Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

In 2018, we set out to simplify Sempra Energy’s business model and sharpen our focus on our mission to be North America’s premier energy infrastructure company. Our 2020 operational and financial results reflect our focus on executing this strategy:

▪We completed the sales of our South American businesses

▪We achieved full commercial operations at Cameron LNG JV Phase 1

▪We reached a final investment decision for ECA LNG Phase 1

▪We executed well on our planned capital expenditures

Our South American businesses and certain activities associated with those businesses are presented as discontinued operations for all periods presented. Nominal activities that are not classified as discontinued operations have been subsumed into Parent and other. Our discussions below exclude discontinued operations, unless otherwise noted.

RESULTS OF OPERATIONS

We discuss the following in Results of Operations:

▪Overall results of operations of Sempra Energy Consolidated;

▪Segment results;

▪Significant changes in revenues, costs and earnings; and

▪Impact of foreign currency and inflation rates on our results of operations.

OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY CONSOLIDATED

In 2020 compared to 2019, our earnings increased by $1,709 million to $3,764 million and our diluted EPS increased by $5.59 to $12.88. In 2019 compared to 2018, our earnings increased by $1,131 million to $2,055 million and our diluted EPS increased by $3.87 to $7.29. The change in diluted EPS for 2020 and 2019 included decreases of $(0.46) and $(0.33), respectively, attributable to an increase in weighted-average common shares outstanding. Our earnings and diluted EPS were impacted by variances discussed in “Segment Results” below.

SEGMENT RESULTS

This section presents earnings (losses) by Sempra Energy segment, as well as Parent and other and discontinued operations, and a related discussion of the changes in segment earnings (losses). Throughout the MD&A, our reference to earnings represents earnings attributable to common shares. Variance amounts presented are the after-tax earnings impact (based on applicable statutory tax rates), unless otherwise noted, and before NCI, where applicable.

SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
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
Parent and other(1)			(562)						(515)						(620)
Discontinued operations			1,840						328						156
Earnings attributable to common shares			$	3,764					$	2,055					$	924

(1) Includes intercompany eliminations recorded in consolidation and certain corporate costs.

SDG&E

The increase in earnings of $57 million (7%) in 2020 compared to 2019 was primarily due to:

▪$62 million due to the release of a regulatory liability in 2020 related to 2016-2018 forecasting differences that are not subject to tracking in the income tax expense memorandum account, which we discuss in Note 4 of the Notes to Consolidated Financial Statements;

▪$52 million higher electric transmission margin, including an increase in authorized ROE and the following impacts from the March 2020 FERC-approved TO5 settlement:

◦$18 million to conclude a rate base matter, and

◦$9 million favorable impact from the retroactive application of the final TO5 settlement for 2019;

▪$23 million higher AFUDC equity; and

▪$16 million higher income tax benefits from flow-through items; offset by

▪$44 million expected to be refunded to customers and a fine related to the Energy Efficiency Program inquiry, which we discuss in Note 4 of the Notes to Consolidated Financial Statements;

▪$31 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed to be allocated to shareholders in a January 2019 decision;

▪$13 million higher amortization and accretion of the Wildfire Fund asset and liability, respectively; and

▪$12 million higher net interest expense.

The increase in earnings of $98 million (15%) in 2019 compared to 2018 was primarily due to:

▪$71 million higher CPUC base operating margin authorized for 2019, net of operating expenses;

▪$31 million income tax benefit from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed to be allocated to shareholders in a January 2019 decision; and

▪$11 million higher margin from electric transmission operations, net of a FERC formulaic rate adjustment benefit in 2018; offset by

▪$10 million amortization of the Wildfire Fund asset.

SoCalGas

The decrease in earnings of $137 million (21%) in 2020 compared to 2019 was primarily due to:

▪$233 million from impacts associated with Aliso Canyon natural gas storage facility litigation and regulatory matters;

▪$38 million income tax benefit in 2019 from the impact of the January 2019 CPUC decision allocating certain excess deferred income tax balances to shareholders; and

▪$12 million higher net interest expense; offset by

▪$64 million due to the release of a regulatory liability in 2020 related to 2016-2018 income tax expense forecasting differences;

▪$29 million higher CPUC base operating margin authorized for 2020, net of operating expenses;

▪$21 million impairment of non-utility native gas assets in 2019;

▪$10 million higher income tax benefits from flow-through items; and

▪$8 million in penalties in 2019 related to the SoCalGas billing practices OII.

The increase in earnings of $241 million in 2019 compared to 2018 was primarily due to:

▪$216 million higher CPUC base operating margin authorized for 2019, net of operating expenses;

▪$38 million income tax benefit from the impact of the January 2019 CPUC decision allocating certain excess deferred income tax balances to shareholders;

▪$22 million from impacts associated with Aliso Canyon natural gas storage facility litigation in 2018; and

▪$14 million higher income tax benefits from flow-through items; offset by

▪$21 million impairment of non-utility native gas assets in 2019;

▪$18 million higher net interest expense; and

▪$8 million penalties in 2019 related to the SoCalGas billing practices OII.

Sempra Texas Utilities

The increase in earnings of $51 million (10%) in 2020 compared to 2019 was primarily due to higher equity earnings from Oncor Holdings driven by:

▪increased revenues from rate updates to reflect increases in invested capital and customer growth;

▪the impact of Oncor’s acquisition of InfraREIT in May 2019; and

▪higher AFUDC equity; offset by

▪unfavorable weather and increased operating costs and expenses attributable to invested capital.

The increase in earnings of $157 million (42%) in 2019 compared to 2018 primarily represented higher equity earnings from Oncor Holdings, which we acquired in March 2018, driven by the impact of Oncor’s acquisition of InfraREIT in May 2019 and higher revenues due to rate updates to reflect increases in invested transmission capital, offset by higher operating costs.

Sempra Mexico

Because Ecogas, our natural gas distribution utility in Mexico, uses the local currency as its functional currency, its revenues and expenses are translated into U.S. dollars at average exchange rates for the period for consolidation in Sempra Energy’s results of operations. Prior year amounts used in the variances discussed below are as adjusted for the difference in foreign currency translation rates between years. We discuss these and other foreign currency effects below in “Impact of Foreign Currency and Inflation Rates on Results of Operations.”

The increase in earnings of $6 million (2%) in 2020 compared to 2019 was primarily due to:

▪$69 million favorable impact from foreign currency and inflation effects, net of foreign currency derivatives effects, comprised of:

◦in 2020, $51 million favorable foreign currency and inflation effects, offset by a $39 million loss from foreign currency derivatives, and

◦in 2019, $86 million unfavorable foreign currency and inflation effects, offset by a $29 million gain from foreign currency derivatives; and

▪$33 million higher earnings primarily due to the start of commercial operations of the Sur de Texas-Tuxpan marine pipeline at IMG JV in September 2019; offset by

▪$165 million earnings attributable to NCI at IEnova in 2020 compared to $122 million earnings in 2019;

▪$22 million higher net interest expense;

▪$21 million lower earnings at the Guaymas-El Oro segment of the Sonora pipeline primarily from force majeure payments that ended in August 2019; and

▪$13 million lower earnings at TdM primarily due to scheduled major maintenance in the fourth quarter of 2020.

The increase in earnings of $16 million (7%) in 2019 compared to 2018 was primarily due to:

▪$18 million primarily due to the start of commercial operations of the Sur de Texas-Tuxpan marine pipeline at IMG JV in the third quarter of 2019;

▪$16 million lower income tax expense in 2019 primarily from a two-year tax abatement that expired in 2020; and

▪$122 million earnings attributable to NCI at IEnova in 2019 compared to $132 million earnings in 2018; offset by

▪$20 million lower earnings primarily from force majeure payments that ended on August 22, 2019 with respect to the Guaymas-El Oro segment of the Sonora pipeline; and

▪$17 million unfavorable impact from foreign currency and inflation effects, net of foreign currency derivatives effects, comprised of:

◦in 2019, $88 million unfavorable foreign currency and inflation effects, offset by a $29 million gain from foreign currency derivatives, offset by

◦in 2018, $43 million unfavorable foreign currency and inflation effects, offset by a $1 million gain from foreign currency derivatives.

Sempra LNG

Earnings of $320 million in 2020 compared to losses of $6 million in 2019 were primarily due to:

▪$284 million higher equity earnings from Cameron LNG JV primarily due to commencement of Phase 1 commercial operations; and

▪$41 million higher earnings from Sempra LNG’s marketing operations primarily driven by changes in natural gas prices.

The decrease in losses of $611 million in 2019 compared to 2018 was primarily due to:

▪$665 million net impairment of certain non-utility natural gas storage assets in the southeast U.S. in 2018, including $801 million impairment in the second quarter of 2018, offset by a $136 million reduction to the impairment in the fourth quarter of 2018;

▪$17 million higher equity earnings from Cameron LNG JV, including:

◦$36 million increase primarily due to Train 1 commencing commercial operation under its tolling agreements in August 2019, offset by

◦$19 million decrease due to the write-off of unamortized debt issuance costs and associated fees related to Cameron LNG JV’s debt refinancing; and

▪$9 million unfavorable adjustment in 2018 to TCJA provisional amounts recorded in 2017 related to the remeasurement of deferred income taxes; offset by

▪$36 million losses attributable to NCI in 2018 related to the net impairment discussed above; and

▪$28 million higher liquefaction project development costs and operating costs.

Sempra Renewables

As we discuss in Note 5 of the Notes to Consolidated Financial Statements, Sempra Renewables sold its remaining wind assets and investments in April 2019, upon which date the segment ceased to exist.

The decrease in earnings of $269 million in 2019 compared to 2018 was primarily due to:

▪$367 million gain on the sale of all Sempra Renewables’ operating solar assets, solar and battery storage development projects and its 50% interest in a wind power generation facility in December 2018; and

▪$92 million lower earnings from assets sold in December 2018 and April 2019, net of lower general and administrative and other costs due to the wind-down of this business; offset by

▪$145 million other-than-temporary impairment of certain U.S. wind equity method investments in 2018; and

▪$45 million gain on sale of Sempra Renewables’ remaining wind assets in 2019.

