidated, we expect that $87 million of losses, which are net of income tax benefit, that are currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. SoCalGas expects that $1 million of losses, net of income tax benefit, that are currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. Actual amounts ultimately reclassified into earnings depend on the interest rates in effect when derivative contracts mature.
For all forecasted transactions, the maximum remaining term over which we are hedging exposure to the variability of cash flows at December 31, 2020 is approximately 14 years for Sempra Energy Consolidated. The maximum remaining term for which we are hedging exposure to the variability of cash flows at our equity method investees is 19 years.
The following table summarizes the effects of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations.
| UNDESIGNATED DERIVATIVE IMPACTS | ||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Pretax gain (loss) on derivatives recognized in earnings | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| Location | 2020 | 2019 | 2018 | |||||||||||||||||
| Sempra Energy Consolidated: | ||||||||||||||||||||
| Commodity contracts not subject to rate recovery | Revenues: Energy-Related Businesses | $ | 17 | $ | 12 | $ | 26 | |||||||||||||
| Commodity contracts subject to rate recovery | Cost of Natural Gas | (7) | 3 | 5 | ||||||||||||||||
| Commodity contracts subject to rate recovery | Cost of Electric Fuel and Purchased Power | 88 | (140) | 279 | ||||||||||||||||
| Foreign exchange instruments | Other (Expense) Income, Net | (56) | 25 | 3 | ||||||||||||||||
| Total | $ | 42 | $ | (100) | $ | 313 | ||||||||||||||
| SDG&E: | ||||||||||||||||||||
| Commodity contracts subject to rate recovery | Cost of Electric Fuel and Purchased Power | $ | 88 | $ | (140) | $ | 279 | |||||||||||||
| SoCalGas: | ||||||||||||||||||||
| Commodity contracts subject to rate recovery | Cost of Natural Gas | $ | (7) | $ | 3 | $ | 5 |
F-116
CONTINGENT FEATURES
For Sempra Energy Consolidated, SDG&E and SoCalGas, certain of our derivative instruments contain credit limits which vary depending on our credit ratings. Generally, these provisions, if applicable, may reduce our credit limit if a specified credit rating agency reduces our ratings. In certain cases, if our credit ratings were to fall below investment grade, the counterparty to these derivative liability instruments could request immediate payment or demand immediate and ongoing full collateralization.
For Sempra Energy Consolidated, the total fair value of this group of derivative instruments in a liability position at December 31, 2020 and 2019 was $16 million and $21 million, respectively. For SoCalGas, the total fair value of this group of derivative instruments in a liability position at December 31, 2020 and 2019 was $6 million and $4 million, respectively. At December 31, 2020, if the credit ratings of Sempra Energy or SoCalGas were reduced below investment grade, $16 million and $6 million, respectively, of additional assets could be required to be posted as collateral for these derivative contracts.
For Sempra Energy Consolidated, SDG&E and SoCalGas, some of our derivative contracts contain a provision that would permit the counterparty, in certain circumstances, to request adequate assurance of our performance under the contracts. Such additional assurance, if needed, is not material and is not included in the amounts above.
NOTE 12. FAIR VALUE MEASUREMENTS
RECURRING FAIR VALUE MEASURES
The three tables below, by level within the fair value hierarchy, set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2020 and 2019. We classify financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair-valued assets and liabilities, and their placement within the fair value hierarchy.
The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 11 under “Financial Statement Presentation.”
The determination of fair values, shown in the tables below, incorporates various factors, including but not limited to, the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests).
Our financial assets and liabilities that were accounted for at fair value on a recurring basis in the tables below include the following (other than a $5 million investment at December 31, 2019 measured at NAV):
▪Nuclear decommissioning trusts reflect the assets of SDG&E’s NDT, excluding cash balances. A third-party trustee values the trust assets using prices from a pricing service based on a market approach. We validate these prices by comparison to prices from other independent data sources. Securities are valued using quoted prices listed on nationally recognized securities exchanges or based on closing prices reported in the active market in which the identical security is traded (Level 1). Other securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2).
▪For commodity contracts, interest rate derivatives and foreign exchange instruments, we primarily use a market or income approach with market participant assumptions to value these derivatives. Market participant assumptions include those about risk, and the risk inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable. We have exchange-traded derivatives that are valued based on quoted prices in active markets for the identical instruments (Level 1). We also may have other commodity derivatives that are valued using industry standard models that consider quoted forward prices for commodities, time value, current market and contractual prices for the underlying instruments, volatility factors, and other relevant economic measures (Level 2). Level 3 recurring items relate to CRRs and long-term, fixed-price electricity positions at SDG&E, as we discuss below in “Level 3 Information – SDG&E.”
▪Rabbi Trust investments include marketable securities that we value using a market approach based on closing prices reported in the active market in which the identical security is traded (Level 1). These investments in marketable securities were negligible at December 31, 2020, and 2019.
F-117
▪As we discuss in Note 6, in July 2020, Sempra Energy entered into a Support Agreement for the benefit of CFIN. We measure the Support Agreement, which includes a guarantee obligation, a put option and a call option, net of related guarantee fees, at fair value on a recurring basis. We use a discounted cash flow model to value the Support Agreement, net of related guarantee fees. Because some of the inputs that are significant to the valuation are less observable, the Support Agreement is classified as Level 3, as we describe below in “Level 3 Information – Sempra LNG.”
F-118
| RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Fair value at December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Nuclear decommissioning trusts: | |||||||||||||||||||||||
| Equity securities | $ | 358 | $ | 6 | $ | — | $ | 364 | |||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | 41 | 24 | — | 65 | |||||||||||||||||||
| Municipal bonds | — | 326 | — | 326 | |||||||||||||||||||
| Other securities | — | 270 | — | 270 | |||||||||||||||||||
| Total debt securities | 41 | 620 | — | 661 | |||||||||||||||||||
| Total nuclear decommissioning trusts(1) | 399 | 626 | — | 1,025 | |||||||||||||||||||
| Interest rate and foreign exchange instruments | — | 25 | — | 25 | |||||||||||||||||||
| Commodity contracts not subject to rate recovery | — | 4 | — | 4 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 21 | — | — | 21 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 6 | 1 | 121 | 128 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 19 | 5 | 6 | 30 | |||||||||||||||||||
| Support Agreement, net of related guarantee fees | — | — | 7 | 7 | |||||||||||||||||||
| Total | $ | 445 | $ | 661 | $ | 134 | $ | 1,240 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate and foreign exchange instruments | $ | — | $ | 186 | $ | — | $ | 186 | |||||||||||||||
| Commodity contracts not subject to rate recovery | — | 16 | — | 16 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | — | 6 | 52 | 58 | |||||||||||||||||||
| Support Agreement, net of related guarantee fees | — | — | 4 | 4 | |||||||||||||||||||
| Total | $ | — | $ | 208 | $ | 56 | $ | 264 | |||||||||||||||
| Fair value at December 31, 2019 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Nuclear decommissioning trusts: | |||||||||||||||||||||||
| Equity securities | $ | 503 | $ | 6 | $ | — | $ | 509 | |||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | 46 | 11 | — | 57 | |||||||||||||||||||
| Municipal bonds | — | 282 | — | 282 | |||||||||||||||||||
| Other securities | — | 226 | — | 226 | |||||||||||||||||||
| Total debt securities | 46 | 519 | — | 565 | |||||||||||||||||||
| Total nuclear decommissioning trusts(1) | 549 | 525 | — | 1,074 | |||||||||||||||||||
| Interest rate and foreign exchange instruments | — | 24 | — | 24 | |||||||||||||||||||
| Commodity contracts not subject to rate recovery | — | 11 | — | 11 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 43 | — | — | 43 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 5 | 8 | 95 | 108 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 11 | 8 | 6 | 25 | |||||||||||||||||||
| Total | $ | 608 | $ | 576 | $ | 101 | $ | 1,285 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate and foreign exchange instruments | $ | — | $ | 157 | $ | — | $ | 157 | |||||||||||||||
| Commodity contracts not subject to rate recovery | — | 17 | — | 17 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 14 | 4 | 67 | 85 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | (14) | — | — | (14) | |||||||||||||||||||
| Total | $ | — | $ | 178 | $ | 67 | $ | 245 |
(1) Excludes cash, cash equivalents and receivables (payables), net.
(2) Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
F-119
| RECURRING FAIR VALUE MEASURES – SDG&E | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Fair value at December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Nuclear decommissioning trusts: | |||||||||||||||||||||||
| Equity securities | $ | 358 | $ | 6 | $ | — | $ | 364 | |||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | 41 | 24 | — | 65 | |||||||||||||||||||
| Municipal bonds | — | 326 | — | 326 | |||||||||||||||||||
| Other securities | — | 270 | — | 270 | |||||||||||||||||||
| Total debt securities | 41 | 620 | — | 661 | |||||||||||||||||||
| Total nuclear decommissioning trusts(1) | 399 | 626 | — | 1,025 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 5 | — | 121 | 126 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 18 | — | 6 | 24 | |||||||||||||||||||
| Total | $ | 422 | $ | 626 | $ | 127 | $ | 1,175 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | — | $ | — | $ | 52 | $ | 52 | |||||||||||||||
| Total | $ | — | $ | — | $ | 52 | $ | 52 | |||||||||||||||
| Fair value at December 31, 2019 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Nuclear decommissioning trusts: | |||||||||||||||||||||||
| Equity securities | $ | 503 | $ | 6 | $ | — | $ | 509 | |||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | 46 | 11 | — | 57 | |||||||||||||||||||
| Municipal bonds | — | 282 | — | 282 | |||||||||||||||||||
| Other securities | — | 226 | — | 226 | |||||||||||||||||||
| Total debt securities | 46 | 519 | — | 565 | |||||||||||||||||||
| Total nuclear decommissioning trusts(1) | 549 | 525 | — | 1,074 | |||||||||||||||||||
| Commodity contracts subject to rate recovery | 1 | 3 | 95 | 99 | |||||||||||||||||||
| Effect of netting and allocation of collateral(2) | 10 | — | 6 | 16 | |||||||||||||||||||
| Total | $ | 560 | $ | 528 | $ | 101 | $ | 1,189 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 14 | $ | — | $ | 67 | $ | 81 | |||||||||||||||
| Effect of netting and allocation of collateral(2) | (14) | — | — | (14) | |||||||||||||||||||
| Total | $ | — | $ | — | $ | 67 | $ | 67 |
(1) Excludes cash, cash equivalents and receivables (payables), net.
(2) Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
F-120
| RECURRING FAIR VALUE MEASURES – SOCALGAS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Fair value at December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 1 | $ | 1 | $ | — | $ | 2 | |||||||||||||||
| Effect of netting and allocation of collateral(1) | 1 | 5 | — | 6 | |||||||||||||||||||
| Total | $ | 2 | $ | 6 | $ | — | $ | 8 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | — | $ | 6 | $ | — | $ | 6 | |||||||||||||||
| Total | $ | — | $ | 6 | $ | — | $ | 6 | |||||||||||||||
| Fair value at December 31, 2019 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | 4 | $ | 5 | $ | — | $ | 9 | |||||||||||||||
| Effect of netting and allocation of collateral(1) | 1 | 8 | — | 9 | |||||||||||||||||||
| Total | $ | 5 | $ | 13 | $ | — | $ | 18 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts subject to rate recovery | $ | — | $ | 4 | $ | — | $ | 4 | |||||||||||||||
| Total | $ | — | $ | 4 | $ | — | $ | 4 |
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
Level 3 Information
SDG&E
The table below sets forth reconciliations of changes in the fair value of CRRs and long-term, fixed-price electricity positions classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated and SDG&E.
| LEVEL 3 RECONCILIATIONS**(1)** | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Balance at January 1 | $ | 28 | $ | 179 | $ | (28) | |||||||||||
| Realized and unrealized gains (losses) | 19 | (184) | 209 | ||||||||||||||
| Allocated transmission instruments | 6 | 6 | 10 | ||||||||||||||
| Settlements | 16 | 27 | (12) | ||||||||||||||
| Balance at December 31 | $ | 69 | $ | 28 | $ | 179 | |||||||||||
| Change in unrealized gains (losses) relating to instruments still held at December 31 | $ | 34 | $ | (139) | $ | 183 |
(1) Excludes the effect of the contractual ability to settle contracts under master netting agreements.
Inputs used to determine the fair value of CRRs and fixed-price electricity positions are reviewed and compared with market conditions to determine reasonableness. SDG&E expects all costs related to these instruments to be recoverable through customer rates. As such, there is no impact to earnings from changes in the fair value of these instruments.
F-121
CRRs are recorded at fair value based almost entirely on the most current auction prices published by the California ISO, an objective source. Annual auction prices are published once a year, typically in the middle of November, and are the basis for valuing CRRs settling in the following year. For the CRRs settling from January 1 to December 31, the auction price inputs, at a given location, were in the following ranges for the years indicated below:
| CONGESTION REVENUE RIGHTS AUCTION PRICE INPUTS | |||||||||||||||||||||||
| Settlement year | Price per MWh | Median price per MWh | |||||||||||||||||||||
| 2021 | $ | (1.81) | to | $ | 14.11 | $ | (0.12) | ||||||||||||||||
| 2020 | (3.77) | to | 6.03 | (1.58) | |||||||||||||||||||
| 2019 | (8.57) | to | 35.21 | (2.94) |
The impact associated with discounting is negligible. Because these auction prices are a less observable input, these instruments are classified as Level 3. The fair value of these instruments is derived from auction price differences between two locations. Positive values between two locations represent expected future reductions in congestion costs, whereas negative values between two locations represent expected future charges. Valuation of our CRRs is sensitive to a change in auction price. If auction prices at one location increase (decrease) relative to another location, this could result in a higher (lower) fair value measurement. We summarize CRR volumes in Note 11.
Long-term, fixed-price electricity positions that are valued using significant unobservable data are classified as Level 3 because the contract terms relate to a delivery location or tenor for which observable market rate information is not available. The fair value of the net electricity positions classified as Level 3 is derived from a discounted cash flow model using market electricity forward price inputs. The range and weighted-average price of these inputs at December 31 were as follows:
| LONG-TERM, FIXED-PRICE ELECTRICITY POSITIONS PRICE INPUTS | |||||||||||||||||||||||
| Settlement year | Price per MWh | Weighted-average price per MWh | |||||||||||||||||||||
| 2020 | $ | 19.60 | to | $ | 78.10 | $ | 39.71 | ||||||||||||||||
| 2019 | 21.00 | to | 61.15 | 37.92 |
A significant increase (decrease) in market electricity forward prices would result in a significantly higher (lower) fair value. We summarize long-term, fixed-price electricity position volumes in Note 11.
Realized gains and losses associated with CRRs and long-term, fixed-price electricity positions, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations. Because unrealized gains and losses are recorded as regulatory assets and liabilities, they do not affect earnings.
Sempra LNG
The table below sets forth a reconciliation of changes in the fair value of Sempra Energy’s Support Agreement for the benefit of CFIN classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated.
| LEVEL 3 RECONCILIATION | |||||||||||
| (Dollars in millions) | |||||||||||
| Year ended December 31, 2020 | |||||||||||
| Balance at January 1 | $ | — | |||||||||
| Realized and unrealized gains(1) | 6 | ||||||||||
| Settlements | (3) | ||||||||||
| Balance at December 31(2) | $ | 3 | |||||||||
| Change in unrealized gains (losses) relating to instruments still held at December 31 | $ | 3 | |||||||||
(1) Net gains are included in Interest Income and net losses are included in Interest Expense on the Sempra Energy Consolidated Statement of Operations.
(2) Includes $7 million in Other Current Assets offset by $4 million in Deferred Credits and Other on the Sempra Energy Consolidated Balance Sheet.
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The fair value of the Support Agreement, net of related guarantee fees, is based on a discounted cash flow model using a probability of default and survival methodology. Our estimate of fair value considers inputs such as third-party default rates, credit ratings, recovery rates, and risk-adjusted discount rates, which may be readily observable, market corroborated or generally unobservable inputs. Because CFIN’s credit rating and related default and survival rates are unobservable inputs that are significant to the valuation, the Support Agreement, net of related guarantee fees, is classified as Level 3. We assigned CFIN an internally developed credit rating of A3 and relied on default rate data published by Moody’s to assign a probability of default. A hypothetical change in the credit rating up or down one notch would not result in a significant change in the fair value of the Support Agreement.
Fair Value of Financial Instruments
The fair values of certain of our financial instruments (cash, accounts and notes receivable, short-term amounts due to/from unconsolidated affiliates, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts because of the short-term nature of these instruments. Investments in life insurance contracts that we hold in support of our Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans are carried at cash surrender values, which represent the amount of cash that could be realized under the contracts. The following table provides the carrying amounts and fair values of certain other financial instruments that are not recorded at fair value on the Consolidated Balance Sheets.
| FAIR VALUE OF FINANCIAL INSTRUMENTS | |||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Carrying | Fair value | ||||||||||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||||||||
| Long-term amounts due from unconsolidated affiliates(1) | $ | 786 | $ | — | $ | 817 | $ | — | $ | 817 | |||||||||||||||||||
| Long-term amounts due to unconsolidated affiliates | 275 | — | 266 | — | 266 | ||||||||||||||||||||||||
| Total long-term debt(2) | 22,259 | — | 25,478 | — | 25,478 | ||||||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||||||||
| Total long-term debt(3) | $ | 6,253 | $ | — | $ | 7,384 | $ | — | $ | 7,384 | |||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||||||||
| Total long-term debt(4) | $ | 4,759 | $ | — | $ | 5,655 | $ | — | $ | 5,655 | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Carrying | Fair value | ||||||||||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Sempra Energy Consolidated: | |||||||||||||||||||||||||||||
| Long-term amounts due from unconsolidated affiliates | $ | 742 | $ | — | $ | 759 | $ | — | $ | 759 | |||||||||||||||||||
| Long-term amounts due to unconsolidated affiliates | 195 | — | 184 | — | 184 | ||||||||||||||||||||||||
| Total long-term debt(2) | 21,247 | — | 22,638 | 26 | 22,664 | ||||||||||||||||||||||||
| SDG&E: | |||||||||||||||||||||||||||||
| Total long-term debt(3) | $ | 5,140 | $ | — | $ | 5,662 | $ | — | $ | 5,662 | |||||||||||||||||||
| SoCalGas: | |||||||||||||||||||||||||||||
| Total long-term debt(4) | $ | 3,809 | $ | — | $ | 4,189 | $ | — | $ | 4,189 |
(1) Before allowances for credit losses of $3 million. Includes $3 million of accrued interest receivable in Due From Unconsolidated Affiliate – Current.