Parent and Other

The increase in losses of $47 million (9%) in 2020 compared to 2019 was primarily due to:

▪$100 million equity losses from our investment in RBS Sempra Commodities to settle pending tax matters and related legal costs, which we discuss in Note 16 of the Notes to Consolidated Financial Statements;

▪$26 million higher preferred dividends due to the issuance of series C preferred stock in June 2020;

▪$9 million lower net investment gains on dedicated assets in support of our employee nonqualified benefit plan and deferred compensation obligations, net of deferred compensation expenses; offset by

▪$36 million lower net interest expense;

▪$18 million higher income tax benefit primarily due to:

◦$26 million income tax benefit in 2020 compared to $7 million income tax expense in 2019 from changes to a valuation allowance against certain tax credit carryforwards, and

◦$11 million income tax benefit in 2020 compared to $2 million income tax expense in 2019 related to share-based compensation, offset by

◦$24 million consolidated California state income tax expense in 2020 associated with income from our investments in Sempra LNG entities, and

◦$10 million income tax benefit in 2019 from a reduction in a valuation allowance against certain NOL carryforwards as a result of our decision to sell our South American businesses; and

▪$8 million decrease in losses from foreign currency derivatives used to hedge exposure to fluctuations in the Peruvian sol and Chilean peso related to the sale of our South American businesses.

The decrease in losses of $105 million (17%) in 2019 compared to 2018 was primarily due to:

▪$65 million impairment of the RBS Sempra Commodities equity method investment in 2018;

▪$48 million higher investment gains in 2019 on dedicated assets in support of our employee nonqualified benefit plan obligations, net of deferred compensation expenses;

▪$32 million income tax expense in 2018 to adjust provisional amounts recorded in 2017 related to the TCJA; and

▪$10 million income tax benefit in 2019 to reduce a valuation allowance against certain NOL carryforwards as a result of our decision to sell our South American businesses; offset by

▪$17 million increase in preferred dividends primarily from the issuance of series B preferred stock in July 2018;

▪$11 million increase primarily related to settlement charges from our nonqualified pension plan; and

▪$11 million loss from foreign currency derivatives used to hedge exposure to fluctuations in the Peruvian sol related to the sale of our operations in Peru.

Discontinued Operations

Discontinued operations that were previously in our Sempra South American Utilities segment include our former 100% interest in Chilquinta Energía in Chile, our former 83.6% interest in Luz del Sur in Peru and our former interests in two energy-services companies, Tecnored and Tecsur, which provide electric construction and infrastructure services to Chilquinta Energía and Luz del Sur, respectively, as well as third parties. Discontinued operations also include activities, mainly income taxes related to the South American businesses, that were previously included in the holding company of the South American businesses at Parent and other.

As we discuss in Note 5 of the Notes to Consolidated Financial Statements, we completed the sales of our South American businesses in the second quarter of 2020. In April 2020, we sold our equity interests in our Peruvian businesses, including our 83.6% interest in Luz del Sur and our interest in Tecsur, for cash proceeds of $3,549 million, net of transaction costs and as adjusted for post-closing adjustments, and in June 2020, we sold our equity interests in our Chilean businesses, including our 100% interest in Chilquinta Energía and Tecnored and our 50% interest in Eletrans, for cash proceeds of $2,216 million, net of transaction costs and as adjusted for post-closing adjustments.

The increase in earnings from our discontinued operations of $1,512 million in 2020 compared to 2019 was primarily due to:

▪$1,499 million after-tax gain on the sale of our Peruvian businesses;

▪$248 million after-tax gain on the sale of our Chilean 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 the January 25, 2019 approval of our plan to sell our South American businesses; offset by

▪$201 million lower operational earnings mainly as a result of the sales of our Peruvian and Chilean businesses; and

▪$89 million income tax benefit in 2019 related to outside basis differences existing as of January 25, 2019.

The increase in earnings of $172 million in 2019 compared to 2018 was primarily due to:

▪$91 million higher earnings from South American operations mainly from higher rates, lower cost of purchased power at Peru, and including $38 million lower depreciation expense due to assets classified as held for sale;

▪$89 million income tax benefit in 2019 from outside basis differences in our South American businesses primarily related to the change in our indefinite reinvestment assertion from our decision on January 25, 2019 to hold those businesses for sale and a change in the anticipated structure of the sale; and

▪$44 million income tax expense in 2018 to adjust TCJA provisional amounts recorded in 2017 primarily related to withholding tax on our expected future repatriation of foreign undistributed earnings; offset by

▪$51 million income tax expense related to the increase in outside basis differences from 2019 earnings since January 25, 2019.

SIGNIFICANT CHANGES IN REVENUES, COSTS AND EARNINGS

This section contains a discussion of the differences between periods in the specific line items of the Consolidated Statements of Operations for Sempra Energy, SDG&E and SoCalGas.

Utilities Revenues and Cost of Sales

Our utilities revenues include natural gas revenues at our California Utilities and Sempra Mexico’s Ecogas and electric revenues at SDG&E. Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Consolidated Statements of Operations.

SoCalGas and SDG&E currently operate under a regulatory framework that permits:

▪The cost of natural gas purchased for core customers (primarily residential and small commercial and industrial customers) to be passed through to customers in rates substantially as incurred. However, SoCalGas’ GCIM provides SoCalGas the opportunity to share in the savings and/or costs from buying natural gas for its core customers at prices below or above monthly market-based benchmarks. This mechanism permits full recovery of costs incurred when average purchase costs are within a price range around the benchmark price. Any higher costs incurred or savings realized outside this range are shared between the core customers and SoCalGas.

▪SDG&E to recover the actual cost incurred to generate or procure electricity based on annual estimates of the cost of electricity supplied to customers. The differences in cost between estimates and actual are recovered or refunded in subsequent periods through rates.

▪The California Utilities to recover certain program expenditures and other costs authorized by the CPUC, or “refundable programs.”

Because changes in SoCalGas’ and SDG&E’s cost of natural gas and/or electricity are recovered in rates, changes in these costs are offset in the changes in revenues and therefore do not impact earnings. In addition to the changes in cost or market prices, natural gas or electric revenues recorded during a period are impacted by customer billing cycles causing a difference between customer billings and recorded or authorized costs. These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts.

The table below summarizes utilities revenues and cost of sales.

UTILITIES REVENUES AND COST OF SALES
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
Natural gas revenues:
SoCalGas			$	4,748					$	4,525					$	3,962
SDG&E			694						658						565
Sempra Mexico			58						73						78
Eliminations and adjustments			(89)						(71)						(65)
Total			5,411						5,185						4,540
Electric revenues:
SDG&E			4,619						4,267						4,003
Eliminations and adjustments			(5)						(4)						(4)
Total			4,614						4,263						3,999
Total utilities revenues			$	10,025					$	9,448					$	8,539
Cost of natural gas**(1)****:**
SoCalGas			$	783					$	977					$	1,048
SDG&E			162						176						152
Sempra Mexico			12						14						21
Eliminations and adjustments			(32)						(28)						(13)
Total			$	925					$	1,139					$	1,208
Cost of electric fuel and purchased power**(1)****:**
SDG&E			$	1,191					$	1,194					$	1,370
Eliminations and adjustments			(4)						(6)						(12)
Total			$	1,187					$	1,188					$	1,358

(1) Excludes depreciation and amortization, which are presented separately on the Sempra Energy, SDG&E and SoCalGas Consolidated Statements of Operations.

Natural Gas Revenues and Cost of Natural Gas

The table below summarizes the average cost of natural gas sold by the California Utilities and included in Cost of Natural Gas on the Consolidated Statements of Operations. The average cost of natural gas sold at each utility is impacted by market prices, as well as transportation, tariff and other charges.

CALIFORNIA UTILITIES AVERAGE COST OF NATURAL GAS
(Dollars per thousand cubic feet)
			Years ended December 31,
			2020						2019						2018
SoCalGas			$	2.59					$	3.07					$	3.58
SDG&E			3.74						3.91						3.81

In 2020 compared to 2019, our natural gas revenues increased by $226 million (4%) to $5.4 billion primarily due to:

▪$223 million increase at SoCalGas, which included:

◦$198 million higher CPUC-authorized revenues,

◦$144 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M, and

◦$84 million due to the release of a regulatory liability in 2020 related to 2016-2018 income tax expense forecasting differences, offset by

◦$194 million decrease in cost of natural gas sold, which we discuss below, and

◦$19 million lower non-service component of net periodic benefit cost in 2020, which fully offsets in Other (Expense) Income, Net; and

▪$36 million increase at SDG&E, which included:

◦$23 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M,

◦$15 million higher CPUC-authorized revenues, and

◦$6 million due to the release of a regulatory liability in 2020 related to 2016-2018 income tax expense forecasting differences, offset by

◦$14 million decrease in cost of natural gas sold, which we discuss below; offset by

▪$15 million decrease at Sempra Mexico primarily due to foreign currency effects and a regulatory rate adjustment.

In 2019 compared to 2018, our natural gas revenues increased by $645 million (14%) to $5.2 billion primarily due to:

▪$563 million increase at SoCalGas, which included:

◦$383 million higher CPUC-authorized revenue in 2019,

◦$105 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M,

◦$62 million higher non-service component of net periodic benefit cost in 2019, which fully offsets in Other (Expense) Income, Net,

◦$29 million charges in 2018 associated with tracking the income tax benefit from flow-through items in relation to forecasted amounts in the 2016 GRC FD, and

◦$16 million higher net revenues from PSEP, offset by

◦$71 million decrease in the cost of natural gas sold, which we discuss below; and

▪$93 million increase at SDG&E, which included:

◦$68 million higher authorized revenue in 2019, and

◦$24 million increase in the cost of natural gas sold, which we discuss below.

Our cost of natural gas decreased by $214 million (19%) to $925 million in 2020 compared to 2019 primarily due to:

▪$194 million decrease at SoCalGas, including $143 million from lower average natural gas prices and $51 million from lower volumes driven primarily by weather; and

▪$14 million decrease at SDG&E, including $7 million from lower average natural gas prices and $7 million from lower volumes driven primarily by weather.

Our cost of natural gas decreased by $69 million (6%) to $1.1 billion in 2019 compared to 2018 primarily due to:

▪$71 million decrease at SoCalGas, including $164 million due to lower average natural gas prices, offset by $93 million from higher volumes driven by weather; and

▪$15 million increase in intercompany eliminations primarily associated with sales between Sempra LNG and SoCalGas; offset by

▪$24 million increase at SDG&E, including $19 million from higher volumes driven by weather and $5 million from higher average natural gas prices.

Electric Revenues and Cost of Electric Fuel and Purchased Power

Our electric revenues, substantially all of which are at SDG&E, increased by $351 million (8%) to $4.6 billion in 2020 compared to 2019 primarily due to:

▪$242 million higher recovery of costs associated with refundable programs, which revenues are offset in O&M;

▪$112 million higher revenues from transmission operations, including an increase in authorized ROE and the following impacts related to the March 2020 FERC-approved TO5 settlement:

◦$26 million to settle a rate base matter, and

◦$12 million favorable impact from the retroactive application of the final TO5 settlement for 2019;

▪$77 million due to the release of a regulatory liability in 2020 related to 2016-2018 income tax expense forecasting differences;

▪$35 million higher CPUC-authorized revenues; and

▪$19 million higher revenues associated with SDG&E’s wildfire mitigation plan; offset by

▪$55 million lower cost of electric fuel and purchased power, which we discuss below; and

▪$51 million expected to be refunded to customers related to the Energy Efficiency Program inquiry.