(2) Before reductions of unamortized discount and debt issuance costs of $268 million and $225 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $1,330 million and $1,289 million at December 31, 2020 and 2019, respectively.
(3) Before reductions of unamortized discount and debt issuance costs of $52 million and $48 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $1,276 million and $1,270 million at December 31, 2020 and 2019, respectively.
(4) Before reductions of unamortized discount and debt issuance costs of $40 million and $34 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $54 million and $19 million at December 31, 2020 and 2019, respectively.
We provide the fair values for the securities held in the NDT related to SONGS in Note 15.
NON-RECURRING FAIR VALUE MEASURES
Sempra LNG
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Non-Utility Natural Gas Storage Assets
As we discuss in Note 5, in June 2018, our board of directors approved a plan to sell Mississippi Hub, our 90.9% ownership interest in Bay Gas and other non-utility assets (the non-utility natural gas storage assets). In June 2018, we also owned a 75.4% interest in LA Storage, a salt cavern development project in Cameron Parish in Louisiana. The LA Storage project also includes an existing 23.3-mile pipeline header system that is not currently contracted.
Because of the plan of sale, we considered a market participant’s view of the total value of the non-utility natural gas storage assets and determined that their fair value, less costs to sell, may be less than their carrying value. Additionally, our inability to secure customer contracts that would support further investment in LA Storage led us to assess and conclude that the full carrying value of these other U.S. midstream assets may not be recoverable. As a result, on June 25, 2018, we recorded an impairment of $1.3 billion ($755 million after tax and NCI) in Impairment Losses on Sempra Energy’s Consolidated Statement of Operations.
We measured the estimated fair value of $190 million at June 25, 2018 using a discounted cash flow approach. This approach included unobservable inputs, resulting in a Level 3 measurement in the fair value hierarchy. We considered a market participant’s view of the values of the non-utility natural gas storage assets based on an estimation of future net cash flows. To estimate future net cash flows, we considered the non-utility natural gas storage assets’ prospects for generating revenues and cash flows beyond their existing contracted capacity and tenors, including natural gas price volatility and seasonality factors, as well as discount rates commensurate with the risks inherent in the cash flows.
On January 1, 2019, Sempra LNG entered into an agreement to sell Mississippi Hub and Bay Gas for $332 million, subject to working capital adjustments and $20 million representing Sempra LNG’s purchase of the 9.1% minority interest in Bay Gas immediately prior to and included as part of the sale. On February 7, 2019, Sempra LNG completed this sale. Additionally, in December 2018, Sempra LNG entered into an agreement to sell other non-utility assets for $5 million; such sale was completed in January 2019. We considered the assets’ sales prices negotiated with active market participants to be a relevant and material data input. Accordingly, we updated our fair value analysis to reflect the Level 2 market participant input as the primary indicator of fair value. As a result, on December 31, 2018, we reduced the impairment of $1.3 billion recorded on June 25, 2018 by $183 million ($126 million after tax and NCI), resulting in a total impairment of $1.1 billion ($629 million after tax and NCI) for the year ended December 31, 2018, based on a fair value of $337 million for these non-utility natural gas storage assets.
Sempra Renewables
U.S. Wind Investments
As we discuss in Notes 5 and 6, in June 2018, our board of directors approved a plan to sell all our wind and solar equity method investments at Sempra Renewables. Because of our expectation of a shorter holding period as a result of this plan of sale, we evaluated the recoverability of the carrying amounts of each of these investments and concluded there was an other-than-temporary impairment on certain of our wind equity method investments totaling $200 million ($145 million after tax), which we recorded in Equity Earnings on Sempra Energy’s Consolidated Statement of Operations for the year ended December 31, 2018. We measured the estimated fair value of $145 million at June 25, 2018 using a discounted cash flow model including significant unobservable inputs, adjusted for our applicable ownership percentages, which is a Level 3 measurement in the fair value hierarchy. The key inputs to the methodology were contracted and merchant pricing, and the discount rate. Sempra Renewables completed the sale of its interests in these wind equity method investments in April 2019.
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The table below summarizes significant inputs impacting our non-recurring fair value measures. Additional discussions about the related transactions are provided in Note 5, and as applicable, in Note 6.
| NON-RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED | ||||||||||||||||||||||||||||||||||||||
| Measurement date | Estimated fair value (in millions) | Valuation technique | Fair value hierarchy | % of fair value measurement | Inputs used to develop measurement | Range of inputs (weighted average) | ||||||||||||||||||||||||||||||||
| Non-utility natural gas storage assets | December 31, 2018 | $ | 337 | Market approach | Level 2 | 100% | Assets’ sales prices | 100% | ||||||||||||||||||||||||||||||
| Non-utility natural gas storage assets | June 25, 2018 | $ | 190 | Discounted cash flows | Level 3 | 100% | Storage rates per dekatherm per month | $0.06 - $0.22 $(0.10) | (1) | |||||||||||||||||||||||||||||
| Discount rate | 10% | (2) | ||||||||||||||||||||||||||||||||||||
| Certain of our U.S. wind equity method investments | June 25, 2018 | $ | 145 | Discounted cash flows | Level 3 | 100% | Contracted and observable merchant prices per MWh | $29 - $92 | (1) | |||||||||||||||||||||||||||||
| Discount rate | 8% - 10% (8.7%) | (2) |
(1) Generally, significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.
(2) An increase in the discount rate would result in a decrease in fair value.
NOTE 13. PREFERRED STOCK
Sempra Energy and SDG&E are authorized to issue up to 50 million and 45 million shares of preferred stock, respectively. At December 31, 2020 and 2019, SDG&E had no preferred stock outstanding. The rights, preferences, privileges and restrictions for any new series of preferred stock would be established by each company’s board of directors at the time of issuance. We discuss SoCalGas preferred stock below.
SEMPRA ENERGY MANDATORY CONVERTIBLE PREFERRED STOCK
In January 2018, we issued 17,250,000 shares of our 6% mandatory convertible preferred stock, series A (series A preferred stock) in a registered public offering at $100.00 per share (or $98.20 per share after deducting underwriting discounts), and received net proceeds of $1.69 billion (net of underwriting discounts and equity issuance costs of $32 million). Each share of series A preferred stock had a liquidation value of $100.00.
In July 2018, we issued 5,750,000 shares of our 6.75% mandatory convertible preferred stock, series B (series B preferred stock) in a registered public offering at $100.00 per share (or $98.35 per share after deducting underwriting discounts), and received net proceeds of $565 million (net of underwriting discounts and equity issuance costs of $10 million). Each share of series B preferred stock has a liquidation value of $100.00.
Mandatory Conversion
Unless earlier converted, each share of the series A preferred stock and series B preferred stock is to automatically convert on the mandatory conversion date of January 15, 2021 and July 15, 2021, respectively. The number of shares of our common stock issuable on conversion of each such series of preferred stock is determined based on the volume-weighted average market value per share of our common stock over the 20-consecutive trading day period beginning on and including the 21st scheduled trading day immediately preceding January 15, 2021 for the series A preferred stock and July 15, 2021 for the series B preferred stock. On January 15, 2021, we converted 17,250,000 shares of series A preferred stock into 13,781,025 shares of our common stock based on a conversion rate of 0.7989 shares of our common stock for each issued and outstanding share of series A preferred stock. As a consequence, no shares of series A preferred stock were outstanding after January 15, 2021 and the 17,250,000 shares that were formerly series A preferred stock have returned to the status of authorized and unissued shares of preferred stock.
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The terms of our series A preferred stock and series B preferred stock require a notice to holders when the aggregate adjustment to the conversion rates at which shares of series A preferred stock or series B preferred stock are convertible into shares of Sempra Energy common stock is more than 1%. On July 6, 2020, we notified the holders of the series A preferred stock of such an adjustment. These adjustments, which resulted from the incremental impact of our second quarter dividend declared on our common stock and which became effective as of June 25, 2020, the ex-dividend date for such dividend, include adjustments to the minimum and maximum conversion rates and the related initial and threshold appreciation prices.
The following table illustrates the conversion rate per share of our series B preferred stock, subject to certain anti-dilution adjustments.
| CONVERSION RATES | ||||||||
| Applicable market value per share of our common stock | Conversion rate (number of shares of our common stock to be received upon conversion of each share of series B preferred stock) | |||||||
| Series B preferred stock | ||||||||
| Greater than $136.50 (which is the threshold appreciation price) | 0.7326 shares (approximately equal to $100.00 divided by the threshold appreciation price) | |||||||
| Equal to or less than $136.50 but greater than or equal to $113.75 | Between 0.7326 and 0.8791 shares, determined by dividing $100.00 by the applicable market value of our common stock | |||||||
| Less than $113.75 (which is the initial price) | 0.8791 shares (approximately equal to $100.00 divided by the initial price) |
Conversion at the Option of the Holder
Generally, and subject to the terms of the respective series of mandatory convertible preferred stock, at any time prior to January 15, 2021 for the series A preferred stock and July 15, 2021 for the series B preferred stock, holders were (with respect to the series A preferred stock) or are (with respect to the series B preferred stock) entitled to elect to convert each share of their preferred stock into shares of our common stock at the minimum conversion rate. No holders of the series A preferred stock elected such a conversion before the January 15, 2021 mandatory conversion of all then-outstanding shares. If all outstanding series B preferred stock were converted early, we would issue, subject to anti-dilution adjustments, 4.2 million common shares upon such conversion. In addition, if holders of the series B preferred stock elect to convert any shares during a specified period beginning on the effective date of a fundamental change, as defined in the certificate of determination of preferences of the series B preferred stock, such shares of preferred stock will be converted into shares of our common stock at a fundamental change conversion rate, and the holders will also be entitled to receive a fundamental change dividend make-whole amount and accumulated dividend amount.
Dividends
Dividends on each series of mandatory convertible preferred stock are (or, with respect to the series A preferred stock, were) payable quarterly on a cumulative basis when, as and if declared by our board of directors. All dividends ceased to accrue on the series A preferred stock upon their mandatory conversion on January 15, 2021. We may pay quarterly declared dividends on the series B preferred stock in cash or, subject to certain limitations, in shares of our common stock, no par value, or in any combination of cash and shares of our common stock. Shares of common stock used to pay dividends will be valued at 97% of the volume-weighted average price per share over the five-consecutive trading day period beginning on, and including the sixth trading day prior to, the applicable dividend payment date.
Voting Rights
The holders of the series B preferred stock do not have voting rights, except with respect to any authorization, creation or increase in the authorized amount of any class or series of capital stock ranking senior to the series B preferred stock, certain amendments to the terms of the series B preferred stock, in certain other limited circumstances and as otherwise specifically required by California law. In addition, whenever dividends on any shares of series B preferred stock have not been declared and paid or have been declared but not paid for six or more dividend periods, whether or not consecutive, the authorized number of directors on our board of directors will automatically be increased by two and the holders of the series B preferred stock, voting together as a single class with holders of any and all other outstanding preferred stock of equal rank having similar voting rights, will be entitled to elect two directors who satisfy certain requirements to fill such newly created directorships. This voting right will terminate when all accumulated and unpaid dividends on the series B preferred stock have been paid in full and, upon such termination and the termination of the same voting rights of all other holders of outstanding series of preferred stock that have such voting rights, the term of office of each director elected pursuant to such rights will terminate and the authorized number of directors will automatically decrease by two, subject to the revesting of that right in the event of each subsequent nonpayment.
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Ranking
The series B preferred stock ranks, with respect to dividend rights and distribution rights upon our liquidation, winding-up or dissolution:
▪senior to our common stock and each other class or series of our capital stock established in the future, unless the terms of such capital stock expressly provide otherwise;
▪on parity with our outstanding series C preferred stock and each class or series of our capital stock established in the future if the terms of such capital stock provide that it ranks on parity with the series B preferred stock;
▪junior to each class or series of our capital stock established in the future, if the terms of such capital stock provide that it ranks senior to the series B preferred stock;
▪junior to our existing and future indebtedness and other liabilities; and
▪structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries and capital stock of our subsidiaries held by third parties.
SEMPRA ENERGY SERIES C PREFERRED STOCK
In June 2020, we issued 900,000 shares of our 4.875% fixed-rate reset cumulative redeemable perpetual preferred stock, series C (series C preferred stock) in a registered public offering at a price to the public of $1,000 per share and received net proceeds of $889 million after deducting the underwriting discount and equity issuance costs of $11 million. We used the net proceeds for working capital and other general corporate purposes, including the repayment of indebtedness.
Liquidation Preference
Each share of series C preferred stock has a liquidation preference of $1,000 plus any accumulated and unpaid dividends (whether or not declared) on such share.
Redemption at the Option of Sempra Energy
The shares of series C preferred stock are perpetual and have no maturity date. However, we may, at our option, redeem the series C preferred stock in whole or in part, from time to time, on any day during the period from and including the July 15 immediately preceding October 15, 2025 and October 15 of every fifth year after 2025 through and including such October 15 at a redemption price in cash equal to $1,000 per share. Additionally, in the event that a credit rating agency then publishing a rating for us makes certain amendments, clarifications or changes to the criteria it uses to assign equity credit to securities such as the series C preferred stock (Ratings Event), we may redeem the series C preferred stock, in whole but not in part, at any time within 120 days after the conclusion of any review or appeal process instituted by us following the occurrence of the Ratings Event or, if no such review or appeal process is available or sought, the occurrence of such Ratings Event, at a redemption price in cash equal to $1,020 per share (102% of the liquidation preference per share).
Dividends
Dividends on the series C preferred stock, when, as and if declared by our board of directors or an authorized committee thereof, are payable in cash, on a cumulative basis, semi-annually in arrears beginning on October 15, 2020. Dividends on the series C preferred stock will be cumulative whether or not:
▪we have earnings;
▪the payment of such dividends is then permitted under California law;
▪such dividends are authorized or declared; and
▪any agreements to which we are a party prohibit the current payment of dividends, including any agreement relating to our indebtedness.
We accrue dividends on the series C preferred stock on a monthly basis. The dividend rate from and including June 19, 2020 to, but excluding, October 15, 2025 is 4.875% per annum of the $1,000 liquidation preference per share. The dividend rate will reset on October 15, 2025 and on October 15 of every fifth year after 2025 and, for each five-year period following such reset dates, will be a per annum rate equal to the Five-year U.S. Treasury Rate (as defined in the certificate of determination of preferences of the series C preferred stock) as of the second business day prior to such reset date, plus a spread of 4.550%, of the $1,000 liquidation preference per share.
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Voting Rights
The holders of series C preferred stock do not have any voting rights, except with respect to any authorization, creation or increase in the authorized amount of any class or series of capital stock ranking senior to the series C preferred stock, certain amendments to the terms of the series C preferred stock, in certain other limited circumstances and as otherwise specifically required by California law. In addition, whenever dividends on any shares of series C preferred stock have not been declared and paid or have been declared but not paid for three or more dividend periods, whether or not consecutive, the authorized number of directors on our board of directors will automatically be increased by two and the holders of the series C preferred stock, voting together as a single class with holders of any and all other outstanding series of preferred stock of equal rank having similar voting rights, will be entitled to elect two directors who satisfy certain requirements to fill such two newly created directorships. This voting right will terminate when all accumulated and unpaid dividends on the series C preferred stock have been paid in full and, upon such termination and the termination of the same voting rights of all other holders of outstanding series of preferred stock that have such voting rights, the term of office of each director elected pursuant to such rights will terminate and the authorized number of directors will automatically decrease by two, subject to the revesting of such rights in the event of each subsequent nonpayment.
Ranking
The series C preferred stock ranks, with respect to dividend rights and distribution rights upon our liquidation, winding-up or dissolution:
▪senior to our common stock and each other class or series of our capital stock established in the future, unless the terms of such capital stock expressly provide otherwise;
▪on parity with our formerly outstanding series A preferred stock and currently outstanding series B preferred stock and each class or series of our capital stock established in the future if the terms of such capital stock provide that it ranks on parity with the series C preferred stock;
▪junior to each class or series of our capital stock established in the future, if the terms of such capital stock provide that it ranks senior to the series C preferred stock;
▪junior to our existing and future indebtedness and other liabilities; and
▪structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries and capital stock of our subsidiaries held by third parties.
SOCALGAS PREFERRED STOCK
SoCalGas is authorized to issue up to an aggregate of 11 million shares of preferred stock, series preferred stock and preference stock. The table below presents preferred stock outstanding at SoCalGas:
| PREFERRED STOCK OUTSTANDING | |||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| $25 par value, authorized 1,000,000 shares: | |||||||||||
| 6% Series, 79,011 shares outstanding | $ | 3 | $ | 3 | |||||||
| 6% Series A, 783,032 shares outstanding | 19 | 19 | |||||||||
| SoCalGas - Total preferred stock | 22 | 22 | |||||||||
| Less: 50,970 shares of the 6% Series outstanding owned by PE | (2) | (2) | |||||||||
| Sempra Energy - Total preferred stock of subsidiary | $ | 20 | $ | 20 |
None of SoCalGas’ outstanding preferred stock is callable, and no shares are subject to mandatory redemption.
All outstanding shares have one vote per share, cumulative preferences as to dividends and liquidation preferences of $25 per share plus any unpaid dividends.
In addition to the outstanding preferred stock above, SoCalGas’ articles of incorporation authorize 5 million shares of series preferred stock and 5 million shares of preference stock, both without par value and with cumulative preferences as to dividends and liquidation value. The preference stock would rank junior to all series of preferred stock and series preferred stock. Other rights and privileges of any new series of such stock would be established by the SoCalGas board of directors at the time of issuance.
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NOTE 14. SEMPRA ENERGY – SHAREHOLDERS’ EQUITY AND EARNINGS PER COMMON SHARE
SEMPRA ENERGY COMMON STOCK REPURCHASES
On September 11, 2007, our board of directors authorized the repurchase of shares of our common stock, provided that the amounts spent for such purpose do not exceed the greater of $2 billion or amounts spent to purchase no more than 40 million shares. On July 1, 2020, we entered into an ASR program under which we prepaid $500 million to repurchase shares of our common stock in a share forward transaction. The total number of shares purchased was determined by dividing the $500 million purchase price by the arithmetic average of the volume-weighted average trading prices of shares of our common stock during the valuation period of July 2, 2020 through August 4, 2020, minus a fixed discount. The program was completed on August 4, 2020 with an aggregate of 4,089,375 shares of Sempra Energy common stock repurchased at an average price of $122.27 per share. Following the completion of the ASR program, the aggregate dollar amount authorized by the September 11, 2007 share repurchase authorization was exhausted.
On July 6, 2020, our board of directors authorized the repurchase of shares of our common stock at any time and from time to time in an aggregate amount not to exceed the lesser of $2 billion or amounts spent to purchase no more than 25 million shares. No shares have been repurchased under this authorization.
SEMPRA ENERGY COMMON STOCK OFFERINGS
In January 2018, we completed the offering of 26,869,158 shares of our common stock, no par value, in a registered public offering at $107.00 per share (approximately $105.07 per share after deducting underwriting discounts), with 23,364,486 shares pursuant to forward sale agreements. We received net proceeds totaling approximately $2.8 billion to fully settle these shares, as follows:
▪$367 million (net of underwriting discounts and equity issuance costs of $8 million) to cover overallotment shares of 3,504,672 in the first quarter of 2018 at a settlement price of $105.07 per share;
▪$900 million (net of underwriting discounts of $16 million) from the settlement of 8,556,630 shares in the first quarter of 2018 at a forward sale price of $105.18 per share;
▪$800 million (net of underwriting discounts of $14 million) from the settlement of 7,651,671 shares in the second quarter of 2018 at forward sale prices ranging from $104.53 to $104.58 per share; and
▪$728 million (net of underwriting discounts of $13 million) from the settlement of 7,156,185 shares in the third quarter of 2019 at a forward sale price of $101.74 per share.
In July 2018, we completed the offering of 11,212,500 shares of our common stock, no par value, in a registered public offering at $113.75 per share (approximately $111.87 per share after deducting underwriting discounts), with 9,750,000 shares pursuant to forward sale agreements. We received net proceeds totaling approximately $1.2 billion to fully settle these shares, as follows:
▪$164 million (net of underwriting discounts and equity issuance costs of $3 million) to cover overallotment shares of 1,462,500 in the third quarter of 2018 at a settlement price of $111.87 per share; and
▪$1,066 million (net of underwriting discounts of $18 million) from the settlement of 9,750,000 shares in the fourth quarter of 2019 at a forward sale price of $109.33 per share.
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EARNINGS PER COMMON SHARE
Basic EPS is calculated by dividing earnings attributable to common shares (from both continuing and discontinued operations) by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
| EARNINGS PER COMMON SHARE COMPUTATIONS | |||||||||||||||||
| (Dollars in millions, except per share amounts; shares in thousands) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Numerator for continuing operations: | |||||||||||||||||
| Income from continuing operations, net of income tax | $ | 2,255 | $ | 1,999 | $ | 938 | |||||||||||
| Earnings attributable to noncontrolling interests | (162) | (129) | (44) | ||||||||||||||
| Preferred dividends | (168) | (142) | (125) | ||||||||||||||
| Preferred dividends of subsidiary | (1) | (1) | (1) | ||||||||||||||
| Earnings from continuing operations attributable to common shares | $ | 1,924 | $ | 1,727 | $ | 768 | |||||||||||
| Numerator for discontinued operations: | |||||||||||||||||
| Income from discontinued operations, net of income tax | $ | 1,850 | $ | 363 | $ | 188 | |||||||||||
| Earnings attributable to noncontrolling interests | (10) | (35) | (32) | ||||||||||||||
| Earnings from discontinued operations attributable to common shares | $ | 1,840 | $ | 328 | $ | 156 | |||||||||||
| Numerator for earnings: | |||||||||||||||||
| Earnings attributable to common shares | $ | 3,764 | $ | 2,055 | $ | 924 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average common shares outstanding for basic EPS(1) | 291,077 | 277,904 | 268,072 | ||||||||||||||
| Dilutive effect of stock options and RSUs(2) | 1,175 | 1,585 | 919 | ||||||||||||||
| Dilutive effect of common shares sold forward | — | 2,544 | 861 | ||||||||||||||
| Weighted-average common shares outstanding for diluted EPS | 292,252 | 282,033 | 269,852 | ||||||||||||||
| Basic EPS: | |||||||||||||||||
| Earnings from continuing operations | $ | 6.61 | $ | 6.22 | $ | 2.86 | |||||||||||
| Earnings from discontinued operations | $ | 6.32 | $ | 1.18 | $ | 0.59 | |||||||||||
| Earnings | $ | 12.93 | $ | 7.40 | $ | 3.45 | |||||||||||
| Diluted EPS: | |||||||||||||||||
| Earnings from continuing operations | $ | 6.58 | $ | 6.13 | $ | 2.84 | |||||||||||
| Earnings from discontinued operations | $ | 6.30 | $ | 1.16 | $ | 0.58 | |||||||||||
| Earnings | $ | 12.88 | $ | 7.29 | $ | 3.42 |
(1) Includes fully vested RSUs held in our Deferred Compensation Plan of 537 in 2020, 617 in 2019 and 641 in 2018. These fully vested RSUs are included in weighted-average common shares outstanding for basic EPS because there are no conditions under which the corresponding shares will not be issued.
(2) Due to market fluctuations of both Sempra Energy common stock and the comparative indices used to determine the vesting percentage of our total shareholder return performance-based RSUs, which we discuss in Note 10, dilutive RSUs may vary widely from period-to-period.
The potentially dilutive impact from stock options and RSUs is calculated under the treasury stock method. Under this method, proceeds based on the exercise price and unearned compensation are assumed to be used to repurchase shares on the open market at the average market price for the period, reducing the number of potential new shares to be issued and sometimes causing an antidilutive effect. The computation of diluted EPS for 2020, 2019 and 2018 excludes potentially dilutive shares of 187,028, 80,281 and 20,814, respectively, because to include them would be antidilutive for the period. However, these shares could potentially dilute basic EPS in the future.
The potentially dilutive impact from the forward sale of our common stock pursuant to the forward sale agreements that we discuss above is reflected in our diluted EPS calculation using the treasury stock method. We have fully settled all forward sale agreements and those shares are included in weighted-average common shares outstanding for basic EPS.
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The potentially dilutive impact from our mandatory convertible preferred stock is calculated under the if-converted method. The computation of diluted EPS for the years ended December 31, 2020, 2019 and 2018 excludes 17,889,365, 17,471,375 and 17,197,035 potentially dilutive shares, respectively, because to include them would be antidilutive for those periods. However, these shares could potentially dilute basic EPS in the future. We discuss the 2018 issuances of our mandatory convertible preferred stock and conversion of the series A preferred stock to Sempra Energy common stock on January 15, 2021 in Note 13.
We are authorized to issue 750 million shares of no par value common stock. The following table provides common stock activity for the last three years.
| COMMON STOCK ACTIVITY | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Common shares outstanding, January 1 | 291,712,925 | 273,769,513 | 251,358,977 | ||||||||||||||
| Shares issued under forward sale agreements | — | 16,906,185 | 21,175,473 | ||||||||||||||
| RSUs vesting(1) | 896,839 | 463,012 | 509,042 | ||||||||||||||
| Stock options exercised | 4,400 | 52,540 | 138,861 | ||||||||||||||
| Savings plan issuance | 201,431 | 475,774 | 553,036 | ||||||||||||||
| Common stock investment plan(2) | 42,955 | 199,253 | 231,242 | ||||||||||||||
| Issuance of RSUs held in our Deferred Compensation Plan | 103,552 | 59,470 | 3,357 | ||||||||||||||
| Shares repurchased(3) | (4,491,858) | (212,822) | (200,475) | ||||||||||||||
| Common shares outstanding, December 31 | 288,470,244 | 291,712,925 | 273,769,513 |
(1) Includes dividend equivalents.
(2) Participants in the Direct Stock Purchase Plan may reinvest dividends to purchase newly issued shares.
(3) Generally, we purchase shares of our common stock or units from LTIP participants who elect to sell to us a sufficient number of vested RSUs to meet minimum statutory tax withholding requirements. In 2020, shares repurchased includes shares repurchased under the ASR program that we discuss above.
NOTE 15. SAN ONOFRE NUCLEAR GENERATING STATION
SDG&E has a 20% ownership interest in SONGS, a nuclear generating facility near San Clemente, California, which permanently ceased operations in June 2013 after an extended outage as a result of issues with the steam generators used in the facility. Edison, the majority owner and operator of SONGS, notified SDG&E that it had reached a decision to permanently retire SONGS and seek approval from the NRC to start the decommissioning activities for the entire facility. SONGS is subject to the jurisdiction of the NRC and the CPUC.
SDG&E, and each of the other owners, holds its undivided interest as a tenant in common in the property. Each owner is responsible for financing its share of costs. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Consolidated Statements of Operations.
SETTLEMENT AGREEMENT TO RESOLVE THE CPUC’S ORDER INSTITUTING INVESTIGATION INTO THE SONGS OUTAGE
In 2012, in response to the SONGS outage, the CPUC issued the SONGS OII, which was intended to determine the ultimate recovery of the investment in SONGS and the costs incurred since the commencement of the outage. In July 2018, the CPUC approved a settlement agreement and, in August 2018, SDG&E, Edison, Cal PA, TURN and other intervenors submitted a notice that they accepted the settlement agreement, which provided for various disallowances, refunds and rate recoveries.
In connection with the settlement agreement, and in exchange for the release of certain SONGS-related claims, in January 2018, SDG&E and Edison entered into a utility shareholder agreement, which became effective upon CPUC approval of the settlement agreement in July 2018, under which Edison has an obligation to compensate SDG&E for the revenue requirement amounts that SDG&E will no longer recover because of the settlement agreement. In exchange for Edison’s reimbursement, the parties mutually released each other from all claims that each party had or could have asserted related to the steam generator replacement failure and its aftermath. Edison’s payment obligation commenced in October 2018, and amounts are due to SDG&E quarterly thereafter until April 2022. At December 31, 2020, SDG&E has a receivable from Edison, including accrued interest, totaling $49 million, with $37 million classified as current and $12 million classified as noncurrent. This receivable reflects amounts Edison is
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obligated to pay to SDG&E in lieu of amounts SDG&E would have collected from ratepayers associated with the SONGS regulatory asset.
NUCLEAR DECOMMISSIONING AND FUNDING
As a result of Edison’s decision to permanently retire SONGS Units 2 and 3, Edison began the decommissioning phase of the plant. We expect the majority of the work to take 10 years after receipt of all the required permits. The coastal development permit, the last permit required to be obtained, was issued in October 2019. The Samuel Lawrence Foundation filed a writ petition under the California Coastal Act in LA Superior Court in December 2019 seeking to invalidate this permit and to obtain injunctive relief to stop decommissioning work. In September 2020, the Samuel Lawrence Foundation filed another writ petition under the California Coastal Act in LA Superior Court seeking to set aside the CCC’s July 2020 approval of the inspection and maintenance plan for the SONGS’ canisters and to obtain injunctive relief to stop decommissioning work. Major decommissioning work began in 2020 and has not been interrupted by the writ petitions filed by the Samuel Lawrence Foundation. Decommissioning of Unit 1, removed from service in 1992, is largely complete. The remaining work for Unit 1 will be completed once Units 2 and 3 are dismantled and the spent fuel is removed from the site. The spent fuel is currently being stored on-site, until the DOE identifies a spent fuel storage facility and puts in place a program for the fuel’s disposal, as we discuss below. SDG&E is responsible for approximately 20% of the total decommissioning costs.
In accordance with state and federal requirements and regulations, SDG&E has assets held in the NDT to fund its share of decommissioning costs for SONGS Units 1, 2 and 3. The amounts collected in rates for SONGS’ decommissioning are invested in the NDT, which is comprised of externally managed trust funds. Amounts held by the NDT are invested in accordance with CPUC regulations. SDG&E classifies debt and equity securities held in the NDT as available-for-sale. The NDT assets are presented on the Sempra Energy and SDG&E Consolidated Balance Sheets at fair value with the offsetting credits recorded in noncurrent Regulatory Liabilities.
Except for the use of funds for the planning of decommissioning activities or NDT administrative costs, CPUC approval is required for SDG&E to access the NDT assets to fund SONGS decommissioning costs for Units 2 and 3. In December 2020, SDG&E received authorization from the CPUC to access NDT funds of up to $89 million for forecasted 2021 costs.
In September 2020, the IRS and the U.S. Department of the Treasury published final regulations that clarify the definition of “nuclear decommissioning costs,” which are costs that may be paid for or reimbursed from a qualified trust fund. The final regulations adopted most of the provisions of the proposed regulations issued in December 2016. The final regulations apply to taxable years ending on or after September 4, 2020 and confirm that the definition of “nuclear decommissioning costs” includes amounts related to the storage of spent nuclear fuel at both on-site and off-site ISFSIs.
The final regulations also clarify that costs incurred for ISFSIs that may be or are expected to be reimbursed by the DOE may be paid or reimbursed from a qualified trust fund. Accordingly, the final regulations allow SDG&E the option to access qualified trust funds to recover spent fuel storage costs before Edison reaches final settlement with the DOE regarding the DOE’s reimbursement of these costs. Historically, the DOE’s reimbursements of spent fuel storage costs have not resulted in timely or complete recovery of these costs. We discuss the DOE’s responsibility for spent nuclear fuel below.
Nuclear Decommissioning Trusts
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The following table shows the fair values and gross unrealized gains and losses for the securities held in the NDT. We provide additional fair value disclosures for the NDT in Note 12.
| NUCLEAR DECOMMISSIONING TRUSTS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||||||||||
| At December 31, 2020: | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies(1) | $ | 64 | $ | 1 | $ | — | $ | 65 | |||||||||||||||
| Municipal bonds(2) | 308 | 18 | — | 326 | |||||||||||||||||||
| Other securities(3) | 253 | 17 | — | 270 | |||||||||||||||||||
| Total debt securities | 625 | 36 | — | 661 | |||||||||||||||||||
| Equity securities | 112 | 254 | (2) | 364 | |||||||||||||||||||
| Cash and cash equivalents | 3 | — | — | 3 | |||||||||||||||||||
| Receivables (payables), net | (9) | — | — | (9) | |||||||||||||||||||
| Total | $ | 731 | $ | 290 | $ | (2) | $ | 1,019 | |||||||||||||||
| At December 31, 2019: | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies | $ | 57 | $ | — | $ | — | $ | 57 | |||||||||||||||
| Municipal bonds | 270 | 12 | — | 282 | |||||||||||||||||||
| Other securities | 218 | 9 | (1) | 226 | |||||||||||||||||||
| Total debt securities | 545 | 21 | (1) | 565 | |||||||||||||||||||
| Equity securities | 176 | 339 | (6) | 509 | |||||||||||||||||||
| Cash and cash equivalents | 16 | — | — | 16 | |||||||||||||||||||
| Receivables (payables), net | (8) | — | — | (8) | |||||||||||||||||||
| Total | $ | 729 | $ | 360 | $ | (7) | $ | 1,082 |
(1) Maturity dates are 2022-2051.
(2) Maturity dates are 2021-2056.
(3) Maturity dates are 2021-2072.
The following table shows the proceeds from sales of securities in the NDT and gross realized gains and losses on those sales.
| SALES OF SECURITIES IN THE NDT | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Proceeds from sales | $ | 1,439 | $ | 914 | $ | 890 | |||||||||||
| Gross realized gains | 156 | 24 | 42 | ||||||||||||||
| Gross realized losses | (17) | (5) | (10) |
Net unrealized gains and losses, as well as realized gains and losses that are reinvested in the NDT, are included in noncurrent Regulatory Liabilities on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets. We determine the cost of securities in the trusts on the basis of specific identification.
ASSET RETIREMENT OBLIGATION AND SPENT NUCLEAR FUEL
The present value of SDG&E’s ARO related to decommissioning costs for the SONGS units was $579 million at December 31, 2020. That amount includes the cost to decommission Units 2 and 3, and the remaining cost to complete the decommissioning of Unit 1, which is substantially complete. The ARO for all three units is based on a cost study prepared in 2017 that is pending CPUC approval. The ARO for Units 2 and 3 reflects the acceleration of the start of decommissioning of these units as a result of the early closure of the plant. SDG&E’s share of total decommissioning costs in 2020 dollars is approximately $860 million. We expect SDG&E’s undiscounted SONGS decommissioning payments to be $110 million in 2021, $83 million in 2022, $63 million in 2023, $45 million in 2024, $44 million in 2025, and $697 million thereafter.
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U.S. DEPARTMENT OF ENERGY NUCLEAR FUEL DISPOSAL
Spent nuclear fuel from SONGS is currently stored on-site in an ISFSI licensed by the NRC. In October 2015, the CCC approved Edison’s application to expand the ISFSI. The ISFSI expansion began construction in 2016 and the transfer of the spent nuclear fuel from Units 2 and 3 to the ISFSI began in 2018 and was completed in August 2020. The ISFSI will operate until 2049, when it is assumed that the DOE will have taken custody of all the SONGS spent fuel. The ISFSI would then be decommissioned, and the site restored to its original environmental state. Until then, SONGS owners are responsible for interim storage of spent nuclear fuel at SONGS.