In 2019 compared to 2018, our electric revenues increased by $264 million (7%) to $4.3 billion, primarily attributable to SDG&E, primarily due to:

▪$121 million higher authorized revenue in 2019, including $108 million of revenues to cover liability insurance premium costs that are now balanced and offset in O&M;

▪$40 million higher revenues from transmission operations, net of a FERC formulaic rate adjustment benefit in 2018;

▪$34 million higher recovery of costs associated with refundable programs, excluding 2019 liability insurance premium costs, which revenues are offset in O&M;

▪$27 million higher finance lease costs, offset by lower cost of electric fuel and purchased power, which we discuss below; and

▪$21 million charges in 2018 associated with tracking the income tax benefit from certain flow-through items in relation to forecasted amounts in the 2016 GRC FD.

Our utility cost of electric fuel and purchased power, substantially all of which is at SDG&E, decreased by $1 million remaining at $1.2 billion in 2020 compared to 2019 primarily due to:

▪$55 million lower recoverable cost of electric fuel and purchased power primarily due to a decrease in residential demand mainly from an increase in rooftop solar adoption; offset by

▪$52 million associated with Otay Mesa VIE, which we deconsolidated in August 2019.

Our utility cost of electric fuel and purchased power decreased by $170 million (13%) to $1.2 billion in 2019 compared to 2018, primarily attributable to SDG&E, primarily due to:

▪$103 million of finance lease costs for PPAs in 2018. Similar amounts are now included in Interest Expense and Depreciation and Amortization Expense as a result of the 2019 adoption of the lease standard; and

▪$73 million decrease primarily from lower electricity market cost, offset by an increase primarily due to an additional capacity contract.

Energy-Related Businesses: Revenues and Cost of Sales

The table below shows revenues and cost of sales for our energy-related businesses.

ENERGY-RELATED BUSINESSES: REVENUES AND COST OF SALES
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
REVENUES
Sempra Mexico			$	1,198					$	1,302					$	1,298
Sempra LNG			374						410						472
Sempra Renewables			—						10						124
Parent and other(1)			(227)						(341)						(331)
Total revenues			$	1,345					$	1,381					$	1,563
COST OF SALES(2)
Sempra Mexico			$	283					$	373					$	363
Sempra LNG			218						299						313
Parent and other(1)			(225)						(328)						(319)
Total cost of sales			$	276					$	344					$	357

(1) Includes eliminations of intercompany activity.

(2) Excludes depreciation and amortization, which are presented separately on the Sempra Energy Consolidated Statements of Operations.

Revenues from our energy-related businesses decreased by $36 million (3%) to $1.3 billion in 2020 compared to 2019 primarily due to:

▪$104 million decrease at Sempra Mexico primarily due to:

◦$59 million from the marketing business primarily due to lower natural gas prices and volumes,

◦$37 million lower revenues from TdM mainly due to lower volumes, offset by higher power prices, and

◦$21 million lower transportation revenues primarily from force majeure payments that ended in August 2019 with respect to the Guaymas-El Oro segment of the Sonora pipeline; and

▪$36 million decrease at Sempra LNG primarily due to:

◦$87 million decrease in revenues from LNG marketing operations primarily from lower natural gas sales to Sempra Mexico mainly as a result of lower volumes and natural gas prices, and from lower diversion revenues due to lower natural gas prices, and

◦$18 million lower revenues from the expiration of capacity release contracts in the fourth quarter of 2019, offset by

◦$70 million increase from natural gas marketing operations primarily due to changes in natural gas prices; offset by

▪$114 million increase primarily from lower intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico.

In 2019 compared to 2018, revenues from our energy-related businesses decreased by $182 million (12%) to $1.4 billion primarily due to:

▪$114 million decrease at Sempra Renewables primarily due to the sale of assets in December 2018 and April 2019; and

▪$62 million decrease at Sempra LNG primarily due to:

◦$45 million lower natural gas storage revenues primarily due to the sale of storage assets in February 2019,

◦$15 million from the marketing business due to lower turnback cargo revenues, and

◦$12 million from LNG sales to Cameron LNG JV in January 2018, offset by

◦$14 million from natural gas marketing activities primarily due to changes in natural gas prices; offset by

▪$4 million increase at Sempra Mexico primarily due to:

◦$23 million from the marketing business, including an increase in volumes due to new regulations that went into effect on March 1, 2018 that require high consumption end users (previously serviced by Ecogas and other natural gas utilities) to procure their natural gas needs from natural gas marketers, such as Sempra Mexico’s marketing business, offset by lower natural gas prices, and

◦$6 million increase primarily due to renewable assets placed in service in 2019, offset by

◦$27 million lower revenues primarily from force majeure payments that ended on August 22, 2019 with respect to the Guaymas-El Oro segment of the Sonora pipeline.

The cost of sales for our energy-related businesses decreased by $68 million (20%) to $276 million in 2020 compared to 2019 primarily due to:

▪$90 million decrease at Sempra Mexico mainly associated with lower revenues from the marketing business and from TdM as a result of lower volumes and natural gas prices; and

▪$81 million decrease at Sempra LNG mainly from natural gas marketing activities primarily due to lower natural gas purchases; offset by

▪$103 million increase primarily from lower intercompany eliminations associated with sales between Sempra LNG and Sempra Mexico.

The cost of sales for our energy-related businesses in 2019 was comparable to 2018.

Operation and Maintenance

In the table below, we provide O&M by segment.

OPERATION AND MAINTENANCE
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
SDG&E(1)			$	1,454					$	1,175					$	1,058
SoCalGas			2,029						1,780						1,613
Sempra Mexico			279						256						239
Sempra LNG			159						156						123
Sempra Renewables			—						18						89
Parent and other(2)			19						81						28
Total operation and maintenance			$	3,940					$	3,466					$	3,150

(1) Excludes impairment losses, which we discuss below.

(2) Includes eliminations of intercompany activity.

Our O&M increased by $474 million (14%) to $3.9 billion in 2020 compared to 2019 primarily due to:

▪$279 million increase at SDG&E, primarily due to:

◦$265 million higher expenses associated with refundable programs for which costs incurred are recovered in revenue (refundable program expenses), and

◦$18 million higher amortization of the Wildfire Fund asset and accretion of the Wildfire Fund obligation; and

▪$249 million increase at SoCalGas, primarily due to:

◦$144 million higher expenses associated with refundable programs, and

◦$105 million higher non-refundable operating costs, including labor, purchased materials and services, and administrative and support costs; offset by

▪$62 million decrease at Parent and other primarily from lower deferred compensation expense and retained operating costs; and

▪$18 million decrease at Sempra Renewables primarily due to lower general and administrative and other costs due to the wind-down of the business in 2019.

Our O&M increased by $316 million (10%) to $3.5 billion in 2019 compared to 2018 primarily due to:

▪$167 million increase at SoCalGas, primarily due to:

◦$105 million higher expenses associated with refundable programs, and

◦$57 million higher non-refundable operating costs, including labor, contract services and administrative and support costs;

▪$117 million increase at SDG&E, primarily due to:

◦$147 million higher expenses associated with refundable programs, including $112 million of 2019 liability insurance premium costs that are now balanced in revenue, and

◦$13 million amortization of the Wildfire Fund asset and accretion of the Wildfire Fund obligation, offset by

◦$46 million lower non-refundable operating costs, including $87 million decrease from liability insurance premium costs for 2018 that were not balanced, offset by $41 million of higher operating costs;

▪$53 million increase at Parent and other primarily from higher deferred compensation expense;

▪$33 million increase at Sempra LNG primarily from higher liquefaction development project costs and higher operating costs; and

▪$17 million increase at Sempra Mexico primarily due to expenses associated with growth in the business and operating lease costs in 2019; offset by

▪$71 million decrease at Sempra Renewables primarily due to lower general and administrative and other costs due to the wind-down of the business.

Aliso Canyon Litigation and Regulatory Matters

In 2020, SoCalGas recorded a charge of $307 million in Aliso Canyon Litigation and Regulatory Matters related to settlement discussions in connection with civil litigation and regulatory matters associated with the Leak, which we describe in Note 16 of the Notes to Consolidated Financial Statements.

Impairment Losses

In September 2019, SoCalGas recognized a $29 million impairment loss related to non-utility native gas assets. In September 2019, SDG&E and SoCalGas recognized impairment losses of $6 million and $8 million, respectively, for certain disallowed capital costs in the 2019 GRC FD. In 2018, Sempra LNG recognized a $1.1 billion net impairment loss for certain non-utility natural gas storage assets in the southeast U.S.

Gain on Sale of Assets

In April 2019, Sempra Renewables recognized a $61 million gain on the sale of its remaining wind assets and investments. In December 2018, Sempra Renewables recognized a $513 million gain on the sale of all its operating solar assets, solar and battery storage development projects and its 50% interest in a wind power generation facility.

Other (Expense) Income, Net

As part of our central risk management function, we may enter into foreign currency derivatives to hedge Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova. The gains/losses associated with these derivatives are included in Other (Expense) Income, Net, as described below, and partially mitigate the transactional effects of foreign currency and inflation included in Income Tax (Expense) Benefit for Sempra Mexico’s consolidated entities and in Equity Earnings for Sempra Mexico’s equity method investments. 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. We discuss policies governing our risk management below in “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

Other expense, net, was $48 million in 2020 compared to other income, net, of $77 million in 2019. The change was primarily due to:

▪$92 million net losses in 2020 from interest rate and foreign exchange instruments and foreign currency transactions compared to net gains of $55 million in 2019 primarily due to:

◦$53 million losses in 2020 compared to $40 million gains in 2019 on foreign currency derivatives as a result of fluctuation of the Mexican peso, and

◦$42 million losses in 2020 compared to $30 million gains in 2019 on a Mexican peso-denominated loan to IMG JV, which is offset in Equity Earnings; offset by

◦$17 million gains in 2020 compared to $9 million losses in 2019 on other foreign currency transactional effects;

▪$20 million lower investment gains in 2020 on dedicated assets in support of our executive retirement and deferred compensation plans; and

▪$6 million fine at SDG&E related to the Energy Efficiency Program inquiry; offset by

▪$34 million higher AFUDC equity, including $23 million at SDG&E and $7 million at SoCalGas;

▪$30 million lower non-service component of net periodic benefit cost in 2020;

▪$8 million increase in regulatory interest at the California Utilities due to the release of a regulatory liability in 2020 related to 2016-2018 income tax expense forecasting differences; and

▪$8 million in penalties in 2019 related to the SoCalGas billing practices OII.