The Nuclear Waste Policy Act of 1982 made the DOE responsible for accepting, transporting, and disposing of spent nuclear fuel. However, it is uncertain when the DOE will begin accepting spent nuclear fuel from SONGS. This delay will lead to increased costs for spent fuel storage. In November 2019, Edison filed a claim for spent fuel management costs in the U.S. Court of Federal Claims for the time period from January 2017 through July 2018. It is unclear when Edison will pursue litigation claims for spent fuel management costs incurred on or after August 1, 2018. SDG&E will continue to support Edison in its pursuit of claims on behalf of the SONGS co-owners against the DOE for its failure to timely accept the spent nuclear fuel.
NUCLEAR INSURANCE
SDG&E and the other owners of SONGS have insurance to cover claims from nuclear liability incidents arising at SONGS. Currently, this insurance provides $450 million in coverage limits, the maximum amount available, including coverage for acts of terrorism. In addition, the Price-Anderson Act provides an additional $110 million of coverage. If a nuclear liability loss occurs at SONGS and exceeds the $450 million insurance limit, this additional coverage would be available to provide a total of $560 million in coverage limits per incident.
As a result of updated coverage assessments, the SONGS owners have nuclear property damage insurance of $130 million, which exceeds the minimum federal requirements of $50 million. This insurance coverage is provided through NEIL. The NEIL policies have specific exclusions and limitations that can result in reduced coverage. Insured members as a group are subject to retrospective premium assessments to cover losses sustained by NEIL under all issued policies. SDG&E could be assessed up to $3.5 million of retrospective premiums based on overall member claims.
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) of $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.
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
We accrue losses for a legal proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, the uncertainties inherent in legal proceedings make it difficult to reasonably estimate the costs and effects of resolving these matters. Accordingly, actual costs incurred may differ materially from amounts accrued, may exceed applicable insurance coverage and could materially adversely affect our business, cash flows, results of operations, financial condition and prospects. Unless otherwise indicated, we are unable to estimate reasonably possible losses in excess of any amounts accrued.
At December 31, 2020, loss contingency accruals for legal matters, including associated legal fees and regulatory matters related to the Leak, that are probable and estimable were $616 million for Sempra Energy Consolidated and $471 million for SoCalGas. Amounts for Sempra Energy Consolidated and SoCalGas include $445 million for matters related to the Leak, which we discuss below. We discuss our policy regarding accrual of legal fees in Note 1.
SoCalGas
Aliso Canyon Natural Gas Storage Facility Gas Leak
From October 23, 2015 through February 11, 2016, SoCalGas experienced a natural gas leak from one of the injection-and-withdrawal wells, SS25, at its Aliso Canyon natural gas storage facility in Los Angeles County. As described below in “Civil and Criminal Litigation” and “Regulatory Proceedings,” numerous lawsuits, investigations and regulatory proceedings have been
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initiated in response to the Leak, resulting in significant costs, which together with other Leak-related costs are discussed below in “Cost Estimates, Accounting Impact and Insurance.”
Civil and Criminal Litigation. As of February 22, 2021, 395 lawsuits, including approximately 36,000 plaintiffs, are pending against SoCalGas related to the Leak, some of which have also named Sempra Energy. All these cases, other than a matter brought by the Los Angeles County District Attorney and the federal securities class action discussed below, are coordinated before a single court in the LA Superior Court for pretrial management.
In November 2017, in the coordinated proceeding, individuals and business entities filed a Third Amended Consolidated Master Case Complaint for Individual Actions, through which their separate lawsuits will be managed for pretrial purposes. The consolidated complaint asserts causes of action for negligence, negligence per se, private and public nuisance (continuing and permanent), trespass, inverse condemnation, strict liability, negligent and intentional infliction of emotional distress, fraudulent concealment, loss of consortium, wrongful death and violations of Proposition 65 against SoCalGas and Sempra Energy. The consolidated complaint seeks compensatory and punitive damages for personal injuries, lost wages and/or lost profits, property damage and diminution in property value, injunctive relief, costs of future medical monitoring, civil penalties (including penalties associated with Proposition 65 claims alleging violation of requirements for warning about certain chemical exposures), and attorneys’ fees. The initial trial previously scheduled for June 2020 for a small number of randomly selected individual plaintiffs was postponed, with a new trial date yet to be determined by the court.
In January 2017, two consolidated class action complaints were filed against SoCalGas and Sempra Energy, one on behalf of a putative class of persons and businesses who own or lease real property within a five-mile radius of the well (the Property Class Action), and a second on behalf of a putative class of all persons and entities conducting business within five miles of the facility (the Business Class Action). The Property Class Action asserts claims for strict liability for ultra-hazardous activities, negligence, negligence per se, violation of the California Unfair Competition Law, trespass, permanent and continuing public and private nuisance, and inverse condemnation. The Business Class Action asserts a claim for violation of the California Unfair Competition Law. Both complaints seek compensatory, statutory and punitive damages, injunctive relief and attorneys’ fees.
Three property developers filed complaints in July and October of 2018 against SoCalGas and Sempra Energy alleging causes of action for strict liability, negligence per se, negligence, continuing nuisance, permanent nuisance and violation of the California Unfair Competition Law, as well as claims for negligence against certain directors of SoCalGas. The complaints seek compensatory, statutory and punitive damages, injunctive relief and attorneys’ fees.
In October 2018 and January 2019, complaints were filed on behalf of 51 firefighters stationed near the Aliso Canyon natural gas storage facility who allege they were injured by exposure to chemicals released during the Leak. The complaints against SoCalGas and Sempra Energy assert causes of actions for negligence, negligence per se, private and public nuisance (continuing and permanent), trespass, inverse condemnation, strict liability, negligent and intentional infliction of emotional distress, fraudulent concealment and loss of consortium. The complaints seek compensatory and punitive damages for personal injuries, lost wages and/or lost profits, property damage and diminution in property value, and attorney’s fees.
Four shareholder derivative actions were filed alleging breach of fiduciary duties against certain officers and certain directors of Sempra Energy and/or SoCalGas. Three of the actions were joined in an Amended Consolidated Shareholder Derivative Complaint, which was dismissed with prejudice in January 2021. The remaining action was also dismissed but plaintiffs were given leave to amend their complaint.
In addition, a federal securities class action alleging violation of the federal securities laws was filed against Sempra Energy and certain of its officers in July 2017 in the U.S. District Court for the Southern District of California. In March 2018, the court dismissed the action with prejudice. The plaintiffs have appealed the dismissal.
In February 2019, the LA Superior Court approved a settlement between SoCalGas and the Los Angeles City Attorney’s Office, the County of Los Angeles, the California Office of the Attorney General and CARB of three actions filed by these entities under which SoCalGas made payments and agreed to provide funding for environmental projects totaling $120 million, including $21 million in civil penalties, as well as other safety-related commitments.
In September 2016, SoCalGas settled a misdemeanor criminal complaint filed in February 2016 by the Los Angeles County District Attorney’s Office against SoCalGas, pleading no contest to a charge that it failed to provide timely notice of the Leak pursuant to California Health and Safety Code section 25510(a), Los Angeles County Code section 12.56.030, and Title 19 California Code of Regulations section 2703(a). In November 2016, the LA Superior Court approved the settlement and entered judgment on the notice charge. Under the settlement, SoCalGas paid a $75,000 fine, $233,500 in penalties, and $246,673 to reimburse costs incurred by Los Angeles County Fire Department’s Health and Hazardous Materials Division, as well as completed operational commitments estimated to cost approximately $6 million. Certain individuals who objected to the settlement petitioned the Court of Appeal to vacate the judgment, contending they should be granted restitution. In July 2019, the
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Court of Appeal denied the petition in part, but remanded the matter to the trial court to give the petitioners an opportunity to prove damages stemming from only the three-day delay in reporting the Leak. Following the hearing, the trial court denied restitution. In December 2020, the California Supreme Court denied review of the ruling.
Regulatory Proceedings. In January 2016, CalGEM and the CPUC directed an independent analysis of the technical root cause of the Leak to be conducted by Blade. In May 2019, Blade released its report, which concluded that the Leak was caused by a failure of the production casing of the well due to corrosion and that attempts to stop the Leak were not effectively conducted, but did not identify any instances of non-compliance by SoCalGas. Blade concluded that SoCalGas’ compliance activities conducted prior to the Leak did not find indications of a casing integrity issue. Blade opined, however, that there were measures, none of which were required by gas storage regulations at the time, that could have been taken to aid in the early identification of corrosion and that, in Blade’s opinion, would have prevented or mitigated the Leak. The report also identified well safety practices and regulations that have since been adopted by CalGEM and implemented by SoCalGas, which address most of the root cause of the Leak identified during Blade’s investigation.
In June 2019, the CPUC opened an OII to consider penalties against SoCalGas for the Leak, which it later bifurcated into two phases. The first phase will consider whether SoCalGas violated California Public Utilities Code Section 451 or other laws, CPUC orders or decisions, rules or requirements, whether SoCalGas engaged in unreasonable and/or imprudent practices with respect to its operation and maintenance of the Aliso Canyon natural gas storage facility or its related record-keeping practices, whether SoCalGas cooperated sufficiently with the SED and Blade during the pre-formal investigation, and whether any of the mitigation proposed by Blade should be implemented to the extent not already done. In November 2019, the SED, based largely on the Blade report, alleged a total of 330 violations, asserting that SoCalGas violated California Public Utilities Code Section 451 and failed to cooperate in the investigation and to keep proper records. Hearings on a subset of issues are scheduled to begin in March 2021. The second phase will consider whether SoCalGas should be sanctioned for the Leak and what damages, fines or other penalties or sanctions, if any, should be imposed for any violations, unreasonable or imprudent practices, or failure to sufficiently cooperate with the SED as determined by the CPUC in the first phase. In addition, the second phase will determine the amounts of various costs incurred by SoCalGas and other parties in connection with the Leak and the ratemaking treatment or other disposition of such costs, which could result in little or no recovery of such costs by SoCalGas. SoCalGas has engaged in settlement discussions with the SED in connection with this proceeding.
In February 2017, the CPUC opened a proceeding pursuant to SB 380 OII to determine the feasibility of minimizing or eliminating the use of the Aliso Canyon natural gas storage facility while still maintaining energy and electric reliability for the region, but excluding issues with respect to air quality, public health, causation, culpability or cost responsibility regarding the Leak. The CPUC issued a decision on the interim range of gas inventory levels at the Aliso Canyon natural gas storage facility in November 2020 with a final determination to be made within the SB 380 OII proceeding. The first phase of the proceeding established a framework for the hydraulic, production cost and economic modeling assumptions for the potential reduction in usage or elimination of the Aliso Canyon natural gas storage facility. Phase 2 of the proceeding, which will evaluate the impacts of reducing or eliminating the Aliso Canyon natural gas storage facility using the established framework and models, began in the first quarter of 2019. In December 2019, the CPUC added a third phase of the proceeding and engaged a consultant to consider alternative means for meeting or avoiding the demand for the facility’s services if it were eliminated in either the 2027 or 2045 timeframe, which is currently underway.
If the Aliso Canyon natural gas storage facility were to be permanently closed, or if future cash flows from its operation were otherwise insufficient to recover its carrying value, it could result in an impairment of the facility and significantly higher than expected operating costs and/or additional capital expenditures, and natural gas reliability and electric generation could be jeopardized. At December 31, 2020, the Aliso Canyon natural gas storage facility had a net book value of $821 million. Any significant impairment of this asset, or higher operating costs and additional capital expenditures incurred by SoCalGas that may not be recoverable in customer rates, could have a material adverse effect on SoCalGas’ and Sempra Energy’s results of operations, financial condition and cash flows.
Cost Estimates, Accounting Impact and Insurance. SoCalGas has incurred significant costs for temporary relocation of community residents; to control the well and stop the Leak; to mitigate the natural gas released; to purchase natural gas to replace what was lost through the Leak; to defend against and, in certain cases, settle, civil and criminal litigation arising from the Leak; to pay the costs of the government-ordered response to the Leak, including the costs for Blade to conduct the root cause analysis described above; to respond to various government and agency investigations regarding the Leak; and to comply with increased regulation imposed as a result of the Leak. At December 31, 2020, SoCalGas estimates its costs related to the Leak are $1,627 million (the cost estimate), which includes $1,279 million of costs recovered or probable of recovery from insurance. This cost estimate may increase significantly as more information becomes available. A substantial portion of the cost estimate has been paid, and $451 million is accrued as Reserve for Aliso Canyon Costs as of December 31, 2020 on SoCalGas’ and Sempra Energy’s Consolidated Balance Sheets.
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In 2020, SoCalGas recorded $484 million in costs, inclusive of estimated legal costs, related to settlement discussions in connection with civil litigation and regulatory matters described above in “Civil and Criminal Litigation” and “Regulatory Proceedings.” Of this amount, $177 million was recorded in Insurance Receivable for Aliso Canyon Costs on the SoCalGas and Sempra Energy Consolidated Balance Sheets and $307 million ($233 million after tax) was recorded in Aliso Canyon Litigation and Regulatory Matters on the SoCalGas and Sempra Energy Consolidated Statements of Operations. These accruals are included in the cost estimate that we describe above.
Except for the amounts paid or estimated to settle certain actions, as described in “Civil and Criminal Litigation” and “Regulatory Proceedings” above, the cost estimate does not include litigation, regulatory proceedings or regulatory costs to the extent it is not possible to predict at this time the outcome of these actions or reasonably estimate the costs to defend or resolve the actions or the amount of damages, restitution, or civil, administrative or criminal fines, sanctions, penalties or other costs or remedies that may be imposed or incurred. The cost estimate also does not include certain other costs incurred by Sempra Energy associated with defending against shareholder derivative lawsuits and other potential costs that we currently do not anticipate incurring or that we cannot reasonably estimate. These costs not included in the cost estimate could be significant and could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
We have received insurance payments for many of the costs included in the cost estimate, including temporary relocation and associated processing costs, control-of-well expenses, costs of the government-ordered response to the Leak, certain legal costs and lost gas. As of December 31, 2020, we recorded the expected recovery of the cost estimate related to the Leak of $445 million as Insurance Receivable for Aliso Canyon Costs on SoCalGas’ and Sempra Energy’s Consolidated Balance Sheets. This amount is exclusive of insurance retentions and $834 million of insurance proceeds we received through December 31, 2020. We intend to pursue the full extent of our insurance coverage for the costs we have incurred. Other than insurance for certain future defense costs we may incur as well as directors’ and officers’ liability, we have exhausted all of our insurance in this matter. We continue to pursue other sources of insurance coverage for costs related to this matter, but we may not be successful in obtaining additional insurance recovery for any of these costs. If we are not able to secure additional insurance recovery, if any costs we have recorded as an insurance receivable are not collected, if there are delays in receiving insurance recoveries, or if the insurance recoveries are subject to income taxes while the associated costs are not tax deductible, such amounts, which could be significant, could have a material adverse effect on SoCalGas’ and Sempra Energy’s cash flows, financial condition and results of operations.
Sempra Mexico
Energía Costa Azul
IEnova has been engaged in a long-running land dispute relating to property adjacent to its ECA Regas Facility that allegedly overlaps with land owned by the ECA Regas Facility (the facility, however, is not situated on the land that is the subject of this dispute). A claimant to the adjacent property filed complaints in the federal Agrarian Court challenging the refusal of SEDATU in 2006 to issue title to him for the disputed property. In November 2013, the federal Agrarian Court ordered that SEDATU issue the requested title and cause it to be registered. Both SEDATU and IEnova challenged the ruling due to lack of notification of the underlying process. In May 2019, a federal court in Mexico reversed the ruling and ordered a retrial.
Four other cases involving two adjacent areas of real property on which part of the ECA Regas Facility is situated, each brought by a single plaintiff or her descendants, remain pending against the facility. The first disputed area is subject to a claim in the federal Agrarian Court that has been ongoing since 2006, in which the plaintiffs seek to annul the property title for a portion of the land on which the ECA Regas Facility is situated and to obtain possession of a different parcel that allegedly overlaps with the site of the ECA Regas Facility. The second disputed area is one parcel adjacent to the ECA Regas Facility that allegedly overlaps with land on which the ECA Regas Facility is situated, which is subject to a claim in the Agrarian Court and two claims in civil courts. The Agrarian Court proceeding, which seeks an order that SEDATU issue title to the plaintiff, was initiated in 2013 and the parties are awaiting a final decision. The two civil court proceedings, which seek to invalidate the contract by which the ECA Regas Facility purchased the applicable parcel of land on which the ECA Regas Facility is situated on the grounds that the purchase price was allegedly unfair, are progressing at different stages. In the first, initiated in 2013, a lower court ruled in favor of the ECA Regas Facility and the ruling has been appealed by the plaintiff. The same plaintiff filed the second civil case in 2019, which is in its initial stages.
Certain of these land disputes involve land on which portions of the ECA LNG liquefaction facilities are proposed to be situated or on which portions of the ECA Regas Facility that would be necessary for the operation of the proposed ECA LNG liquefaction facilities are situated.
Several administrative challenges are pending before Mexico’s Secretariat of Environment and Natural Resources (the Mexican environmental protection agency) and Federal Tax and Administrative Courts, seeking revocation of the environmental impact
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authorization issued to the ECA Regas Facility in 2003. These cases generally allege that the conditions and mitigation measures in the environmental impact authorization are inadequate and challenge findings that the activities of the terminal are consistent with regional development guidelines.
In 2018, two related claimants filed separate challenges in the federal district court in Ensenada, Baja California in relation to the environmental and social impact permits issued by each of Agencia de Seguridad, Energía y Ambiente (ASEA) and SENER to ECA LNG authorizing natural gas liquefaction activities at the ECA Regas Facility. In the first case, the court issued a provisional injunction in September 2018. In December 2018, ASEA approved modifications to the environmental permit that facilitate the development of the proposed natural gas liquefaction facility in two phases. In May 2019, the court canceled the provisional injunction. The claimant appealed the court’s decision canceling the injunction, but was not successful. The claimant’s underlying challenge to the permits remains pending. In the second case, the initial request for a provisional injunction was denied. That decision was reversed on appeal in January 2020, resulting in the issuance of a new injunction against the same environmental and social impact permits that were already issued by ASEA and SENER. This injunction has uncertain application absent clarification by the court. The reversal and issuance of the injunction in the second case is under further appeal.