In 2019 compared to 2018, other income, net, increased by $19 million (33%) to $77 million primarily due to:

▪$61 million investment gains in 2019 compared to $6 million investment losses in 2018 on dedicated assets in support of our executive retirement and deferred compensation plans; and

▪$54 million higher net gains from interest rate and foreign exchange instruments and foreign currency transactions primarily due to:

◦$37 million higher gains in 2019 on foreign currency derivatives as a result of fluctuation of the Mexican peso, and

◦$30 million foreign currency gains in 2019 compared to $3 million foreign currency losses in 2018 on a Mexican peso-denominated loan to IMG JV, which is offset in Equity Earnings, offset by

◦$15 million losses in 2019 on foreign currency derivatives used to hedge exposure to fluctuations in the Peruvian sol related to the sale of our operations in Peru; offset by

▪$97 million higher non-service component of net periodic benefit cost in 2019, including $14 million at SDG&E and $62 million at SoCalGas.

We provide further details of the components of other (expense) income, net, in Note 1 of the Notes to Consolidated Financial Statements.

Income Taxes

The table below shows the income tax expense (benefit) and ETRs for Sempra Energy Consolidated, SDG&E and SoCalGas.

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 of the Notes to Consolidated Financial Statements.

Sempra Energy Consolidated

Sempra Energy’s income tax expense decreased in 2020 compared to 2019 primarily due to a lower ETR. The change in ETR was primarily due to:

▪$44 million income tax benefit in 2020 compared to $71 million income tax expense in 2019 from foreign currency and inflation effects primarily as a result of fluctuation of the Mexican peso;

▪$26 million income tax benefit in 2020 compared to $7 million income tax expense in 2019 from changes to a valuation allowance against certain tax credit carryforwards; and

▪$19 million income tax benefit in 2020 compared to $4 million income tax expense in 2019 related to share-based compensation; offset by

▪$69 million total income tax benefits in 2019 from the release of regulatory liabilities at SDG&E and SoCalGas established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision; and

▪$10 million income tax benefit in 2019 from a reduction in a valuation allowance against certain NOL carryforwards as a result of our decision to sell our South American businesses.

Sempra Energy’s income tax expense in 2019 compared to an income tax benefit in 2018 was due to higher pretax income and a higher ETR. Pretax income in 2018 was impacted by the impairments at our Sempra LNG and Sempra Renewables segments offset by the gain from sale of assets at Sempra Renewables. The change in ETR was primarily due to:

▪$131 million income tax benefit in 2018 resulting from the reduced outside basis difference in Sempra LNG as a result of the impairment of certain non-utility natural gas storage assets; and

▪$45 million higher income tax expense in 2019 from foreign currency and inflation effects primarily as a result of fluctuation of the Mexican peso; offset by

▪$69 million total income tax benefits in 2019 from the release of regulatory liabilities at SDG&E and SoCalGas established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision;

▪$41 million income tax expense in 2018 to adjust provisional estimates recorded in 2017 for the effects of tax reform;

▪$21 million income tax expense in 2018 associated with Aliso Canyon natural gas storage facility litigation; and

▪$10 million income tax benefit in 2019 from a reduction in a valuation allowance against certain NOL carryforwards as a result of our decision to sell our South American businesses.

We report as part of our pretax results the income or loss attributable to NCI. However, we do not record income taxes for a portion of this income or loss, as some of our entities with NCI are currently treated as partnerships for income tax purposes, and thus we are only liable for income taxes on the portion of the earnings that are allocated to us. Our pretax income, however, includes 100% of these entities. If our entities with NCI grow, and if we continue to invest in such entities, the impact on our ETR may become more significant.

We discuss the impact of foreign currency exchange rates and inflation on income taxes below in “Impact of Foreign Currency and Inflation Rates on Results of Operations.” See Notes 1 and 8 of the Notes to Consolidated Financial Statements for further details about our accounting for income taxes and items subject to flow-through treatment.

SDG&E

SDG&E’s income tax expense increased in 2020 compared to 2019 primarily due to:

▪higher pretax income; and

▪$31 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision; offset by

▪higher income tax benefits in 2020 from flow-through deductions.

SDG&E’s income tax expense decreased in 2019 compared to 2018 due to a lower ETR offset by higher pretax income. The change in ETR was primarily due to a $31 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision.

SoCalGas

SoCalGas’ income tax expense decreased in 2020 compared to 2019 primarily due to:

▪lower pretax income; and

▪higher income tax benefits in 2020 from flow-through deductions; offset by

▪$38 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision.

SoCalGas’ income tax expense increased in 2019 compared to 2018 due to higher pretax income offset by a lower ETR. The change in ETR was primarily due to:

▪$38 million income tax benefit in 2019 from the release of a regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances that the CPUC directed be allocated to shareholders in a January 2019 decision; and

▪$21 million income tax expense in 2018 associated with the Aliso Canyon natural gas storage facility litigation.

Equity Earnings

Equity earnings increased by $435 million to $1.0 billion in 2020 compared to 2019 primarily due to:

▪$367 million higher equity earnings from Cameron LNG JV primarily due to commencement of Phase 1 commercial operations;

▪$94 million higher equity earnings at IMG JV, primarily due to higher revenues from the start of commercial operations of the Sur de Texas-Tuxpan marine pipeline and foreign currency effects, including $42 million foreign currency gains in 2020 compared to $30 million foreign currency losses in 2019 on IMG JV’s Mexican peso-denominated loans from its JV owners, which is fully offset in Other (Expense) Income, Net, offset by lower AFUDC equity;

▪$51 million higher equity earnings at Oncor Holdings primarily due to higher revenues from rate updates and customer growth, the acquisition of InfraREIT in May 2019 and higher AFUDC equity, offset by unfavorable weather and increased operating costs; and

▪$23 million higher equity earnings at TAG JV primarily due to lower income tax expense in 2020; offset by

▪$100 million equity losses at RBS Sempra Commodities in 2020, which represents an estimate of our obligations to settle pending tax matters and related legal costs at our equity method investment.

Equity earnings increased by $405 million to $580 million in 2019 compared to 2018 primarily due to:

▪$174 million increase at Sempra Renewables, including $200 million other-than-temporary impairment of certain wind equity method investments in 2018;

▪$155 million higher equity earnings, net of income tax, from our investment in Oncor Holdings, which we acquired in March 2018;

▪$65 million impairment of our RBS Sempra Commodities equity method investment in 2018; and

▪$24 million higher equity earnings from Cameron LNG JV including:

◦$50 million increase primarily due to Train 1 commencing commercial operation under its tolling agreements in August 2019, offset by

◦$26 million decrease due to the write-off of unamortized debt issuance costs and associated fees related to the JV’s debt refinancing; offset by

▪$20 million lower equity earnings, net of income tax, from IMG JV, including $30 million foreign currency losses in 2019 compared to $3 million foreign currency gains in 2018 on its Mexican peso-denominated loans from its JV owners, which is fully offset in Other Income, Net.

Earnings Attributable to Noncontrolling Interests

Earnings attributable to NCI were $172 million for 2020 compared to $164 million for 2019. The net change of $8 million (5%) was primarily due to an increase in earnings attributable to NCI at Sempra Mexico mainly from foreign currency effects as a result of fluctuation of the Mexico peso, offset by a decrease due to the sales of our Peruvian businesses in April 2020 and Chilean businesses in June 2020.

Earnings attributable to NCI were $164 million for 2019 compared to $76 million for 2018. The net change of $88 million included:

▪$1 million earnings attributable to NCI at Sempra Renewables in 2019 compared to $58 million losses in 2018 primarily due to the sales of our tax equity investments in December 2018 and April 2019; and

▪$36 million losses attributable to NCI at Sempra LNG in 2018 due to the net impairment of certain non-utility natural gas storage assets.

Preferred Dividends

Preferred dividends increased by $26 million (18%) to $168 million in 2020 compared to 2019 primarily due to dividends associated with our series C preferred stock, which was issued in June 2020.

Preferred dividends increased by $17 million (14%) to $142 million in 2019 compared to 2018 primarily due to dividends associated with our series B preferred stock, which was issued in July 2018.

IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS

Because our natural gas distribution utility in Mexico, Ecogas, uses its local currency as its functional currency, revenues and expenses are translated into U.S. dollars at average exchange rates for the period for consolidation in Sempra Energy Consolidated’s results of operations. Prior to the sales of our South American businesses in 2020, our operations in South America used their local currency as their functional currency.

Foreign Currency Translation

Any difference in average exchange rates used for the translation of income statement activity from year to year can cause a variance in Sempra Energy’s comparative results of operations. Changes in foreign currency translation rates between years resulted in $9 million lower earnings in 2020 compared to 2019 and $8 million lower earnings in 2019 compared to 2018.

Transactional Impacts

Income statement activities at our foreign operations and their JVs are also impacted by transactional gains and losses, a summary of which is shown in the table below:

TRANSACTIONAL (LOSSES) GAINS FROM FOREIGN CURRENCY AND INFLATION
(Dollars in millions)
			Total reported amounts																		Transactional (losses) gains included in reported amounts
			Years ended December 31,
			2020						2019						2018						2020						2019						2018
Other (expense) income, net			$	(48)					$	77					$	58					$	(92)					$	55					$	(1)
Income tax (expense) benefit			(249)						(315)						49						44						(71)						(26)
Equity earnings			1,015						580						175						43						(47)						(14)
Income from continuing operations, net of income tax			2,255						1,999						938						8						(70)						(41)
Income from discontinued operations, net of income tax			1,850						363						188						15						2						6
Earnings attributable to common shares			3,764						2,055						924						(1)						(39)						(21)

Foreign Currency Exchange Rate and Inflation Impacts on Income Taxes and Related Hedging Activity

Our Mexican subsidiaries have U.S. dollar-denominated cash balances, receivables, payables and debt (monetary assets and liabilities) that are affected by Mexican currency exchange rate movements for Mexican income tax purposes. They also have deferred income tax assets and liabilities, which are significant, denominated in the Mexican peso that 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. As a result, fluctuations in both the currency exchange rate for the Mexican peso against the U.S. dollar and Mexican inflation may expose us to fluctuations in Income Tax Expense, Other (Expense) Income, Net and Equity Earnings. We may use foreign currency derivatives as a means to help manage exposure to the currency exchange rate on our monetary assets and liabilities, and this derivative activity impacts Other (Expense) Income, Net. However, we generally do not hedge our deferred income tax assets and liabilities, which makes us susceptible to volatility in income tax expense caused by exchange rate fluctuations and 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 in discontinued operations.

Other Transactions

Although the financial statements of most of our Mexican subsidiaries and JVs have the U.S. dollar as the functional currency, some transactions may be denominated in the local currency; such transactions are remeasured into U.S. dollars. This

remeasurement creates transactional gains and losses that are included in Other (Expense) Income, Net, for our consolidated subsidiaries and in Equity Earnings for our JVs.

We utilize cross-currency swaps that 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. The impacts of these cross-currency swaps are offset in OCI and are reclassified from AOCI into earnings through Other (Expense) Income, Net and Interest Expense as settlements occur.

Certain of our Mexican pipelines (namely Los Ramones I at IEnova Pipelines and Los Ramones Norte at TAG JV) generate revenue based on tariffs that are set by government agencies in Mexico, with contracts denominated in Mexican pesos that are indexed to the U.S. dollar, adjusted annually for inflation and fluctuation in the exchange rate. The resultant gains and losses from remeasuring the local currency amounts into U.S. dollars and the settlement of foreign currency forwards and swaps related to these contracts are included in Revenues: Energy-Related Businesses or Equity Earnings.

CAPITAL RESOURCES AND LIQUIDITY

OVERVIEW

Sempra Energy Consolidated

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. The U.S. government officially declared a national emergency on March 13, 2020, and the Mexican government announced a national state of sanitary emergency on March 30, 2020. The COVID-19 pandemic is materially impacting the economy, including a surge in unemployment claims and, at times, substantial volatility in financial markets, and has resulted in action by governments and other authorities to help address these effects. For example:

▪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. The measures currently apply to all residential and small business customers affected by the COVID-19 pandemic and include suspending service disconnections due to nonpayment, waiving late payment fees, and offering flexible payment plans to all customers experiencing difficulty paying their electric or gas bills. The CPUC approved a resolution authorizing each of the California Utilities 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. Although we are tracking these costs in various regulatory mechanisms, recovery is not assured. The continuation of these circumstances could result in a further reduction in payments received from the California Utilities’ customers and a further increase in uncollectible accounts, which could become material, and any inability or delay in recovering all or a substantial portion of these costs could have a material adverse effect on the cash flows, financial condition and results of operations of Sempra Energy, SDG&E and SoCalGas. We discuss regulatory mechanisms in Note 4 of the Notes to Consolidated Financial Statements.

▪In Texas, the PUCT issued orders creating the COVID-19 Electricity Relief Program and suspending service disconnections due to nonpayment for customers enrolled in the program through September 30, 2020. The COVID-19 Electricity Relief Program created a fund through which transmission and distribution utilities and retail electric providers in Texas may seek to recover certain costs (including transmission and distribution utility electricity delivery charges) of providing uninterrupted services to customers facing financial hardship due to the effects of the COVID-19 pandemic. Financial assistance under the program was available to enrolled residential customers for electricity bills issued on or after March 26, 2020 through September 30, 2020. The PUCT has also authorized the use of a regulatory asset accounting mechanism and a subsequent process through which regulated utility companies may seek future recovery of other expenses resulting from the effects of the COVID-19 pandemic. Rate regulation is premised on the full recovery of prudently incurred costs. The regulatory assets established with respect to COVID-19 pandemic costs are subject to PUCT review for reasonableness and possible disallowance. Any inability to recover these costs could have an adverse effect on the cash flows, financial condition and results of operations of Sempra Energy.

▪On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted and signed into law in response to the COVID-19 pandemic. Among other things, the CARES Act contains significant business tax provisions, including a delay of payment of employer payroll taxes and an acceleration of refunds of corporate alternative minimum tax (AMT) credits. Sempra Energy, SDG&E and SoCalGas have deferred payment of the employer’s share of payroll taxes through the end of 2020, with half of such taxes to be paid by the end of 2021 and the other half to be paid by the end of 2022. In 2020, Sempra Energy filed and received a refund claim for its corporate AMT credits, rather than receiving it in installments through 2021.

Our businesses that invest in, develop and operate energy infrastructure and provide electric and gas services to customers have been identified as critical or essential services in the U.S. and Mexico and have continued to operate throughout the COVID-19 pandemic. As our businesses continue to operate, our priority is the safety of our employees, customers, partners and the communities we serve. We and other companies, including our partners, are taking steps to try to protect the health and well-being of our employees and other stakeholders. For example, we have activated our business continuity plans and continue to work closely with local, state and federal authorities to provide essential services with minimum interruption to customers and in accordance with applicable shelter-in-place and other orders. We have implemented precautionary measures across our businesses, including requiring employees to work remotely when possible, restricting non-essential business travel, increasing facility sanitization and communicating proper health and safety protocols to employees. We also have engaged an infectious disease expert to advise us during this public health crisis. Throughout 2020, these actions have not required significant outlays of capital and have not had a material impact on our results of operations, but these or other measures that we may implement in the future could have a material adverse effect on our liquidity, cash flows, financial position and results of operations if circumstances related to the COVID-19 pandemic worsen or continue for an extended period of time.

The COVID-19 pandemic and its widespread effects also have impacted our capital plans, liquidity and asset values, as we discuss with respect to each of our segments below. We perform recovery testing of our recorded asset values when market conditions indicate that such values may not be recoverable. Given the current environment (including the decline in the price of our common stock, financial market volatility, high unemployment rates, reduction in customer collections that could become material, inability to secure permits and other authorizations due to government closures, and governments pursuing new laws or policies that modify pre-existing contract terms or alter operations), we evaluated whether these events or changes in circumstances resulted in an impairment of our long-lived assets, intangible assets or goodwill in 2020 and concluded that no such impairment was warranted. However, as the effects of the COVID-19 pandemic evolve, we will continue to periodically assess the need to perform interim impairment tests. A significant impairment charge related to our long-lived assets, intangible assets or goodwill would have a material adverse effect on our results of operations in the period in which it is recorded.

For a further discussion of risks and uncertainties related to the COVID-19 pandemic, see below in “Part I – Item 1A. Risk Factors.”

Liquidity

We expect to meet our cash requirements through cash flows from operations, unrestricted cash and cash equivalents, proceeds from recent asset sales, borrowings under our credit facilities, distributions from our equity method investments, issuances of debt, project financing and partnering in JVs. We believe that these cash flow sources, combined with available funds, will be adequate to fund our current operations, including to:

▪finance capital expenditures

▪meet liquidity requirements

▪fund dividends

▪fund new business or asset acquisitions or start-ups

▪fund capital contribution requirements

▪repay long-term debt

▪fund expenditures related to the natural gas leak at SoCalGas’ Aliso Canyon natural gas storage facility

Sempra Energy and the California Utilities currently have reasonable access to the money markets and capital markets and are not currently constrained in their ability to borrow money at reasonable rates from commercial banks, under existing revolving credit facilities or through public offerings registered with the SEC. However, the money markets and capital markets in general, including particularly the commercial paper markets, and the availability of financing from commercial banks have experienced distress at times during 2020 due to the COVID-19 pandemic, and our ability to access the money markets and capital markets or obtain credit from commercial banks outside of our committed revolving credit facilities could become materially constrained if changing economic conditions and disruptions to the money markets and capital markets, due to the COVID-19 pandemic or otherwise, worsen. In addition, our financing activities and actions by credit rating agencies, as well as many other factors, could

negatively affect the availability and cost of both short-term and long-term financing. Also, cash flows from operations may be impacted by the timing of commencement and completion, and potentially cost overruns, of large projects. If cash flows from operations were to be significantly reduced or we were unable to borrow under acceptable terms, we would likely first reduce or postpone discretionary capital expenditures (not related to safety) and investments in new businesses. We monitor our ability to finance the needs of our operating, investing and financing activities in a manner consistent with our intention to maintain our investment-grade credit ratings and capital structure.

We have significant investments in several trusts to provide for future payments of pensions and other postretirement benefits and nuclear decommissioning. Changes in asset values, which are dependent on activity in the equity and fixed income markets, have not materially and adversely affected the trust funds’ abilities to make required payments. However, changes in these or other factors in future periods, such as changes to discount rates, assumed rates of return, mortality tables and regulations, may impact funding requirements for pension and other postretirement benefits plans. Funding requirements for SDG&E’s NDT could also be impacted by the timing and amount of SONGS decommissioning costs. At the California Utilities, funding requirements are generally recoverable in rates. We discuss our employee benefit plans and SDG&E’s NDT, including our investment allocation strategies for assets in these trusts, in Notes 9 and 15, respectively, of the Notes to Consolidated Financial Statements.

Available Funds

Our committed lines of credit provide liquidity and support commercial paper. As we discuss in Note 7 of the Notes to Consolidated Financial Statements, Sempra Energy, Sempra Global, SDG&E and SoCalGas each have five-year credit agreements expiring in 2024. In addition, Sempra Mexico has committed lines of credit that expire in 2021 and 2024 and an uncommitted revolving credit facility that expires in 2023. The table below shows the amount of available funds at December 31, 2020, including available unused credit on these primary U.S. and foreign lines of credit.

AVAILABLE FUNDS AT DECEMBER 31, 2020
(Dollars in millions)
			Sempra Energy Consolidated						SDG&E						SoCalGas
Unrestricted cash and cash equivalents(1)			$	960					$	262					$	4
Available unused credit(2)(3)			7,700						1,500						637

(1) Amounts at Sempra Energy Consolidated include $295 million held in non-U.S. jurisdictions. We discuss repatriation in Note 8 of the Notes to Consolidated Financial Statements.

(2) Available unused credit is the total available on Sempra Energy’s, Sempra Global’s, SDG&E’s, SoCalGas’ and Sempra Mexico’s credit facilities that we discuss in Note 7 of the Notes to Consolidated Financial Statements.

(3) Because our commercial paper programs are supported by these lines, we reflect the amount of commercial paper outstanding as a reduction to the available unused credit.

Short-Term Borrowings

We use short-term debt primarily to meet liquidity requirements, fund shareholder dividends, and temporarily finance capital expenditures, acquisitions or start-ups. Our California Utilities use short-term debt primarily to meet working capital needs. Due to volatility in commercial paper markets shortly following the start of the COVID-19 pandemic, commercial paper borrowing at that time became less desirable and, in some cases, not competitive or unavailable. To secure sufficient sources of liquidity during this period, Sempra Energy, Sempra Global, SDG&E, SoCalGas and IEnova each drew amounts under their respective credit facilities and Sempra Energy and SDG&E each also obtained short-term term loans, much of which has been subsequently repaid. Revolving lines of credit, term loans and commercial paper were our primary sources of short-term debt funding in 2020.