In September 2020, parties claiming a property interest in the land on which the ECA Regas Facility is situated and the proposed ECA LNG liquefaction facilities are anticipated to be situated filed an administrative proceeding with the Municipality of Ensenada against the permit for the construction of the proposed liquefaction export projects at the ECA Regas Facility. The ECA Regas Facility and ECA LNG contested the validity of the claim and the Municipality of Ensenada has confirmed the validity of the construction permit and closed the proceeding.
In May 2020, the two third-party capacity customers at the ECA Regas Facility, Shell Mexico and Gazprom, asserted that a 2019 update of the general terms and conditions for service at the facility, as approved by the CRE, resulted in a breach of contract by IEnova and a force majeure event. Citing these circumstances, the customers subsequently stopped making payments of amounts due under their respective LNG storage and regasification agreements. IEnova has rejected the customers’ assertions and has drawn (and expects to continue to draw) on the customers’ letters of credit provided as payment security. The parties engaged in discussions under the applicable contractual dispute resolution procedures without coming to a mutually acceptable resolution. In July 2020, Shell Mexico submitted a request for arbitration of the dispute and although Gazprom has joined the proceeding, Gazprom has replenished the amounts drawn on its letter of credit and has resumed making regular monthly payments under its LNG storage and regasification agreement. IEnova intends to avail itself of its available claims, defenses, rights and remedies in the arbitration proceeding, including seeking dismissal of the customers’ claims. In addition to the arbitration proceeding, Shell Mexico also filed a constitutional challenge to the CRE’s approval of the update to the general terms and conditions. In October 2020, Shell Mexico’s request to stay CRE’s approval was denied and, subsequently, Shell Mexico filed an appeal of that decision.
One or more unfavorable final decisions on these disputes or challenges could materially and adversely affect our existing natural gas regasification operations and proposed natural gas liquefaction projects at the site of the ECA Regas Facility.
Guaymas-El Oro Segment of the Sonora Pipeline
IEnova’s Sonora natural gas pipeline consists of two segments, the Sasabe-Puerto Libertad-Guaymas segment, and the Guaymas-El Oro segment. Each segment has its own service agreement with the CFE. In 2015, the Yaqui tribe, with the exception of some members living in the Bácum community, granted its consent and a right-of-way easement agreement for the construction of the Guaymas-El Oro segment of the Sonora natural gas pipeline that crosses its territory. Representatives of the Bácum community filed a legal challenge in Mexican federal court demanding the right to withhold consent for the project, the stoppage of work in the Yaqui territory and damages. In 2016, the judge granted a suspension order that prohibited the construction of such segment through the Bácum community territory. Because the pipeline does not pass through the Bácum community, IEnova did not believe the 2016 suspension order prohibited construction in the remainder of the Yaqui territory. Construction of the Guaymas-El Oro segment was completed, and commercial operations began in May 2017.
Following the start of commercial operations of the Guaymas-El Oro segment, IEnova reported damage to the Guaymas-El Oro segment of the Sonora pipeline in the Yaqui territory that has made that section inoperable since August 2017 and, as a result, IEnova declared a force majeure event. In 2017, an appellate court ruled that the scope of the 2016 suspension order encompassed the wider Yaqui territory, which has prevented IEnova from making repairs to put the pipeline back in service. In July 2019, a federal district court ruled in favor of IEnova and held that the Yaqui tribe was properly consulted and that consent from the Yaqui tribe was properly received. Representatives of the Bácum community appealed this decision, causing the suspension order preventing IEnova from repairing the damage to the Guaymas-El Oro segment of the Sonora pipeline in the Yaqui territory to remain in place until the appeals process is exhausted.
IEnova exercised its rights under the contract, which included seeking force majeure payments for the two-year period such force majeure payments were required to be made, which ended in August 2019.
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In July 2019, the CFE filed a request for arbitration generally to nullify certain contract terms that provide for fixed capacity payments in instances of force majeure and made a demand for substantial damages in connection with the force majeure event. In September 2019, the arbitration process ended when IEnova and the CFE reached an agreement to restart natural gas transportation service on the earlier of completion of repair of the damaged pipeline or January 15, 2020, and to modify the tariff structure and extend the term of the contract by 10 years. Subsequently, IEnova and the CFE agreed to extend the service start date to May 15, 2020 and then again to September 15, 2020. In the third quarter of 2020, the parties agreed to further extend the service start date to March 14, 2021. Under the revised agreement, the CFE will resume making payments only when the damaged section of the Guaymas-El Oro segment of the Sonora pipeline is repaired. If the pipeline is not repaired by March 14, 2021 and the parties do not agree on a new service start date, IEnova retains the right to terminate the contract and seek to recover its reasonable and documented costs and lost profits.
If IEnova is unable to make such repairs and resume operations in the Guaymas-El Oro segment of the Sonora pipeline within this time frame or if IEnova terminates the contract and is unable to obtain recovery, there may be a material adverse impact on Sempra Energy’s results of operations and cash flows and our ability to recover the carrying value of our investment. At December 31, 2020, the Guaymas-El Oro segment of the Sonora pipeline had a net book value of $447 million. The Sasabe-Puerto Libertad-Guaymas segment of the Sonora pipeline remains in full operation and is not impacted by these developments.
Regulatory Actions by the Mexican Government that Impact Renewable Energy Facilities
In April 2020, Mexico’s CENACE issued an order that it claims would safeguard Mexico’s national power grid from interruptions that may be caused by renewable energy projects. The main provision of the order suspends all legally mandated pre-operative testing that would be needed for new renewable energy projects to commence operations and prevents such projects from connecting to the national power grid until further notice. IEnova’s renewable energy projects affected by the order filed for legal protection through amparo claims (constitutional protection lawsuits) and, in June 2020, received injunctive relief until the claims are resolved by the courts. We have since achieved commercial operations on two solar power generation projects, Tepezalá and Don Diego, and expect to achieve commercial operations on Border Solar in the first half of 2021. The second phase of ESJ is not impacted by the order because it is not interconnected to the Mexican electric grid.
In May 2020, Mexico’s SENER published a resolution to establish guidelines intended to guarantee the security and reliability of the national grid’s electricity supply by reducing the threat that it claims is caused by clean, intermittent energy. IEnova’s renewable energy projects, including those in construction and in service, filed amparo claims against the SENER resolution in June 2020 and received injunctive relief in July 2020. In addition, in June 2020, COFECE, Mexico’s antitrust regulator, filed a complaint with Mexico’s Supreme Court against the SENER resolution. The court accepted COFECE’s complaint and, in February 2021, issued its final ruling that the main proposed changes in the SENER resolution are unconstitutional.
In May 2020, the CRE approved an update to the transmission rates included in legacy renewables and cogeneration energy contracts, based on the claim that the legacy transmission rates did not reflect fair and proportional costs for providing the applicable services and, therefore, created inequitable competitive conditions. Three of IEnova’s renewables facilities are currently holders of contracts with such legacy rates, and any increases in the transmission rates would be passed through directly to their customers. IEnova filed amparo claims for its affected facilities and, in August 2020, was granted injunctive relief.
IEnova and other companies affected by these new orders and regulations have challenged the orders and regulations by filing amparo claims, some of which have been granted injunctive relief. The court-ordered injunctions provide relief until Mexico’s Federal District Court ultimately resolves the amparo claims. An unfavorable final decision on these amparo challenges, or the potential for an extended dispute, could impact our ability to successfully complete construction of our Border Solar project, which is not yet commercially operating, or to complete such construction in a timely manner and within expected budgets, may impact our ability to operate our wind and solar facilities already in service at existing levels or at all, and may adversely affect our ability to develop new projects, any of which may have a material adverse impact on our results of operations and cash flows and our ability to recover the carrying values of our renewable energy investments in Mexico.
In October 2020, the CRE approved a resolution to amend the rules for the inclusion of new offtakers of legacy generation and self-supply permits (the Offtaker Resolution), which became effective immediately. The Offtaker Resolution prohibits self-supply permit holders from adding new offtakers that were not included in the original development or expansion plans, making modifications to the amount of energy allocated to the named offtakers, and including load centers that have entered into a supply arrangement under Mexico’s Electricity Industry Law. Don Diego Solar and Border Solar (two of IEnova’s projects, the first of which has achieved commercial operations and the second of which is currently in construction) and the Ventika wind power generation facilities are holders of legacy self-supply permits and are impacted by the Offtaker Resolution. If IEnova is not able to obtain legal protection for these impacted facilities, IEnova expects it will sell Border Solar’s capacity and a portion of Don Diego Solar’s capacity affected by the Offtaker Resolution into the spot market. Currently, prices in the spot market are significantly
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lower than the fixed prices in the PPAs that were entered into through self-supply permits. IEnova has filed lawsuits against the Offtaker Resolution. Currently, Border Solar and Don Diego Solar are prohibited from delivering electric power to all (with respect to Border Solar) or a portion (with respect to Don Diego Solar) of their respective offtakers pending final resolution of these lawsuits. IEnova is evaluating ways to obtain injunctive relief that would allow Border Solar and Don Diego Solar to deliver electric power to their offtakers pending a final decision in the lawsuits.
Other Litigation
RBS Sempra Commodities
Sempra Energy holds an equity method investment in RBS Sempra Commodities, a limited liability partnership in the process of being liquidated. RBS, now NatWest Markets plc, our partner in the JV, paid an assessment of £86 million (approximately $138 million in U.S. dollars) in October 2014 to HMRC for denied VAT refund claims filed in connection with the purchase of carbon credit allowances by RBS SEE, a subsidiary of RBS Sempra Commodities. RBS SEE has since been sold to J.P. Morgan Chase & Co. and later to Mercuria Energy Group, Ltd. HMRC asserted that RBS was not entitled to reduce its VAT liability by VAT paid on certain carbon credit purchases during 2009 because RBS knew or should have known that certain vendors in the trading chain did not remit their own VAT to HMRC. After paying the assessment, RBS filed a Notice of Appeal of the assessment with the First-Tier Tribunal. Trial on the matter, which could include the assessment of a penalty of up to 100% of the claimed amount, is scheduled to begin in June 2021.
In 2015, liquidators filed a claim in the High Court of Justice against RBS and Mercuria Energy Europe Trading Limited (the Defendants) on behalf of 10 companies (the Liquidating Companies) that engaged in carbon credit trading via chains that included a company that traded directly with RBS SEE. The claim alleges that the Defendants’ participation in the purchase and sale of carbon credits resulted in the Liquidating Companies’ carbon credit trading transactions creating a VAT liability they were unable to pay, and that the Defendants are liable to provide for equitable compensation due to dishonest assistance and for compensation under the U.K. Insolvency Act of 1986. Trial on the matter was held in June and July of 2018. In March 2020, the High Court of Justice rendered its judgment mostly in favor of the Liquidating Companies and awarded damages of approximately £45 million (approximately $61 million in U.S. dollars at December 31, 2020), plus costs and interest. In October 2020, the High Court of Justice issued an order granting the Defendants permission to appeal its March 2020 judgment to the Court of Appeal, and the Defendants have filed an application for such appeal.
Although the final outcome of both the High Court of Justice case and First-Tier Tribunal case remains uncertain, we recorded $100 million in equity losses from our investment in RBS Sempra Commodities in Equity Earnings on the Sempra Energy Consolidated Statement of Operations in the year ended December 31, 2020, which represents an estimate of our obligations to settle pending tax matters and related legal costs.
Asbestos Claims Against EFH Subsidiaries
Certain EFH subsidiaries that we acquired as part of the merger of EFH with an indirect subsidiary of Sempra Energy are defendants in personal injury lawsuits brought in state courts throughout the U.S. As of February 22, 2021, 209 such lawsuits are pending with 77 such lawsuits having been served. These cases allege illness or death as a result of exposure to asbestos in power plants designed and/or built by companies whose assets were purchased by predecessor entities to the EFH subsidiaries, and generally assert claims for product defects, negligence, strict liability and wrongful death. They seek compensatory and punitive damages. Additionally, in connection with the EFH bankruptcy proceeding, approximately 28,000 proofs of claim were filed on behalf of persons who allege exposure to asbestos under similar circumstances and assert the right to file such lawsuits in the future. None of these claims or lawsuits were discharged in the EFH bankruptcy proceeding. The costs to defend or resolve these lawsuits and the amount of damages that may be imposed or incurred could have a material adverse effect on Sempra Energy’s cash flows, financial condition and results of operations.
We are also defendants in ordinary routine litigation incidental to our businesses, including personal injury, employment litigation, product liability, property damage and other claims. Juries have demonstrated an increasing willingness to grant large awards, including punitive damages, in these types of cases.
LEASES
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A lease exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. We determine if an arrangement is or contains a lease at inception of the contract.
Some of our lease agreements contain nonlease components, which represent activities that transfer a separate good or service to the lessee. As the lessee for both operating and finance leases, we have elected to combine lease and nonlease components as a single lease component for real estate, fleet vehicles, power generating facilities, and pipelines, whereby fixed or in-substance fixed payments allocable to the nonlease component are accounted for as part of the related lease liability and ROU asset. As the lessor, we have elected to combine lease and nonlease components as a single lease component for real estate and power generating facilities if the timing and pattern of transfer of the lease and nonlease components are the same and the lease component would be classified as an operating lease if accounted for separately.
Lessee Accounting
We have operating and finance leases for real and personal property (including office space, land, fleet vehicles, machinery and equipment, warehouses and other operational facilities) and PPAs with renewable energy and peaker plant facilities.
Some of our leases include options to extend the lease terms for up to 20 years, or to terminate the lease within one year. Our lease liabilities and ROU assets are based on lease terms that may include such options when it is reasonably certain that we will exercise the option.
Certain of our contracts are short-term leases, which have a lease term of 12 months or less at lease commencement. We do not recognize a lease liability or ROU asset arising from short-term leases for all existing classes of underlying assets. In such cases, we recognize short-term lease costs on a straight-line basis over the lease term. Our short-term lease costs for the period reasonably reflect our short-term lease commitments.
Certain of our leases contain escalation clauses requiring annual increases in rent ranging from 2% to 4% or based on the Consumer Price Index. The rentals payable under these leases may increase by a fixed amount each year or by a percentage of a base year. Variable lease payments that are based on an index or rate are included in the initial measurement of our lease liability and ROU asset based on the index or rate at lease commencement and are not remeasured because of changes to the index or rate. Rather, changes to the index or rate are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred.
Similarly, PPAs for the purchase of renewable energy at SDG&E require lease payments based on a stated rate per MWh produced by the facilities, and we are required to purchase substantially all the output from the facilities. SDG&E is required to pay additional amounts for capacity charges and actual purchases of energy that exceed the minimum energy commitments. Under these contracts, we do not recognize a lease liability or ROU asset for leases for which there are no fixed lease payments. Rather, these variable lease payments are recognized separately as variable lease costs. SDG&E estimates these variable lease payments to be $297 million in each of 2021 and 2022, $296 million in 2023, $297 million in 2024, $296 million in 2025 and $3,069 million thereafter.
As of the lease commencement date, we recognize a lease liability for our obligation to make future lease payments, which we initially measure at present value using our incremental borrowing rate at the date of lease commencement, unless the rate implicit in the lease is readily determinable. We determine our incremental borrowing rate based on the rate of interest that we would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. We also record a corresponding ROU asset, initially equal to the lease liability and adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs. We test ROU assets for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of the ROU assets.
For our operating leases, our non-regulated entities recognize a single lease cost on a straight-line basis over the lease term in operating expenses. The California Utilities recognize this single lease cost on a basis that is consistent with the recovery of such costs in accordance with U.S. GAAP governing rate-regulated operations.
For our finance leases, the interest expense on the lease liability and amortization of the ROU asset are accounted for separately. Our non-regulated entities use the effective interest rate method to account for the imputed interest on the lease liability and amortize the ROU asset on a straight-line basis over the lease term. The California Utilities recognize amortization of the ROU asset on a basis that is consistent with the recovery of such costs in accordance with U.S. GAAP governing rate-regulated operations.
Our leases do not contain any material residual value guarantees, restrictions or covenants.