We discuss our short-term debt activities in Note 7 of the Notes to Consolidated Financial Statements.

The following table shows selected statistics for our commercial paper borrowings.

COMMERCIAL PAPER STATISTICS
(Dollars in millions)
			Sempra Energy Consolidated						SDG&E						SoCalGas
			December 31,						December 31,						December 31,
			2020			2019			2020			2019			2020			2019
Amount outstanding at period end			$	113		$	2,334		$	—		$	80		$	113		$	630
Weighted-average interest rate at period end			0.14		%	2.06		%	—		%	1.97		%	0.14		%	1.86		%
Daily weighted-average outstanding balance			$	2,282		$	2,774		$	198		$	288		$	373		$	322
Daily weighted-average yield			1.61		%	2.48		%	1.50		%	2.65		%	0.44		%	2.23		%
Maximum daily amount outstanding			$	2,495		$	3,243		$	263		$	417		$	635		$	642

Long-Term Debt Activities

Major issuances of and payments on long-term debt in 2020 included the following:

LONG-TERM DEBT ISSUANCES AND PAYMENTS
(Dollars in millions)
Issuances:						Amount at issuance						Maturity
SDG&E variable rate 364-day term loan						$	200					2021
SDG&E variable rate revolving line of credit						200						2024
SDG&E 1.70% first mortgage bonds						800						2030
SDG&E 3.32% first mortgage bonds						400						2050
SoCalGas senior unsecured variable rate notes						300						2023
SoCalGas 2.55% first mortgage bonds						650						2030
Sempra Mexico 2.38% bank loans						100						2034
Sempra Mexico 2.90% bank loans						241						2034
Sempra Mexico 4.75% senior unsecured notes						800						2051
Sempra LNG variable rate notes						17						2025
Payments:						Payments						Maturity
Sempra Energy 2.4% notes						$	500					2020
Sempra Energy 2.4% notes						500						2020
Sempra Energy 2.85% notes						400						2020
Sempra Energy variable rate notes						700						2021
SDG&E 1.914% amortizing first mortgage bonds						36						2020
SDG&E variable rate revolving line of credit						200						2024
SDG&E 5.875% first mortgage bonds						176						2034
SDG&E 4% first mortgage bonds						75						2039
Sempra Mexico amortizing variable rate notes						41						2020
Sempra Mexico amortizing fixed and variable rate bank loans						25						2020

SDG&E used the proceeds from its long-term debt offerings to repay first mortgage bonds, commercial paper and line of credit borrowings, for working capital and for other general corporate purposes.

SoCalGas used the proceeds from its long-term debt offerings to repay commercial paper and for general corporate purposes.

Sempra Mexico used the proceeds from its issuances of long-term debt to finance the construction of solar generation projects, to repay line of credit borrowings and for other general corporate purposes.

We discuss our long-term debt activities in Note 7 of the Notes to Consolidated Financial Statements.

Credit Ratings

The credit ratings of Sempra Energy, SDG&E and SoCalGas remained at investment grade levels in 2020. On January 29, 2021, Moody’s placed the long-term debt ratings of SDG&E on review for upgrade.

CREDIT RATINGS AT DECEMBER 31, 2020
			Sempra Energy						SDG&E						SoCalGas
Moody’s			Baa2 with a stable outlook						Baa1 with a positive outlook						A2 with a stable outlook
S&P			BBB+ with a negative outlook						BBB+ with a negative outlook						A with a negative outlook
Fitch			BBB+ with a stable outlook						BBB+ with a stable outlook						A with a stable outlook

A downgrade of Sempra Energy’s or any of its subsidiaries’ credit ratings or rating outlooks may, depending on the severity, result in a requirement for collateral to be posted in the case of certain financing arrangements and may materially and adversely affect the market prices of their equity and debt securities, the rates at which borrowings are made and commercial paper is issued, and the various fees on their outstanding credit facilities. We provide additional information about our credit ratings at Sempra Energy, SDG&E and SoCalGas in “Part I – Item 1A. Risk Factors.”

Sempra Energy has agreed that, if the credit rating of Oncor’s senior secured debt by any of the three major 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. Oncor’s senior secured debt was rated A2, A+ and A at Moody’s, S&P and Fitch, respectively, at December 31, 2020.

Sempra Energy, SDG&E and SoCalGas have committed lines of credit to provide liquidity and to support commercial paper. Borrowings under these facilities bear interest at benchmark rates plus a margin that varies with market index rates and each borrower’s credit rating. Each facility also requires a commitment fee on available unused credit that may be impacted by each borrower’s credit rating. Depending on the severity of the downgrade:

▪If Sempra Energy were to experience a ratings downgrade from its current level, the rate at which borrowings bear interest would increase by 25 to 50 bps. The commitment fee on available unused credit would also increase 5 to 10 bps.

▪If SDG&E were to experience a ratings downgrade from its current level, the rate at which borrowings bear interest would increase by 25 to 50 bps. The commitment fee on available unused credit would also increase 5 to 10 bps.

▪If SoCalGas were to experience a ratings downgrade from its current level, the rate at which borrowings bear interest would increase by 12.5 bps. The commitment fee on available unused credit would also increase 2.5 bps.

Sempra Energy’s and SDG&E’s credit ratings also may affect their respective credit limits related to derivative instruments, as we discuss in Note 11 of the Notes to Consolidated Financial Statements.

Loans to/from Affiliates

At December 31, 2020, Sempra Energy had $780 million in loans due from unconsolidated affiliates and $275 million in loans due to unconsolidated affiliates.

California Utilities

SDG&E’s and SoCalGas’ operations have historically provided relatively stable earnings and liquidity. Their future performance and liquidity will depend primarily on the ratemaking and regulatory process, environmental regulations, economic conditions, actions by the California legislature, litigation and the changing energy marketplace, as well as other matters described in this report.

SDG&E and SoCalGas expect that the available unused credit from their credit facilities described above, cash flows from operations, and debt issuances will continue to be adequate to fund their respective current operations and planned capital expenditures. The California Utilities are continuing to monitor the impacts of the COVID-19 pandemic on cash flows and results of operations. Some customers are experiencing a diminished ability to pay their electric or gas bills, leading to slower payments and higher levels of nonpayment than has been the case historically. These impacts could become significant and could require modifications to our financing plans. The California Utilities manage their capital structure and pay dividends when appropriate and as approved by their respective boards of directors.

As we discuss in Note 4 of the Notes to Consolidated Financial Statements, changes in balancing accounts for significant costs at SDG&E and SoCalGas, particularly a change between over- and undercollected status, may have a significant impact on cash flows. These changes generally represent the difference between when costs are incurred and when they are ultimately recovered in rates through billings to customers.

Disconnection OIR

In June 2020, the CPUC issued a decision 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 and is effective as of February 2021. The California Utilities have recorded increases in their allowances for uncollectible accounts at December 31, 2020 primarily related to expected forgiveness of outstanding bill amounts for customers eligible under the AMP. The AMP could result in a further reduction in payments received from the California Utilities’ customers and a further increase to uncollectible accounts, which could become material, and any inability to recover these costs could have a material adverse effect on the cash flows, financial condition and results of operations of Sempra Energy, SDG&E and SoCalGas.

Pipeline Safety Enhancement Plan

In November 2018, SoCalGas and SDG&E filed a joint application with the CPUC for a reasonableness review of PSEP project costs totaling $941 million for 83 pipeline safety enhancement projects. SoCalGas and SDG&E subsequently entered into a settlement agreement for cost recovery of $935 million ($806 million for SoCalGas and $129 million for SDG&E). A final decision was approved in August 2020, granting the proposed settlement agreement as well as the amortization schedule for recovery of costs. The final decision was implemented in rates on October 1, 2020.

CCM

A CPUC cost of capital proceeding determines a utility’s authorized capital structure and authorized return on rate base and addresses the CCM. The CCM, if triggered in 2021, would be effective January 1, 2022, and would automatically update the California Utilities’ authorized cost of debt based on actual costs and update the California Utilities’ authorized ROE. A trigger of the CCM that requires a downward adjustment beginning January 1, 2022 could materially adversely affect the results of operations and cash flows of Sempra Energy and, depending on the CCM that is triggered, SDG&E and SoCalGas. We discuss the CCM further in “Part I – Item 1. Business – Ratemaking Mechanisms – California Utilities – Cost of Capital Proceedings,” “Part I – Item 1A. Risk Factors” and in Note 4 of the Notes to Consolidated Financial Statements.

SDG&E

Wildfire Fund

In 2019, SDG&E recorded a Wildfire Fund asset for committed shareholder contributions to the Wildfire Fund. We describe the Wildfire Legislation and related accounting treatment in Note 1 of the Notes to Consolidated Financial Statements.

SDG&E is exposed to the risk that the participating California electric IOUs may incur third-party wildfire claims for which they will seek recovery from the Wildfire Fund. In such a situation, 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. As a result, if any California electric IOU’s equipment is determined to be a cause of a fire, it could have a material adverse effect on SDG&E’s and Sempra Energy’s financial condition and results of operations up to the carrying value of our Wildfire Fund asset, with additional potential material exposure if SDG&E’s equipment is determined to be a cause of a fire. In addition, the Wildfire Fund could be completely exhausted due to fires in the other California electric IOUs’ service territories, by fires in SDG&E’s service territory or by a combination thereof. In 2020, California experienced some of the largest wildfires in its history (measured by acres burned), including fires in SDG&E’s service territory. Although SDG&E is not aware of any claims made against the Wildfire Fund by any participating IOU, there is no assurance that the equipment of a California electric IOU will not be determined to be a cause of one or more of these fires. In the event that the Wildfire Fund is materially diminished, exhausted or terminated, SDG&E will lose the protection afforded by the Wildfire Fund, and as a consequence, a fire in SDG&E’s service territory could cause a material adverse effect on SDG&E’s and Sempra Energy’s cash flows, results of operations and financial condition.

SoCalGas

SoCalGas’ future performance and liquidity will be impacted by the resolution of legal, regulatory and other matters concerning the Leak, which we discuss below, in Note 16 of the Notes to Consolidated Financial Statements, and in “Part I – Item 1A. Risk Factors.”

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 located in Los Angeles County. In February 2016, CalGEM confirmed that the well was permanently sealed.

Cost Estimates, Accounting Impact and Insurance. At December 31, 2020, SoCalGas estimates certain costs related to the Leak are $1,627 million (the cost estimate). 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 on SoCalGas’ and Sempra Energy’s Consolidated Balance Sheets.

Except for the amounts paid or estimated to settle certain actions, the cost estimate does not include litigation 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.

Natural Gas Storage Operations and Reliability. Natural gas withdrawn from storage is important for service reliability during peak demand periods, including peak electric generation needs in the summer and consumer heating needs in the winter. The Aliso Canyon natural gas storage facility is the largest SoCalGas storage facility and an important element of SoCalGas’ delivery system. As a result of the Leak, SoCalGas suspended injection of natural gas into the Aliso Canyon natural gas storage facility beginning in October 2015 and, following a comprehensive safety review and authorization by CalGEM and the CPUC’s Executive Director, resumed injection operations in July 2017 based on limited operating ranges for the field. 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, including considering alternative means for meeting or avoiding the demand for the facility’s services if it were eliminated.

The CPUC has issued a series of directives to SoCalGas specifying the range of working gas to be maintained in the Aliso Canyon natural gas storage facility as well as protocols for the withdrawal of gas, to support safe and reliable natural gas service. Withdrawals of natural gas from the facility were made in 2018, 2019 and 2020 to augment natural gas supplies to meet consumer demand, including for electric generation needs.

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.

OSCs – Energy Efficiency and Advocacy

As we discuss in Note 4 of the Notes to Consolidated Financial Statements, in October 2019, the CPUC issued an OSC to determine whether SoCalGas should be sanctioned for violation of certain CPUC code sections and orders related to energy efficiency codes and standards advocacy activities undertaken by SoCalGas in 2018. In December 2019, the CPUC issued a second OSC to determine whether SoCalGas is entitled to the energy efficiency 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 second OSC was later expanded to include energy efficiency program years 2014 and 2015, and SoCalGas’ engagement with local governments on proposed reach codes. If the CPUC were to assess fines or penalties on SoCalGas associated with these OSCs, they could have a material adverse effect on SoCalGas’ and

Sempra Energy’s results of operations, financial condition and cash flows. We expect CPUC decisions on these OSCs in the first half of 2021.

Sempra Texas Utilities

Oncor relies on external financing as a significant source of liquidity for its capital requirements. In the past, Oncor has financed a substantial portion of its cash needs from operations and with proceeds from indebtedness. In the event that Oncor fails to meet its capital requirements or is unable to access sufficient capital to finance its ongoing needs, we may elect to make additional capital contributions to Oncor (as our commitments to the PUCT prohibit us from making loans to Oncor) which could be substantial and which would reduce the cash available to us for other purposes, could increase our indebtedness and could ultimately materially adversely affect our results of operations, liquidity, financial condition and prospects.

Oncor’s ability to pay dividends may be limited by factors such as its credit ratings, regulatory capital requirements, debt-to-equity ratio approved by the PUCT and other restrictions. In addition, Oncor will not pay dividends if a majority of Oncor’s independent directors or any minority member director determines it is in the best interests of Oncor to retain such amounts to meet expected future requirements.

Sempra Mexico

Construction Projects and Related Regulatory Matters

Sempra Mexico is currently constructing additional terminals for the receipt, storage, and delivery of liquid fuels in the vicinity of Mexico City, Puebla, Veracruz and Topolobampo. Sempra Mexico is also constructing a new solar facility (Border Solar) in Juárez, Chihuahua, through which it intends to supply renewable energy to several private companies. Sempra Mexico is currently developing additional terminals for the receipt, storage, and delivery of liquid fuels in the vicinity of Manzanillo, Guadalajara and Ensenada. We expect to fund these capital expenditures, investments and operations at IEnova with available funds, including credit facilities, and funds internally generated by the Sempra Mexico businesses, as well as funds from project financing, sales of securities, interim funding from the parent or affiliates, and partnering in JVs. We expect the projects under construction to commence commercial operations on various dates in 2021. However, expected commencement dates could be delayed by worsening or extended disruptions of project construction or development caused by the COVID-19 pandemic or other factors outside our control. Sempra Mexico is continuing to monitor the impacts of the COVID-19 pandemic on cash flows and results of operations. See “Part I – Item 1A. Risk Factors.”

As we discuss in Note 16 of the Notes to Consolidated Financial Statements, in the second quarter of 2020, certain Mexican governmental agencies issued orders and regulations that would reduce or limit the renewable energy sector’s participation in the country’s energy market. Those orders would, among other things, create barriers for renewable energy facilities to enter the wholesale electricity market, prevent renewable energy projects currently in construction from reaching operations and increase grid fees for legacy renewables and cogeneration energy contract holders. IEnova and other companies affected by such measures, certain non-governmental environmental organizations or advocacy groups, and COFECE, Mexico’s antitrust regulator, have filed legal complaints with the respective Mexican courts to prevent such measures from going into effect. In most cases, the courts have sided with the complainants and such measures have been stayed temporarily. The court-ordered injunctions provide relief until Mexico’s Federal District Court ultimately resolves the amparo claims (constitutional protection lawsuits).

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.

The ability to successfully complete major construction projects is subject to a number of risks and uncertainties. For a discussion of these risks and uncertainties, see “Part I – Item 1A. Risk Factors.”

Other Legal and Regulatory Matters

As we discuss in Note 16 of the Notes to Consolidated Financial Statements, IEnova received force majeure payments for the Guaymas-El Oro segment of the Sonora pipeline from August 2017 to August 2019. Under an agreement between IEnova and the CFE, 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 (which have not commenced) and resume operations in the Guaymas-El Oro segment of

the Sonora pipeline 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.

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.

Potential Acquisition of ESJ

As we discuss in Note 5 of the Notes to Consolidated Financial Statements, 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.

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.

Exchange Offer

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, which exchange ratio remains subject to approval by the Sempra Energy 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. This proposed transaction is subject to a number of risks that we discuss in “Part I – Item 1A. Risk Factors.”

IEnova Common Stock Repurchase Fund

In April 2020, IEnova’s shareholders approved an increase to a previously approved fund for IEnova to repurchase shares of its common stock for a maximum amount of $500 million, increased from $250 million. As of February 25, 2021, IEnova has repurchased 81,742,780 shares of its outstanding common stock held by NCI for approximately $248 million since the inception of the fund in 2018, increasing Sempra Energy’s ownership interest in IEnova from 66.6% to 70.2% over this period. IEnova does not intend to repurchase shares of its common stock during the pendency of the exchange offer described above. Following the completion of the exchange offer, IEnova may repurchase shares under the existing program from time-to-time at the discretion of management.

Sempra LNG

Sempra LNG is pursuing development of additional LNG export facilities on the Gulf Coast and Pacific Coast of North America through its proposed Cameron LNG JV Phase 2 liquefaction expansion project in Louisiana, ECA LNG liquefaction export projects in Mexico, and Port Arthur LNG liquefaction export project in Texas. We expect Sempra LNG to require funding for the development and expansion of its portfolio of projects, which may be financed through a combination of operating cash flows, funding from the parent, project financing and participating in JVs.

Cameron LNG JV Three-Train Liquefaction Project (Phase 1)

Sempra LNG, through its 50.2% interest in Cameron LNG JV, operates a three-train natural gas liquefaction facility with an export capacity of 12 Mtpa of LNG, which we refer to as Phase 1. The majority of the construction was project-financed at the JV, with most or all of the remainder of the capital requirements provided by the project partners, including Sempra Energy,

through equity contributions under the project equity agreements. 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.

As we discuss below in “Off-Balance Sheet Arrangements” and in Note 6 of the Notes to Consolidated Financial Statements, Sempra Energy has guaranteed a maximum of $4.0 billion related to Cameron LNG JV’s project financing and financing-related agreements for the Phase 1 project. These guarantees terminate upon Cameron LNG JV achieving “financial completion” of the Phase 1 three-train liquefaction export project, including all three trains achieving commercial operation and meeting certain operational performance tests, which are currently underway. Cameron LNG JV’s financing agreements contain events of default customary for such financings, including a failure to achieve financial completion of the project by a deadline of September 30, 2021 (with up to an additional 365 days extension beyond such date permitted in cases of force majeure). 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, at which time any deferred distributions will be released. A delay that results in a 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 on Sempra Energy’s guarantees. We anticipate that the guarantees will be terminated in the first half of 2021, but this timing could be delayed, perhaps substantially, if the operational performance tests required to achieve financial completion are not completed due to weather-related events, other events or other factors beyond our control. If, due to Cameron LNG JV’s failure to satisfy the financial completion criteria by the applicable deadline, we are required to repay some or all of the $4.0 billion under our guarantees, any such repayments could have a material adverse effect on our business, results of operations, cash flows, financial condition and/or prospects.

For a discussion of our investment in Cameron LNG JV, JV financing, Sempra Energy guarantees, the risks discussed above and other risks relating to the Cameron LNG JV Phase 1 liquefaction export project that could adversely affect our future performance, see “Part I – Item 1A. Risk Factors.”

Cameron LNG JV Liquefaction Expansion Project (Phase 2)

Cameron LNG JV has received the major permits and FTA and non-FTA approvals necessary to expand the current configuration of the Cameron LNG JV liquefaction project beyond Phase 1. The permits obtained for the Phase 2 project include up to two additional liquefaction trains and up to two additional full containment LNG storage tanks (one of which was permitted with the Phase 1 three-train project).

Sempra Energy has entered MOUs with TOTAL SE, Mitsui & Co., Ltd. and Mitsubishi Corporation that provide a framework for cooperation for the development of and 100% of the offtake from the potential Cameron LNG JV Phase 2 project. The ultimate participation of and offtake by TOTAL SE, Mitsui & Co., Ltd. and Mitsubishi Corporation remains subject to negotiation and finalization of definitive agreements, among other factors, and TOTAL SE, Mitsui & Co., Ltd. and Mitsubishi Corporation have no commitment to participate in or enter into offtake agreements with the Phase 2 project until such definitive agreements are established.

Expansion of the Cameron LNG JV liquefaction facility beyond the first three trains is subject to certain restrictions and conditions under the JV project financing agreements, including among others, timing restrictions on expansion of the project unless appropriate prior consent is obtained from the Phase 1 project lenders. Under the Cameron LNG JV equity agreements, the expansion of the project requires the unanimous consent of all the partners, including with respect to the equity investment obligation of each partner. Discussions among all the Cameron LNG JV partners have been taking place regarding how an expansion may be structured and we expect that discussions will continue. There is no assurance that the Cameron LNG JV members will unanimously agree in a timely manner or at all on an expansion structure, which, if not accomplished, would materially and adversely impact the development of the Phase 2 expansion project. In light of this and other considerations, we are unable to predict whether or when Cameron LNG JV might be able to move forward on the Phase 2 expansion of the Cameron LNG JV liquefaction facility beyond the first three trains.