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Classification of ROU assets and lease liabilities and the weighted-average remaining lease term and discount rate associated with operating and finance leases are summarized in the table below.
| LESSEE INFORMATION ON THE CONSOLIDATED BALANCE SHEETS | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Right-of-use assets: | |||||||||||||||||||||||||||||||||||
| Operating leases: | |||||||||||||||||||||||||||||||||||
| Right-of-use assets | $ | 543 | $ | 591 | $ | 102 | $ | 130 | $ | 74 | $ | 94 | |||||||||||||||||||||||
| Finance leases: | |||||||||||||||||||||||||||||||||||
| Property, plant and equipment | 1,429 | 1,353 | 1,356 | 1,326 | 73 | 27 | |||||||||||||||||||||||||||||
| Accumulated depreciation | (99) | (64) | (80) | (57) | (19) | (7) | |||||||||||||||||||||||||||||
| Property, plant and equipment, net | 1,330 | 1,289 | 1,276 | 1,269 | 54 | 20 | |||||||||||||||||||||||||||||
| Total right-of-use assets | $ | 1,873 | $ | 1,880 | $ | 1,378 | $ | 1,399 | $ | 128 | $ | 114 | |||||||||||||||||||||||
| Lease liabilities: | |||||||||||||||||||||||||||||||||||
| Operating leases: | |||||||||||||||||||||||||||||||||||
| Other current liabilities | $ | 52 | $ | 52 | $ | 27 | $ | 27 | $ | 18 | $ | 18 | |||||||||||||||||||||||
| Deferred credits and other | 407 | 445 | 73 | 102 | 56 | 75 | |||||||||||||||||||||||||||||
| 459 | 497 | 100 | 129 | 74 | 93 | ||||||||||||||||||||||||||||||
| Finance leases: | |||||||||||||||||||||||||||||||||||
| Current portion of long-term debt and finance leases | 36 | 26 | 26 | 20 | 10 | 6 | |||||||||||||||||||||||||||||
| Long-term debt and finance leases | 1,294 | 1,263 | 1,250 | 1,250 | 44 | 13 | |||||||||||||||||||||||||||||
| 1,330 | 1,289 | 1,276 | 1,270 | 54 | 19 | ||||||||||||||||||||||||||||||
| Total lease liabilities | $ | 1,789 | $ | 1,786 | $ | 1,376 | $ | 1,399 | $ | 128 | $ | 112 | |||||||||||||||||||||||
| Weighted-average remaining lease term (in years): | |||||||||||||||||||||||||||||||||||
| Operating leases | 13 | 13 | 6 | 6 | 5 | 6 | |||||||||||||||||||||||||||||
| Finance leases | 18 | 19 | 19 | 20 | 7 | 6 | |||||||||||||||||||||||||||||
| Weighted-average discount rate: | |||||||||||||||||||||||||||||||||||
| Operating leases | 5.81 | % | 6.01 | % | 3.62 | % | 3.55 | % | 2.03 | % | 3.73 | % | |||||||||||||||||||||||
| Finance leases | 14.45 | % | 14.76 | % | 14.65 | % | 14.83 | % | 2.83 | % | 3.23 | % |
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The components of lease costs were as follows:
| LESSEE INFORMATION ON THE CONSOLIDATED STATEMENTS OF OPERATIONS**(1)** | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| Years ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Operating lease costs | $ | 92 | $ | 96 | $ | 31 | $ | 33 | $ | 24 | $ | 27 | |||||||||||||||||||||||
| Finance lease costs: | |||||||||||||||||||||||||||||||||||
| Amortization of ROU assets(2) | 35 | 24 | 23 | 18 | 12 | 6 | |||||||||||||||||||||||||||||
| Interest on lease liabilities | 188 | 173 | 186 | 173 | 2 | — | |||||||||||||||||||||||||||||
| Total finance lease costs | 223 | 197 | 209 | 191 | 14 | 6 | |||||||||||||||||||||||||||||
| Short-term lease costs(3) | 7 | 6 | 3 | 2 | — | — | |||||||||||||||||||||||||||||
| Variable lease costs(3) | 477 | 482 | 467 | 471 | 10 | 10 | |||||||||||||||||||||||||||||
| Total lease costs | $ | 799 | $ | 781 | $ | 710 | $ | 697 | $ | 48 | $ | 43 |
(1) Includes costs capitalized in PP&E.
(2) Included in O&M, except for $18 million in 2020 and $15 million in 2019, which is included in Depreciation and Amortization Expense at Sempra Energy Consolidated and SDG&E.
(3) Short-term leases with variable lease costs are recorded and presented as variable lease costs.
Cash paid for amounts included in the measurement of lease liabilities was as follows:
| LESSEE INFORMATION ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| Years ended December 31 | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Operating activities: | |||||||||||||||||||||||||||||||||||
| Cash paid for operating leases | $ | 79 | $ | 101 | $ | 31 | $ | 33 | $ | 24 | $ | 27 | |||||||||||||||||||||||
| Cash paid for finance leases | 173 | 173 | 171 | 173 | 2 | — | |||||||||||||||||||||||||||||
| Financing activities: | |||||||||||||||||||||||||||||||||||
| Cash paid for finance leases | 35 | 24 | 23 | 18 | 12 | 6 | |||||||||||||||||||||||||||||
| Increase (decrease) in operating lease obligations for right-of-use assets | 20 | 585 | (1) | 158 | 1 | 118 | |||||||||||||||||||||||||||||
| Increase in finance lease obligations for investment in PP&E | 77 | 38 | 30 | 16 | 47 | 22 |
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The table below presents the maturity analysis of our lease liabilities and reconciliation to the present value of lease liabilities:
| LESSEE MATURITY ANALYSIS OF LIABILITIES | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Sempra Energy Consolidated | SDG&E | SoCalGas | |||||||||||||||||||||||||||||||||
| Operating leases | Finance leases(1) | Operating leases | Finance leases(1) | Operating leases | Finance leases | ||||||||||||||||||||||||||||||
| 2021 | $ | 73 | $ | 206 | $ | 30 | $ | 194 | $ | 19 | $ | 12 | |||||||||||||||||||||||
| 2022 | 64 | 203 | 22 | 194 | 17 | 9 | |||||||||||||||||||||||||||||
| 2023 | 55 | 203 | 17 | 194 | 13 | 9 | |||||||||||||||||||||||||||||
| 2024 | 51 | 198 | 15 | 189 | 11 | 9 | |||||||||||||||||||||||||||||
| 2025 | 40 | 193 | 5 | 185 | 9 | 8 | |||||||||||||||||||||||||||||
| Thereafter | 415 | 2,465 | 22 | 2,453 | 8 | 12 | |||||||||||||||||||||||||||||
| Total undiscounted lease payments | 698 | 3,468 | 111 | 3,409 | 77 | 59 | |||||||||||||||||||||||||||||
| Less: imputed interest | (239) | (2,138) | (11) | (2,133) | (3) | (5) | |||||||||||||||||||||||||||||
| Total lease liabilities | 459 | 1,330 | 100 | 1,276 | 74 | 54 | |||||||||||||||||||||||||||||
| Less: current lease liabilities | (52) | (36) | (27) | (26) | (18) | (10) | |||||||||||||||||||||||||||||
| Long-term lease liabilities | $ | 407 | $ | 1,294 | $ | 73 | $ | 1,250 | $ | 56 | $ | 44 |
(1) Substantially all amounts are related to purchased-power contracts.
Lease Disclosures Under Previous U.S. GAAP
Rent expense for operating leases was as follows:
| RENT EXPENSE – OPERATING LEASES | |||||
| (Dollars in millions) | |||||
| Year ended December 31, 2018 | |||||
| Sempra Energy Consolidated | $ | 122 | |||
| SDG&E | 27 | ||||
| SoCalGas | 41 |
The annual amortization charge for PPAs accounted for as capital leases at both Sempra Energy Consolidated and SDG&E was $11 million in 2018. The annual depreciation charge for fleet vehicles and other assets in 2018 was $8 million at Sempra Energy Consolidated, including $2 million at SDG&E and $6 million at SoCalGas.
Lessor Accounting
Sempra Mexico is a lessor for certain of its natural gas and ethane pipelines, compressor stations and LPG storage facilities. These operating leases expire at various dates from 2021 through 2039.
Sempra Mexico expects to continue to derive value from the underlying assets associated with its pipelines following the end of their respective lease terms based on the expected remaining useful life, expected market conditions and plans to re-market and re-contract the underlying assets.
Generally, we recognize operating lease income on a straight-line basis over the lease term and evaluate the underlying asset for impairment. Certain of our leases contain rate adjustments or are based on foreign currency exchange rates that may result in lease payments received that vary in amount from one period to the next.
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We provide information below for leases for which we are the lessor.
| LESSOR INFORMATION – SEMPRA ENERGY | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Assets subject to operating leases: | |||||||||||||||||
| Property, plant and equipment(1) | $ | 1,092 | $ | 1,038 | |||||||||||||
| Accumulated depreciation | (228) | (179) | |||||||||||||||
| Property, plant and equipment, net | $ | 864 | $ | 859 | |||||||||||||
| December 31, 2020 | |||||||||||||||||
| Maturity analysis of operating lease payments: | |||||||||||||||||
| 2021 | $ | 207 | |||||||||||||||
| 2022 | 202 | ||||||||||||||||
| 2023 | 202 | ||||||||||||||||
| 2024 | 202 | ||||||||||||||||
| 2025 | 202 | ||||||||||||||||
| Thereafter | 2,344 | ||||||||||||||||
| Total undiscounted cash flows | $ | 3,359 |
(1) Included in Machinery and Equipment — Pipelines and Storage within the major functional categories of PP&E.
| LESSOR INFORMATION ON THE CONSOLIDATED STATEMENTS OF OPERATIONS – SEMPRA ENERGY | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Fixed lease payments | $ | 195 | $ | 200 | $ | 194 | |||||||||||
| Variable lease payments | 1 | 6 | 72 | ||||||||||||||
| Total revenues from operating leases(1) | $ | 196 | $ | 206 | $ | 266 | |||||||||||
| Depreciation expense | $ | 39 | $ | 38 | $ | 72 |
(1) Included in Revenues: Energy-Related Businesses on the Consolidated Statements of Operations.
CONTRACTUAL COMMITMENTS
Natural Gas Contracts
SoCalGas has responsibility for procuring natural gas for both SDG&E’s and SoCalGas’ core customers in a combined portfolio. SoCalGas buys natural gas under short-term and long-term contracts for this portfolio from various producing regions in the southwestern U.S., U.S. Rockies and Canada, primarily based on published monthly bid-week indices.
SoCalGas transports natural gas primarily under long-term firm interstate pipeline capacity agreements that provide for annual reservation charges, which are recovered in rates. SoCalGas has commitments with interstate pipeline companies for firm pipeline capacity under contracts that expire at various dates through 2032.
Sempra LNG has various capacity agreements for natural gas storage and transportation. Transportation costs on these agreements vary based on pipeline capacity.
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Payments on our natural gas contracts could exceed the minimum commitment based on portfolio needs. At December 31, 2020, the future minimum payments under existing natural gas contracts and natural gas storage and transportation contracts are as follows:
| FUTURE MINIMUM PAYMENTS – SEMPRA ENERGY CONSOLIDATED | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Storage and transportation | Natural gas(1) | Total(1) | |||||||||||||||
| 2021 | $ | 216 | $ | 61 | $ | 277 | |||||||||||
| 2022 | 203 | 13 | 216 | ||||||||||||||
| 2023 | 189 | 12 | 201 | ||||||||||||||
| 2024 | 166 | 12 | 178 | ||||||||||||||
| 2025 | 131 | 6 | 137 | ||||||||||||||
| Thereafter | 1,014 | — | 1,014 | ||||||||||||||
| Total minimum payments | $ | 1,919 | $ | 104 | $ | 2,023 |
(1) Excludes amounts related to the LNG purchase agreement discussed below.
| FUTURE MINIMUM PAYMENTS – SOCALGAS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Transportation | Natural gas | Total | |||||||||||||||
| 2021 | $ | 134 | $ | 41 | $ | 175 | |||||||||||
| 2022 | 126 | — | 126 | ||||||||||||||
| 2023 | 123 | — | 123 | ||||||||||||||
| 2024 | 103 | — | 103 | ||||||||||||||
| 2025 | 68 | — | 68 | ||||||||||||||
| Thereafter | 359 | — | 359 | ||||||||||||||
| Total minimum payments | $ | 913 | $ | 41 | $ | 954 |
Total payments under natural gas contracts and natural gas storage and transportation contracts as well as payments to meet additional portfolio needs at Sempra Energy Consolidated and SoCalGas were as follows:
| PAYMENTS UNDER NATURAL GAS CONTRACTS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | $ | 989 | $ | 1,326 | $ | 1,345 | |||||||||||
| SoCalGas | 935 | 1,181 | 1,169 |
LNG Purchase Agreement
Sempra LNG has a sale and purchase agreement for the supply of LNG to the ECA Regas Facility. The commitment amount is calculated using a predetermined formula based on estimated forward prices of the index applicable from 2021 to 2029. Although this agreement specifies a number of cargoes to be delivered, under its terms, the customer may divert certain cargoes, which would reduce amounts paid under the agreement by Sempra LNG.
At December 31, 2020, the following LNG commitment amounts are based on the assumption that all cargoes, less those already confirmed to be diverted, under the agreement are delivered:
| LNG COMMITMENT AMOUNTS | |||||
| (Dollars in millions) | |||||
| 2021 | $ | 320 | |||
| 2022 | 422 | ||||
| 2023 | 389 | ||||
| 2024 | 386 | ||||
| 2025 | 390 | ||||
| Thereafter | 1,452 | ||||
| Total | $ | 3,359 |
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Actual LNG purchases in 2020, 2019 and 2018 have been significantly lower than the maximum amount provided under the agreement due to the customer electing to divert cargoes as allowed by the agreement.
Purchased-Power Contracts
For 2021, SDG&E expects to meet its customer power requirements from the following resource types:
▪Long-term contracts: 28% (of which 27% is provided by renewable energy contracts expiring on various dates through 2041)
▪Other SDG&E-owned generation and tolling contracts: 43%
▪Spot market purchases: 29%
Payments on our purchased-power contracts could exceed the minimum commitments based on energy needs. At December 31, 2020, the future minimum payments under long-term purchased-power contracts for Sempra Energy Consolidated and SDG&E are as follows:
| FUTURE MINIMUM PAYMENTS – PURCHASED-POWER CONTRACTS | |||||
| (Dollars in millions) | |||||
| 2021 | $ | 222 | |||
| 2022 | 208 | ||||
| 2023 | 173 | ||||
| 2024 | 145 | ||||
| 2025 | 88 | ||||
| Thereafter | 794 | ||||
| Total minimum payments(1) | $ | 1,630 |
(1) Excludes purchase agreements accounted for as finance leases.
Payments on these contracts represent capacity charges and minimum energy and transmission purchases that exceed the minimum commitment. SDG&E is required to pay additional amounts for actual purchases of energy that exceed the minimum energy commitments. SDG&E estimates these variable payments to be $66 million in each of 2021 and 2022, $67 million in 2023, $65 million in 2024, $66 million in 2025 and $541 million thereafter. Total payments under purchased-power contracts for Sempra Energy Consolidated and SDG&E were $534 million in 2020, $744 million in 2019 and $712 million in 2018.
Construction and Development Projects
Sempra Energy Consolidated has various capital projects in progress in the U.S. and Mexico. Our total contractual commitments at December 31, 2020 under these projects are approximately $696 million, requiring future payments of $525 million in 2021, $22 million in 2022, $19 million in 2023, $16 million in each of 2024 and 2025 and $98 million thereafter. The following is a summary by segment of contractual commitments and contingencies related to such projects.
SDG&E
At December 31, 2020, SDG&E has commitments to make future payments of $25 million for construction projects that include:
▪$1 million for infrastructure improvements for electric and natural gas transmission and distribution systems; and
▪$24 million related to spent fuel management at SONGS.
SDG&E expects future payments under these contractual commitments to be $2 million in 2021, $1 million in each of 2022 through 2025 and $19 million thereafter.
Sempra Mexico
At December 31, 2020, Sempra Mexico has commitments to make future payments of $610 million for construction projects that include:
▪$349 million for liquid fuels terminals;
▪$249 million for natural gas pipelines and ongoing maintenance services; and
▪$12 million for renewables projects.
Sempra Mexico expects future payments under these contractual commitments to be $466 million in 2021, $19 million in 2022, $16 million in 2023, $15 million in each of 2024 and 2025 and $79 million thereafter.
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Sempra LNG
At December 31, 2020, Sempra LNG has commitments to make future payments of $61 million primarily for natural gas liquefaction development costs and natural gas transportation projects. Sempra LNG expects future payments under these contractual commitments to be $57 million in 2021, $2 million in each of 2022 and 2023.
OTHER COMMITMENTS
SDG&E
We discuss nuclear insurance and nuclear fuel disposal related to SONGS in Note 15.
In connection with the completion of the Sunrise Powerlink project in 2012, the CPUC required that SDG&E establish a fire mitigation fund to minimize the risk of fire as well as reduce the potential wildfire impact on residences and structures near the Sunrise Powerlink. The future payments for these contractual commitments, for which a liability has been recorded, are expected to be $4 million per year in 2021 through 2025 and $279 million thereafter, subject to escalation of 2% per year, for a remaining 49-year period. At December 31, 2020, the present value of these future payments of $121 million has been recorded as a regulatory asset as the amounts represent a cost that we expect will be recovered from customers in the future.
Sempra LNG
Additional consideration for a 2006 comprehensive legal settlement with the State of California to resolve the Continental Forge litigation included an agreement that, for a period of 18 years beginning in 2011, Sempra LNG would sell to the California Utilities, subject to annual CPUC approval, up to 500 MMcf per day of regasified LNG from Sempra Mexico’s ECA Regas Facility that is not delivered or sold in Mexico at the price indexed to the California border minus $0.02 per MMBtu. There are no specified minimums required, and to date, Sempra LNG has not been required to deliver any natural gas pursuant to this agreement.
ENVIRONMENTAL ISSUES
Our operations are subject to federal, state and local environmental laws. We also are subject to regulations related to hazardous wastes, air and water quality, land use, solid waste disposal and the protection of wildlife. These laws and regulations require that we investigate and correct the effects of the release or disposal of materials at sites associated with our past and our present operations. These sites include those at which we have been identified as a PRP under the federal Superfund laws and similar state laws.
In addition, we are required to obtain numerous governmental permits, licenses and other approvals to construct facilities and operate our businesses. The related costs of environmental monitoring, pollution control equipment, cleanup costs, and emissions fees are significant. Increasing national and international concerns regarding global warming and mercury, carbon dioxide, nitrogen oxide and sulfur dioxide emissions could result in requirements for additional pollution control equipment or significant emissions fees or taxes that could adversely affect Sempra LNG and Sempra Mexico. The California Utilities’ costs to operate their facilities in compliance with these laws and regulations generally have been recovered in customer rates.
We disclose any proceeding under environmental laws to which a government authority is a party when the potential monetary sanctions, exclusive of interest and costs, exceed the lesser of $1 million or 1% of current assets, which was $45 million for Sempra Energy Consolidated, $16 million for SDG&E and $15 million for SoCalGas at December 31, 2020.
We discuss environmental matters related to the natural gas leak at SoCalGas’ Aliso Canyon natural gas storage facility above in “Legal Proceedings – SoCalGas – Aliso Canyon Natural Gas Storage Facility Gas Leak.”
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Other Environmental Issues
We generally capitalize the significant costs we incur to mitigate or prevent future environmental contamination or extend the life, increase the capacity, or improve the safety or efficiency of property used in current operations. The following table shows our capital expenditures (including construction work in progress) in order to comply with environmental laws and regulations:
| CAPITAL EXPENDITURES FOR ENVIRONMENTAL ISSUES | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Sempra Energy Consolidated | $ | 76 | $ | 80 | $ | 100 | |||||||||||
| SDG&E | 39 | 39 | 38 | ||||||||||||||
| SoCalGas | 37 | 41 | 62 |
We have not identified any significant environmental issues outside the U.S.