The development of the potential Cameron LNG JV Phase 2 expansion project is subject to numerous other risks and uncertainties, including securing binding customer commitments; reaching unanimous agreement with our partners to proceed; obtaining a number of permits and regulatory approvals; securing financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract, equity acquisition and governance agreements; reaching a final investment decision; and other factors associated with this potential investment. For a discussion of these risks, see “Part I – Item 1A. Risk Factors.”

ECA LNG Liquefaction Export Projects

Sempra LNG and IEnova are developing two natural gas liquefaction export projects at IEnova’s existing ECA Regas Facility. The liquefaction export projects, which are planned for development in two phases (a mid-scale project referred to as ECA LNG Phase 1 and a proposed large-scale project referred to as ECA LNG Phase 2), are being developed to provide buyers with direct access to North American west coast LNG supplies. We do not expect the construction of the ECA LNG Phase 1 project to disrupt operations at the ECA Regas Facility. However, construction of the ECA LNG Phase 2 project would conflict with the current operations at the ECA Regas Facility, which currently has long-term regasification contracts for 100% of the regasification facility’s capacity through 2028, making the decisions on whether and how to pursue the ECA LNG Phase 2 project dependent in part on whether the investment in a large-scale liquefaction facility would, over the long term, be more beneficial financially than continuing to supply regasification services under our existing contracts. We have planned measures to not disrupt operations at the ECA Regas Facility with the construction of the ECA LNG Phase 1 project.

In March 2019, ECA LNG received two authorizations from the DOE to export U.S.-produced natural gas to Mexico and to re-export LNG to non-FTA countries from its ECA LNG Phase 1 project, which is a one-train natural gas liquefaction facility with a nameplate capacity of 3.25 Mtpa and initial offtake capacity of approximately 2.5 Mtpa that is under construction, and its proposed ECA LNG Phase 2 project that is in development.

In April 2020, ECA LNG Phase 1 executed definitive 20-year LNG sale and purchase agreements with Mitsui & Co., Ltd. for approximately 0.8 Mtpa of LNG and with an affiliate of TOTAL SE for approximately 1.7 Mtpa of 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. Our MOU with Mitsui & Co., Ltd. provides a framework for Mitsui & Co., Ltd.’s potential offtake of LNG from, and potential acquisition of an equity interest in, ECA LNG Phase 2.

In February 2020, we entered into an EPC contract with TechnipFMC for the engineering, procurement and construction of the ECA LNG Phase 1 project. Since reaching a final investment decision with respect to the project in November 2020, we released TechnipFMC to commence work to construct the ECA LNG Phase 1 project. The total price of the EPC contract is estimated at approximately $1.5 billion. We estimate that capital expenditures will approximate $2.0 billion, including capitalized interest and project contingency. The actual cost of the EPC contract and the actual amount of these capital expenditures may differ, perhaps substantially, from our estimates.

In December 2020, ECA LNG Phase 1 entered into a five-year loan agreement for an aggregate principal amount of up to $1.6 billion, of which $17 million was outstanding at December 31, 2020. Proceeds from the loan are being used to finance the cost of construction of the ECA LNG Phase 1 project. We discuss the details of this loan in Note 7 of the Notes to Consolidated Financial Statements.

The construction of the ECA LNG Phase 1 project and the development of the potential ECA LNG Phase 2 project are subject to numerous risks and uncertainties. For Phase 1, these include maintaining permits and regulatory approvals; construction delays; securing and maintaining commercial arrangements, such as gas supply and transportation agreements; and other factors associated with the project and its construction. For Phase 2, these include obtaining binding customer commitments; the receipt of a number of permits and regulatory approvals; obtaining financing; negotiating and completing suitable commercial agreements, including a definitive EPC contract, equity acquisition and governance agreements, LNG sales agreements and gas supply and transportation agreements; reaching a final investment decision; and other factors associated with this potential investment. In addition, as we discuss in Note 16 of the Notes to Consolidated Financial Statements, an unfavorable decision on certain property disputes or permit challenges, or an extended dispute with existing customers at the ECA Regas Facility, could materially and adversely affect the development of these projects and Sempra Energy’s financial condition, results of operations, cash flows and prospects, including the impairment of all or a substantial portion of the capital costs invested in the projects to date. For a discussion of these risks, see “Part I – Item 1A. Risk Factors.”

Port Arthur LNG Liquefaction Export Project

Sempra LNG is developing a proposed natural gas liquefaction export project on a greenfield site that it owns in the vicinity of Port Arthur, Texas, located along the Sabine-Neches waterway. Sempra LNG received authorizations from the DOE in August 2015 and May 2019 that collectively permit the LNG to be produced from the proposed Port Arthur LNG project to be exported to all current and future FTA and non-FTA countries.

In April 2019, the FERC approved the siting, construction and operation of the proposed Port Arthur LNG liquefaction facility, along with certain natural gas pipelines, including the Louisiana Connector and Texas Connector Pipelines, that could be used to supply feed gas to the liquefaction facility, assuming the project is completed. In February 2020, Sempra LNG filed a FERC application for the siting, construction and operation of a second phase at the proposed Port Arthur LNG facility, including the potential addition of two liquefaction trains.

In February 2020, we entered into an EPC contract with Bechtel for the proposed Port Arthur LNG liquefaction project. The EPC contract contemplates the construction of two liquefaction trains with a nameplate capacity of approximately 13.5 Mtpa, two LNG storage tanks, a marine berth and associated loading facilities and related infrastructure necessary to provide liquefaction services. We have no obligation to move forward on the EPC contract, and we may release Bechtel to perform portions of the work pursuant to limited notices to proceed. We plan to fully release Bechtel to perform all of the work to construct the Port Arthur LNG liquefaction export project only after we reach a final investment decision with respect to the project and after certain other conditions are met, including obtaining project financing. In December 2020, we amended and restated the EPC contract to reflect an estimated price of approximately $8.7 billion, depending on the timing of a full notice to proceed, which, if not issued by July 15, 2021, will require renegotiation of the EPC contract. Any changes to the EPC contract will require the agreement of both parties, which cannot be assured.

In December 2018, Polish Oil & Gas Company (PGNiG) and Port Arthur LNG entered into a definitive 20-year agreement for the sale and purchase of 2 Mtpa of LNG per year from the Port Arthur LNG liquefaction export project. Under the agreement, LNG purchases by PGNiG from Port Arthur LNG will be made on a free-on-board basis, with PGNiG responsible for shipping the LNG from the Port Arthur facility to the final destination. Port Arthur LNG will manage the gas pipeline transportation, liquefaction processing and cargo loading. The agreement is subject to certain conditions precedent, including Port Arthur LNG making a positive final investment decision within certain agreed timelines. The failure of these conditions precedent to be satisfied or waived within the agreed timelines could result in the termination of the agreement.

In May 2019, Aramco Services Company and Sempra LNG signed a Heads of Agreement for the negotiation of a definitive 20-year LNG sale and purchase agreement for 5 Mtpa of LNG offtake from the Port Arthur LNG liquefaction export project. The Heads of Agreement also includes the negotiation of a potential 25% equity investment in the project. In January 2020, Aramco Services Company and Sempra LNG signed an Interim Project Participation Agreement, which sets forth certain mechanisms for the parties to work towards receipt of corporate approvals to enter into and proceed with the transaction, execution of the transaction agreements and the fulfillment or waiver of the conditions precedent contemplated by these agreements, making a final investment decision and other pre-final investment decision activities. The Heads of Agreement and Interim Project Participation Agreement do not obligate the parties to ultimately execute any agreements or participate in the project.

In November 2019, Port Arthur LNG commenced the relocation and upgrade of approximately three miles of highway where the Port Arthur LNG liquefaction export project would be located.

We continue to work on completing all necessary milestones so that we are prepared to make a final investment decision for the proposed Port Arthur LNG liquefaction export project when appropriate. The impact of the COVID-19 pandemic on the global economy and uncertainty in the energy and financial markets, among other reasons, have delayed the expected timing of our final investment decision until 2021.

Development of the Port Arthur LNG liquefaction export project is subject to a number of risks and uncertainties, including obtaining additional customer commitments; completing the required commercial agreements, such as equity acquisitions and governance agreements, LNG sales agreements and gas supply and transportation agreements; completing construction contracts; securing all necessary permits and approvals; obtaining financing and incentives; reaching a final investment decision; and other factors associated with the potential investment. An unfavorable outcome with respect to any of these factors could have a material adverse effect on Sempra Energy’s financial condition, results of operations and prospects, including the impairment of all or a substantial portion of the capital costs invested in the project to date. For a discussion of these risks, see “Part I – Item 1A. Risk Factors.”

Proposed Sempra Infrastructure Partners Transaction

In December 2020, we announced our intention to sell NCI in Sempra Infrastructure Partners, which represents the combined businesses of Sempra LNG and IEnova. We expect to complete this transaction in the second quarter of 2021. We intend to use the expected proceeds from the proposed sale of NCI to fund capital investments to support additional growth opportunities and strengthen our balance sheet by reducing debt.

The proposed sale of NCI in Sempra Infrastructure Partners will reduce our ownership interest in Sempra Infrastructure Partners. Any decrease in our ownership of Sempra Infrastructure Partners would also decrease our share of the cash flows, profits and other benefits these businesses currently or may in the future produce, which could materially adversely affect our results of operations, cash flows, financial condition and/or prospects.

Our ability to complete this transaction is subject to a number of risks, including, among others, the ability to identify a suitable partner to purchase such NCI; negotiate the terms of equity sale, shareholder and other governance agreements with such partner; and obtain governmental, regulatory and third-party consents and approvals and satisfy any other closing conditions to complete

this transaction. Although the structure and terms of this transaction remain to be determined, the governmental and regulatory authorities with jurisdiction over the transaction could seek to block or challenge it or could impose requirements or obligations as conditions to its approval. If any of these circumstances were to occur, or if we are not able to achieve all of the foregoing in a timely manner or on satisfactory terms, then the proposed transaction may be abandoned and our prospects could be materially adversely affected. This transaction is subject to a number of risks and uncertainties that we discuss further in “Part I – Item 1A. Risk Factors.”

Discontinued Operations

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. 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.

Our utilities in South America historically provided relatively stable earnings and liquidity. We used a portion of the proceeds from the sales of these businesses to strengthen our balance sheet by repaying certain borrowings and repurchasing shares of our common stock, and we intend to use the remaining proceeds to focus on capital investment in North America to support additional growth opportunities. We expect the cash provided by earnings from our capital investments will exceed the absence of cash flows from these discontinued operations. However, there is no assurance that we will derive these anticipated benefits. Further, there is no assurance that we will be able to redeploy the capital that we obtained from such sales in a way that results in cash flows or earnings exceeding those