At the California Utilities, costs that relate to current operations or an existing condition caused by past operations are generally recorded as a regulatory asset due to the probability that these costs will be recovered in rates.
The environmental issues currently facing us, except for those related to the Aliso Canyon natural gas storage facility leak as we discuss above or resolved during the last three years, include (1) investigation and remediation of the California Utilities’ manufactured-gas sites, (2) cleanup of third-party waste-disposal sites used by the California Utilities at which we have been identified as a PRP and (3) mitigation of damage to the marine environment caused by the cooling-water discharge from SONGS.
The table below shows the status at December 31, 2020 of the California Utilities’ manufactured-gas sites and the third-party waste-disposal sites for which we have been identified as a PRP:
| STATUS OF ENVIRONMENTAL SITES | |||||||||||
| # Sites complete(1) | # Sites in process | ||||||||||
| SDG&E: | |||||||||||
| Manufactured-gas sites | 3 | — | |||||||||
| Third-party waste-disposal sites | 2 | 1 | |||||||||
| SoCalGas: | |||||||||||
| Manufactured-gas sites | 39 | 3 | |||||||||
| Third-party waste-disposal sites | 5 | 2 |
(1) There may be ongoing compliance obligations for completed sites, such as regular inspections, adherence to land use covenants and water quality monitoring.
We record environmental liabilities when our liability is probable and the costs can be reasonably estimated. In many cases, however, investigations are not yet at a stage where we can determine whether we are liable or, if the liability is probable, to reasonably estimate the amount or range of amounts of the costs. Estimates of our liability are further subject to uncertainties such as the nature and extent of site contamination, evolving cleanup standards and imprecise engineering evaluations. We review our accruals periodically and, as investigations and cleanups proceed, we make adjustments as necessary.
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The following table shows our accrued liabilities for environmental matters at December 31, 2020. Of the total liability, $9 million at SoCalGas is recorded on a discounted basis, with a discount rate of 1.5%.
| ACCRUED LIABILITIES FOR ENVIRONMENTAL MATTERS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Manufactured- gas sites | Waste disposal sites (PRP)(1) | Other hazardous waste sites | Total(2) | ||||||||||||||||||||
| SDG&E(3) | $ | — | $ | 6 | $ | 13 | $ | 19 | |||||||||||||||
| SoCalGas(4) | 36 | 3 | 1 | 40 | |||||||||||||||||||
| Other | — | 1 | — | 1 | |||||||||||||||||||
| Total Sempra Energy | $ | 36 | $ | 10 | $ | 14 | $ | 60 |
(1) Sites for which we have been identified as a PRP.
(2) Includes $11 million, $1 million and $10 million classified as current liabilities, and $49 million, $18 million and $30 million classified as noncurrent liabilities on Sempra Energy’s, SDG&E’s and SoCalGas’ Consolidated Balance Sheets, respectively.
(3) Does not include SDG&E’s liability for SONGS marine environment mitigation.
(4) Does not include SoCalGas’ liability for environmental matters for the Leak. We discuss matters related to the Leak above in “Legal Proceedings – SoCalGas – Aliso Canyon Natural Gas Storage Facility Gas Leak.”
In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached an agreement with the CCC to mitigate the damage to the marine environment caused by the cooling-water discharge from SONGS during its operation. SONGS’ early retirement, described in Note 15, does not reduce SDG&E’s mitigation obligation. SDG&E’s share of the estimated mitigation costs is $84 million, of which $47 million has been incurred through December 31, 2020 and $37 million is accrued for remaining costs through 2053, which is recoverable in rates and included in noncurrent Regulatory Assets on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets.
We expect future payments related to our environmental liabilities on an undiscounted basis to be $12 million in 2021, $16 million in 2022, $3 million in 2023, $6 million in 2024, $3 million in 2025 and $58 million thereafter.
NOTE 17. SEGMENT INFORMATION
We have five separately managed reportable segments, as follows:
▪SDG&E provides electric service to San Diego and southern Orange counties and natural gas service to San Diego County.
▪SoCalGas is a natural gas distribution utility, serving customers throughout most of Southern California and part of central California.
▪Sempra Texas Utilities holds our investment in Oncor Holdings, which owns an 80.25% interest in Oncor, a regulated electric transmission and distribution utility serving customers in the north-central, eastern, western and panhandle regions of Texas; and our indirect, 50% interest in Sharyland Holdings, which owns Sharyland Utilities, a regulated electric transmission utility serving customers near the Texas-Mexico border. As we discuss in Note 5, we acquired our investment in Sharyland Holdings in May 2019.
*▪*Sempra Mexico develops, owns and operates, or holds interests in, natural gas, electric, LNG, LPG, ethane and liquid fuels infrastructure, and has marketing operations for the purchase of LNG and the purchase and sale of natural gas in Mexico.
▪Sempra LNG develops and builds natural gas liquefaction export facilities, holds an interest in a facility for the export of LNG, owns and operates natural gas pipelines, and buys, sells and transports natural gas through its marketing operations, all within the U.S. and Mexico. In February 2019, we completed the sale of our natural gas storage assets at Mississippi Hub and Bay Gas.
In April 2019, Sempra Renewables completed the sale of its remaining wind assets and investments. Upon completion of this sale, remaining nominal business activities at Sempra Renewables were subsumed into Parent and other and the Sempra Renewables segment ceased to exist. The tables below include amounts from Sempra Renewables up until cessation of the segment.
As we discuss in Note 5, the financial information related to our businesses that constituted the Sempra South American Utilities segment is presented as discontinued operations for all periods presented. The information in the tables below excludes amounts from discontinued operations unless otherwise noted. We completed the sales of our discontinued operations in the second quarter of 2020.
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We evaluate each segment’s performance based on its contribution to Sempra Energy’s reported earnings and cash flows. The California Utilities operate in essentially separate service territories, under separate regulatory frameworks and rate structures set by the CPUC and the FERC. We describe the accounting policies of all of our segments in Note 1.
The cost of common services shared by the business segments is assigned directly or allocated based on various cost factors, depending on the nature of the service provided. Interest income and expense is recorded on intercompany loans. The loan balances and related interest are eliminated in consolidation.
The following tables show selected information by segment from our Consolidated Statements of Operations and Consolidated Balance Sheets. We provide information about our equity method investments by segment in Note 6. Amounts labeled as “All other” in the following tables consist primarily of activities of parent organizations and include certain nominal amounts from our South American businesses that did not qualify for treatment as discontinued operations.
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| SEGMENT INFORMATION | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| REVENUES | |||||||||||||||||
| SDG&E | $ | 5,313 | $ | 4,925 | $ | 4,568 | |||||||||||
| SoCalGas | 4,748 | 4,525 | 3,962 | ||||||||||||||
| Sempra Mexico | 1,256 | 1,375 | 1,376 | ||||||||||||||
| Sempra LNG | 374 | 410 | 472 | ||||||||||||||
| Sempra Renewables | — | 10 | 124 | ||||||||||||||
| All other | 2 | 3 | — | ||||||||||||||
| Adjustments and eliminations | (3) | (3) | (3) | ||||||||||||||
| Intersegment revenues(1) | (320) | (416) | (397) | ||||||||||||||
| Total | $ | 11,370 | $ | 10,829 | $ | 10,102 | |||||||||||
| INTEREST EXPENSE | |||||||||||||||||
| SDG&E(2) | $ | 413 | $ | 411 | $ | 221 | |||||||||||
| SoCalGas | 158 | 141 | 115 | ||||||||||||||
| Sempra Mexico | 132 | 119 | 120 | ||||||||||||||
| Sempra LNG | 43 | 35 | 21 | ||||||||||||||
| Sempra Renewables | — | 3 | 19 | ||||||||||||||
| All other | 389 | 450 | 496 | ||||||||||||||
| Intercompany eliminations | (54) | (82) | (106) | ||||||||||||||
| Total | $ | 1,081 | $ | 1,077 | $ | 886 | |||||||||||
| INTEREST INCOME | |||||||||||||||||
| SDG&E | $ | 2 | $ | 4 | $ | 4 | |||||||||||
| SoCalGas | 2 | 2 | 2 | ||||||||||||||
| Sempra Mexico | 60 | 78 | 65 | ||||||||||||||
| Sempra LNG | 81 | 61 | 49 | ||||||||||||||
| Sempra Renewables | — | 11 | 12 | ||||||||||||||
| All other | 7 | 4 | 14 | ||||||||||||||
| Intercompany eliminations | (56) | (73) | (61) | ||||||||||||||
| Total | $ | 96 | $ | 87 | $ | 85 | |||||||||||
| DEPRECIATION AND AMORTIZATION | |||||||||||||||||
| SDG&E | $ | 801 | $ | 760 | $ | 688 | |||||||||||
| SoCalGas | 654 | 602 | 556 | ||||||||||||||
| Sempra Mexico | 189 | 183 | 175 | ||||||||||||||
| Sempra LNG | 9 | 10 | 26 | ||||||||||||||
| Sempra Renewables | — | — | 27 | ||||||||||||||
| All other | 13 | 14 | 19 | ||||||||||||||
| Total | $ | 1,666 | $ | 1,569 | $ | 1,491 | |||||||||||
| INCOME TAX EXPENSE (BENEFIT) | |||||||||||||||||
| SDG&E | $ | 190 | $ | 171 | $ | 173 | |||||||||||
| SoCalGas | 96 | 120 | 92 | ||||||||||||||
| Sempra Texas Utilities | 1 | — | — | ||||||||||||||
| Sempra Mexico | 57 | 227 | 185 | ||||||||||||||
| Sempra LNG | 92 | (5) | (435) | ||||||||||||||
| Sempra Renewables | — | 4 | 71 | ||||||||||||||
| All other | (187) | (202) | (135) | ||||||||||||||
| Total | $ | 249 | $ | 315 | $ | (49) |
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| SEGMENT INFORMATION (CONTINUED) | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31 or at December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| EARNINGS (LOSSES) ATTRIBUTABLE TO COMMON SHARES | |||||||||||||||||
| SDG&E | $ | 824 | $ | 767 | $ | 669 | |||||||||||
| SoCalGas | 504 | 641 | 400 | ||||||||||||||
| Sempra Texas Utilities | 579 | 528 | 371 | ||||||||||||||
| Sempra Mexico | 259 | 253 | 237 | ||||||||||||||
| Sempra LNG | 320 | (6) | (617) | ||||||||||||||
| Sempra Renewables | — | 59 | 328 | ||||||||||||||
| Discontinued operations | 1,840 | 328 | 156 | ||||||||||||||
| All other | (562) | (515) | (620) | ||||||||||||||
| Total | $ | 3,764 | $ | 2,055 | $ | 924 | |||||||||||
| EXPENDITURES FOR PROPERTY, PLANT & EQUIPMENT | |||||||||||||||||
| SDG&E | $ | 1,942 | $ | 1,522 | $ | 1,542 | |||||||||||
| SoCalGas | 1,843 | 1,439 | 1,538 | ||||||||||||||
| Sempra Mexico | 611 | 624 | 368 | ||||||||||||||
| Sempra LNG | 268 | 112 | 31 | ||||||||||||||
| Sempra Renewables | — | 2 | 51 | ||||||||||||||
| All other | 12 | 9 | 14 | ||||||||||||||
| Total | $ | 4,676 | $ | 3,708 | $ | 3,544 | |||||||||||
| ASSETS | |||||||||||||||||
| SDG&E | $ | 22,311 | $ | 20,560 | $ | 19,225 | |||||||||||
| SoCalGas | 18,460 | 17,077 | 15,389 | ||||||||||||||
| Sempra Texas Utilities | 12,542 | 11,619 | 9,652 | ||||||||||||||
| Sempra Mexico | 10,752 | 9,938 | 9,165 | ||||||||||||||
| Sempra LNG | 2,205 | 3,901 | 4,060 | ||||||||||||||
| Sempra Renewables | — | — | 2,549 | ||||||||||||||
| Discontinued operations | — | 3,958 | 3,718 | ||||||||||||||
| All other | 1,209 | 749 | 1,070 | ||||||||||||||
| Intersegment receivables | (856) | (2,137) | (4,190) | ||||||||||||||
| Total | $ | 66,623 | $ | 65,665 | $ | 60,638 | |||||||||||
| GEOGRAPHIC INFORMATION | |||||||||||||||||
| Long-lived assets(3): | |||||||||||||||||
| United States | $ | 46,902 | $ | 43,719 | $ | 40,611 | |||||||||||
| Mexico | 6,929 | 6,355 | 5,800 | ||||||||||||||
| Total | $ | 53,831 | $ | 50,074 | $ | 46,411 | |||||||||||
| Revenues(4): | |||||||||||||||||
| United States | $ | 10,205 | $ | 9,574 | $ | 8,840 | |||||||||||
| Mexico | 1,165 | 1,255 | 1,262 | ||||||||||||||
| Total | $ | 11,370 | $ | 10,829 | $ | 10,102 |
*(1)*Revenues for reportable segments include intersegment revenues of $5 million, $88 million, $91 million and $136 million for 2020; $5 million, $69 million, $120 million and $222 million for 2019; and $4 million, $64 million, $114 million and $215 million for 2018 for SDG&E, SoCalGas, Sempra Mexico and Sempra LNG, respectively.
*(2)*In accordance with adoption of the lease standard on January 1, 2019, on a prospective basis, a significant portion of finance lease costs for PPAs that have historically been presented in Cost of Electric Fuel and Purchased Power are now presented in Interest Expense.
*(3)*Includes net PP&E and investments.
*(4)*Amounts are based on where the revenue originated, after intercompany eliminations.
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NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
We provide quarterly financial information for Sempra Energy Consolidated, SDG&E and SoCalGas below:
| SEMPRA ENERGY | |||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Quarters ended | |||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2020: | |||||||||||||||||||||||
| Revenues | $ | 3,029 | $ | 2,526 | $ | 2,644 | $ | 3,171 | |||||||||||||||
| Expenses and other income | $ | 2,632 | $ | 2,063 | $ | 2,443 | $ | 2,743 | |||||||||||||||
| Income from continuing operations, net of income tax | $ | 867 | $ | 528 | $ | 428 | $ | 432 | |||||||||||||||
| Income (loss) from discontinued operations, net of income tax | 80 | 1,777 | (7) | — | |||||||||||||||||||
| Net income | $ | 947 | $ | 2,305 | $ | 421 | $ | 432 | |||||||||||||||
| Earnings attributable to common shares | $ | 760 | $ | 2,239 | $ | 351 | $ | 414 | |||||||||||||||
| Basic EPS(1): | |||||||||||||||||||||||
| Earnings from continuing operations | $ | 2.35 | $ | 1.58 | $ | 1.23 | $ | 1.43 | |||||||||||||||
| Earnings (losses) from discontinued operations | $ | 0.25 | $ | 6.06 | $ | (0.02) | $ | — | |||||||||||||||
| Earnings | $ | 2.60 | $ | 7.64 | $ | 1.21 | $ | 1.43 | |||||||||||||||
| Weighted-average common shares outstanding | 292.8 | 293.1 | 289.5 | 289.0 | |||||||||||||||||||
| Diluted EPS(1): | |||||||||||||||||||||||
| Earnings from continuing operations(2) | $ | 2.30 | $ | 1.58 | $ | 1.23 | $ | 1.43 | |||||||||||||||
| Earnings (losses) from discontinued operations | $ | 0.23 | $ | 6.03 | $ | (0.02) | $ | — | |||||||||||||||
| Earnings(2) | $ | 2.53 | $ | 7.61 | $ | 1.21 | $ | 1.43 | |||||||||||||||
| Weighted-average common shares outstanding | 313.9 | 294.2 | 290.6 | 290.2 | |||||||||||||||||||
| 2019: | |||||||||||||||||||||||
| Revenues | $ | 2,898 | $ | 2,230 | $ | 2,758 | $ | 2,943 | |||||||||||||||
| Expenses and other income | $ | 2,397 | $ | 1,944 | $ | 2,310 | $ | 2,444 | |||||||||||||||
| Income from continuing operations, net of income tax | $ | 560 | $ | 357 | $ | 653 | $ | 429 | |||||||||||||||
| (Loss) income from discontinued operations, net of income tax | (42) | 78 | 256 | 71 | |||||||||||||||||||
| Net income | $ | 518 | $ | 435 | $ | 909 | $ | 500 | |||||||||||||||
| Earnings attributable to common shares | $ | 441 | $ | 354 | $ | 813 | $ | 447 | |||||||||||||||
| Basic EPS(1): | |||||||||||||||||||||||
| Earnings from continuing operations | $ | 1.79 | $ | 1.03 | $ | 2.04 | $ | 1.36 | |||||||||||||||
| (Losses) earnings from discontinued operations | $ | (0.19) | $ | 0.26 | $ | 0.89 | $ | 0.21 | |||||||||||||||
| Earnings | $ | 1.60 | $ | 1.29 | $ | 2.93 | $ | 1.57 | |||||||||||||||
| Weighted-average common shares outstanding | 274.7 | 275.0 | 277.4 | 284.6 | |||||||||||||||||||
| Diluted EPS(1): | |||||||||||||||||||||||
| Earnings from continuing operations(2) | $ | 1.78 | $ | 1.01 | $ | 2.00 | $ | 1.34 | |||||||||||||||
| (Losses) earnings from discontinued operations | $ | (0.19) | $ | 0.25 | $ | 0.84 | $ | 0.21 | |||||||||||||||
| Earnings(2) | $ | 1.59 | $ | 1.26 | $ | 2.84 | $ | 1.55 | |||||||||||||||
| Weighted-average common shares outstanding | 277.2 | 279.6 | 295.8 | 288.8 |
(1) EPS is computed independently for each of the quarters and therefore may not sum to the total for the year.
(2) In the quarters ended March 31, 2020 and September 30, 2019, due to the dilutive effect of certain mandatory convertible preferred stock, the numerator used to calculate diluted EPS included an add-back of related mandatory convertible preferred dividends declared in those quarters.
F-154
In April 2020, we completed the sale of our equity interests in our Peruvian businesses for cash proceeds of $3,549 million, net of transaction costs and as adjusted for post-closing adjustments, and recorded a pretax gain of $2,271 million ($1,499 million after tax). In June 2020, we completed the sale of our equity interests in our Chilean businesses for cash proceeds of $2,216 million, net of transaction costs and as adjusted for post-closing adjustments, and recorded a pretax gain of $628 million ($248 million after tax). We discuss the sale of these discontinued operations and related gains in Note 5.
In March, September and December of 2020, SoCalGas recorded charges of $100 million ($72 million after tax), $27 million ($22 million after tax) and $180 million ($139 million after tax), respectively, in Aliso Canyon Litigation and Regulatory Matters on the SoCalGas and Sempra Energy Consolidated Statements of Operations related to settlement discussions in connection with civil litigation and regulatory matters. We discuss these matters in Note 16.
In April 2019, Sempra Renewables completed the sale of its remaining wind assets and investments and recognized a pretax gain on sale of $61 million ($45 million after tax). We discuss the sale and related gain in Note 5.
| SDG&E | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Quarters ended | |||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2020: | |||||||||||||||||||||||
| Operating revenues | $ | 1,269 | $ | 1,235 | $ | 1,472 | $ | 1,337 | |||||||||||||||
| Operating expenses | 880 | 887 | 1,157 | 1,016 | |||||||||||||||||||
| Operating income | $ | 389 | $ | 348 | $ | 315 | $ | 321 | |||||||||||||||
| Net income/Earnings attributable to common shares | $ | 262 | $ | 193 | $ | 178 | $ | 191 | |||||||||||||||
| 2019: | |||||||||||||||||||||||
| Operating revenues | $ | 1,145 | $ | 1,094 | $ | 1,427 | $ | 1,259 | |||||||||||||||
| Operating expenses | 883 | 831 | 1,004 | 894 | |||||||||||||||||||
| Operating income | $ | 262 | $ | 263 | $ | 423 | $ | 365 | |||||||||||||||
| Net income | $ | 177 | $ | 146 | $ | 266 | $ | 185 | |||||||||||||||
| Earnings attributable to noncontrolling interest | (1) | (3) | (3) | — | |||||||||||||||||||
| Earnings attributable to common shares | $ | 176 | $ | 143 | $ | 263 | $ | 185 |
| SOCALGAS | |||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Quarters ended | |||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2020: | |||||||||||||||||||||||
| Operating revenues | $ | 1,395 | $ | 1,010 | $ | 842 | $ | 1,501 | |||||||||||||||
| Operating expenses | 1,031 | 773 | 826 | 1,333 | |||||||||||||||||||
| Operating income | $ | 364 | $ | 237 | $ | 16 | $ | 168 | |||||||||||||||
| Net income (loss) | $ | 303 | $ | 147 | $ | (24) | $ | 79 | |||||||||||||||
| Dividends on preferred stock | — | (1) | — | — | |||||||||||||||||||
| Earnings (losses) attributable to common shares | $ | 303 | $ | 146 | $ | (24) | $ | 79 | |||||||||||||||
| 2019: | |||||||||||||||||||||||
| Operating revenues | $ | 1,361 | $ | 806 | $ | 975 | $ | 1,383 | |||||||||||||||
| Operating expenses | 1,060 | 747 | 762 | 1,000 | |||||||||||||||||||
| Operating income | $ | 301 | $ | 59 | $ | 213 | $ | 383 | |||||||||||||||
| Net income | $ | 264 | $ | 31 | $ | 143 | $ | 204 | |||||||||||||||
| Dividends on preferred stock | — | (1) | — | — | |||||||||||||||||||
| Earnings attributable to common shares | $ | 264 | $ | 30 | $ | 143 | $ | 204 |
SoCalGas recognizes annual authorized revenue for core natural gas customers using seasonal factors established in the Triennial Cost Allocation Proceeding. Accordingly, a significant portion of SoCalGas’ annual earnings are recognized in the first and fourth quarters each year.
F-155
S-1
| SEMPRA ENERGY | |||||||||||||||||
| CONDENSED STATEMENTS OF OPERATIONS | |||||||||||||||||
| (Dollars in millions, except per share amounts; shares in thousands) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest income | $ | 4 | $ | 3 | $ | 14 | |||||||||||
| Interest expense | (495) | (521) | (495) | ||||||||||||||
| Operating expenses | (86) | (124) | (82) | ||||||||||||||
| Other (expense) income, net | (38) | 59 | (16) | ||||||||||||||
| Income tax benefit | 176 | 163 | 154 | ||||||||||||||
| Loss before equity in earnings of subsidiaries | (439) | (420) | (425) | ||||||||||||||
| Equity in earnings of subsidiaries, net of income taxes | 4,371 | 2,617 | 1,474 | ||||||||||||||
| Net income | 3,932 | 2,197 | 1,049 | ||||||||||||||
| Preferred dividends | (168) | (142) | (125) | ||||||||||||||
| Earnings | $ | 3,764 | $ | 2,055 | $ | 924 | |||||||||||
| Basic EPS: | |||||||||||||||||
| Earnings | $ | 12.93 | $ | 7.40 | $ | 3.45 | |||||||||||
| Weighted-average common shares outstanding | 291,077 | 277,904 | 268,072 | ||||||||||||||
| Diluted EPS: | |||||||||||||||||
| Earnings | $ | 12.88 | $ | 7.29 | $ | 3.42 | |||||||||||
| Weighted-average common shares outstanding | 292,252 | 282,033 | 269,852 |
See Notes to Condensed Financial Information of Parent.
S-2
| SEMPRA ENERGY | |||||||||||||||||
| CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, 2020, 2019 and 2018 | |||||||||||||||||
| Pretax amount | Income tax benefit (expense) | Net-of-tax amount | |||||||||||||||
| 2020: | |||||||||||||||||
| Net income | $ | 3,756 | $ | 176 | $ | 3,932 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustments | 547 | — | 547 | ||||||||||||||
| Financial instruments | (146) | 33 | (113) | ||||||||||||||
| Pension and other postretirement benefits | 11 | 1 | 12 | ||||||||||||||
| Total other comprehensive income | 412 | 34 | 446 | ||||||||||||||
| Comprehensive income | $ | 4,168 | $ | 210 | $ | 4,378 | |||||||||||
| 2019: | |||||||||||||||||
| Net income | $ | 2,034 | $ | 163 | $ | 2,197 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustments | (43) | — | (43) | ||||||||||||||
| Financial instruments | (161) | 53 | (108) | ||||||||||||||
| Pension and other postretirement benefits | 25 | (7) | 18 | ||||||||||||||
| Total other comprehensive loss | (179) | 46 | (133) | ||||||||||||||
| Comprehensive income | $ | 1,855 | $ | 209 | $ | 2,064 | |||||||||||
| 2018: | |||||||||||||||||
| Net income | $ | 895 | $ | 154 | $ | 1,049 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustments | (144) | — | (144) | ||||||||||||||
| Financial instruments | 64 | (21) | 43 | ||||||||||||||
| Pension and other postretirement benefits | (38) | 4 | (34) | ||||||||||||||
| Total other comprehensive loss | (118) | (17) | (135) | ||||||||||||||
| Comprehensive income | $ | 777 | $ | 137 | $ | 914 |
See Notes to Condensed Financial Information of Parent.
S-3
| SEMPRA ENERGY | |||||||||||
| CONDENSED BALANCE SHEETS | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Assets: | |||||||||||
| Cash and cash equivalents | $ | 366 | $ | 6 | |||||||
| Due from affiliates | 58 | 98 | |||||||||
| Income taxes receivable, net | 42 | — | |||||||||
| Other current assets | 26 | 34 | |||||||||
| Total current assets | 492 | 138 | |||||||||
| Investments in subsidiaries | 33,898 | 32,604 | |||||||||
| Due from affiliates | 1 | 3 | |||||||||
| Deferred income taxes | 2,187 | 1,766 | |||||||||
| Other long-term assets | 717 | 682 | |||||||||
| Total assets | $ | 37,295 | $ | 35,193 | |||||||
| Liabilities and shareholders’ equity: | |||||||||||
| Current portion of long-term debt | $ | 850 | $ | 1,399 | |||||||
| Due to affiliates | 224 | 369 | |||||||||
| Income taxes payable, net | — | 274 | |||||||||
| Other current liabilities | 536 | 561 | |||||||||
| Total current liabilities | 1,610 | 2,603 | |||||||||
| Long-term debt | 7,317 | 8,856 | |||||||||
| Due to affiliates | 4,375 | 3,138 | |||||||||
| Other long-term liabilities | 620 | 667 | |||||||||
| Commitments and contingencies (Note 4) | |||||||||||
| Shareholders’ equity | 23,373 | 19,929 | |||||||||
| Total liabilities and shareholders’ equity | $ | 37,295 | $ | 35,193 |
See Notes to Condensed Financial Information of Parent.
S-4
| SEMPRA ENERGY | |||||||||||||||||
| CONDENSED STATEMENTS OF CASH FLOWS | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net cash (used in) provided by operating activities | (978) | $ | 294 | $ | 213 | ||||||||||||
| Expenditures for property, plant and equipment | (9) | (8) | (11) | ||||||||||||||
| Expenditures for acquisition | — | — | (329) | ||||||||||||||
| Capital contributions to investees | (364) | (1,528) | (9,457) | ||||||||||||||
| Distribution from investments | 3,616 | — | — | ||||||||||||||
| Decrease (increase) in loans to affiliates, net | 2 | — | (1) | ||||||||||||||
| Other | — | 4 | — | ||||||||||||||
| Net cash provided by (used in) investing activities | 3,245 | (1,532) | (9,798) | ||||||||||||||
| Common stock dividends paid | (1,174) | (993) | (877) | ||||||||||||||
| Preferred dividends paid | (157) | (142) | (89) | ||||||||||||||
| Issuances of preferred stock, net | 891 | — | 2,258 | ||||||||||||||
| Issuances of common stock, net | 11 | 1,830 | 2,272 | ||||||||||||||
| Repurchases of common stock | (566) | (26) | (21) | ||||||||||||||
| Issuances of long-term debt | 1,599 | 758 | 4,969 | ||||||||||||||
| Payments on long-term debt | (3,700) | (1,500) | (500) | ||||||||||||||
| Increase in loans from affiliates, net | 1,194 | 1,328 | 1,520 | ||||||||||||||
| Equity transaction costs with third parties | (4) | — | — | ||||||||||||||
| Debt issuance costs | (1) | (25) | (37) | ||||||||||||||
| Net cash (used in) provided by financing activities | (1,907) | 1,230 | 9,495 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 360 | (8) | (90) | ||||||||||||||
| Cash and cash equivalents, January 1 | 6 | 14 | 104 | ||||||||||||||
| Cash and cash equivalents, December 31 | $ | 366 | $ | 6 | $ | 14 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||||||||||||
| Preferred dividends declared but not paid | $ | 47 | $ | 36 | $ | 36 | |||||||||||
| Common dividends issued in stock | 22 | 55 | 54 | ||||||||||||||
| Common dividends declared but not paid | 301 | 283 | 245 |
See Notes to Condensed Financial Information of Parent.
S-5
SEMPRA ENERGY
NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT
NOTE 1. BASIS OF PRESENTATION
The condensed financial information of Sempra Energy has been prepared in accordance with SEC Regulation S-X Rule 5-04 and Rule 12-04. We apply the same accounting policies as in the financial statements of Sempra Energy Consolidated, except that Sempra Energy accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.
Other (Expense) Income, Net, on the Condensed Statements of Operations includes:
▪$41 million, $61 million and $(6) million of gains (losses) on dedicated assets in support of our executive retirement and deferred compensation plans in 2020, 2019 and 2018, respectively;
▪$3 million net gains primarily from the settlement of foreign currency derivatives to hedge Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova in 2018; and
▪$3 million and $15 million of losses in 2020 and 2019, respectively, from foreign currency derivatives used to hedge exposure to fluctuations in the Peruvian sol and Chilean peso related to the sale of our operations in Peru and Chile.
Sempra Energy received cash dividends from its consolidated subsidiaries totaling $300 million, $150 million and $300 million in 2020, 2019 and 2018, respectively.
Additional information on Sempra Energy’s foreign currency derivatives is provided in Note 11 of the Notes to Consolidated Financial Statements.
NOTE 2. NEW ACCOUNTING STANDARDS
We describe below and in Note 2 of the Notes to Consolidated Financial Statements recent pronouncements that have had a significant effect on Sempra Energy’s financial condition, results of operations, cash flows or disclosures.
ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”: ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications that replace LIBOR or another reference rate affected by reference rate reform and to hedging relationships that reference LIBOR or another reference rate affected or expected to be affected by reference rate reform. ASU 2020-04 was effective March 12, 2020 and can be applied through December 31, 2022, with certain exceptions for hedging relationships that continue to exist after this date, and may be applied from January 1, 2020. For contract modifications, the standard allows entities to account for modifications as an event that does not require reassessment or remeasurement (i.e., as a continuation of the existing contract). The standard also allows entities to amend their formal designation and documentation of hedging relationships affected or expected to be affected by reference rate reform, without having to de-designate the hedging relationship. Entities may elect the optional expedients and exceptions on an individual hedging relationship basis and independently from one another. We elected the optional expedients for contract modifications. We elected the cash flow hedging expedients to disregard the potential discontinuation of a reference rate when assessing whether a hedged forecasted interest payment is probable and to disregard certain mismatches between the designated hedging instrument and the hedged item when assessing the hedge effectiveness. We are applying these expedients prospectively from January 1, 2020. Application of these expedients preserves the presentation of derivatives consistent with the past presentation.
ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”: ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. In addition to other changes, this standard amends ASC 470-20, “Debt with Conversion and Other Options,” by removing the accounting models for instruments with beneficial conversion features and cash conversion features. The standard also amends ASC 260, “Earnings Per Share,” as follows:
▪requires an entity to apply the if-converted method when calculating diluted EPS for convertible instruments and no longer use the treasury stock method, which was previously allowed for certain convertible instruments;
S-6
▪requires an entity to include the effect of potential share settlement in the diluted EPS calculation when an instrument may be settled in cash or shares, and no longer allows an entity to rebut the presumption of share settlement if it has a history or policy of cash settlement;
▪requires an entity to include equity-classified convertible preferred stock that contains down-round features whereby, if the down-round feature is triggered, its effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS;
▪clarifies that the average market price should be used to calculate the diluted EPS denominator when the exercise price or the number of shares that may be issued is variable, except for certain contingently issuable shares; and
▪clarifies that the weighted-average share count from each quarter should be used when calculating the year-to-date weighted-average share count.
For public entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods therein, with early adoption permitted for fiscal years beginning after December 15, 2020. An entity can use either a full or modified retrospective approach to adopt ASU 2020-06 and must disclose, in the period of adoption, EPS transition information about the effect of the change on affected per-share amounts. We plan to adopt the standard on January 1, 2022 and are currently evaluating the effect of the standard on our ongoing financial reporting.
NOTE 3. LONG-TERM DEBT
The following table shows the detail and maturities of long-term debt outstanding:
| LONG-TERM DEBT | |||||||||||
| (Dollars in millions) | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| 2.4% Notes February 1, 2020 | $ | — | $ | 500 | |||||||
| 2.4% Notes March 15, 2020 | — | 500 | |||||||||
| 2.85% Notes November 15, 2020 | — | 400 | |||||||||
| Notes at variable rates (2.50% at December 31, 2019) January 15, 2021(1) | — | 700 | |||||||||
| Notes at variable rates (3.069% after floating-to-fixed rate swaps effective 2019) March 15, 2021 | 850 | 850 | |||||||||
| 2.875% Notes October 1, 2022 | 500 | 500 | |||||||||
| 2.9% Notes February 1, 2023 | 500 | 500 | |||||||||
| 4.05% Notes December 1, 2023 | 500 | 500 | |||||||||
| 3.55% Notes June 15, 2024 | 500 | 500 | |||||||||
| 3.75% Notes November 15, 2025 | 350 | 350 | |||||||||
| 3.25% Notes June 15, 2027 | 750 | 750 | |||||||||
| 3.4% Notes February 1, 2028 | 1,000 | 1,000 | |||||||||
| 3.8% Notes February 1, 2038 | 1,000 | 1,000 | |||||||||
| 6% Notes October 15, 2039 | 750 | 750 | |||||||||
| 4% Notes February 1, 2048 | 800 | 800 | |||||||||
| 5.75% Junior Subordinated Notes July 1, 2079(1) | 758 | 758 | |||||||||
| 8,258 | 10,358 | ||||||||||
| Current portion of long-term debt | (850) | (1,399) | |||||||||
| Unamortized discount on long-term debt | (32) | (35) | |||||||||
| Unamortized debt issuance costs | (59) | (68) | |||||||||
| Total long-term debt | $ | 7,317 | $ | 8,856 |
(1) Callable long-term debt not subject to make-whole provisions.
In October 2020, Sempra Energy redeemed $700 million of floating-rate notes, prior to a scheduled maturity in January 2021, utilizing a portion of the proceeds received from the sales of our South American businesses.
Maturities of long-term debt at December 31, 2020 are $850 million in 2021, $500 million in 2022, $1.0 billion in 2023, $500 million in 2024, $350 million in 2025 and $5.1 billion thereafter.
Additional information on Sempra Energy’s long-term debt is provided in Note 7 of the Notes to Consolidated Financial Statements.
S-7
NOTE 4. COMMITMENTS AND CONTINGENCIES
Sempra Energy has an operating lease commitment related to its corporate headquarters building of approximately $257 million. Sempra Energy expects payments for its operating lease to be $10 million in 2021, $11 million in 2022, $12 million in 2023, $12 million in 2024, $12 million in 2025 and $200 million thereafter.
For other contingencies and guarantees related to Sempra Energy, refer to Notes 6, 7 and 16 of the Notes to Consolidated Financial Statements.
S-8
Previous: Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES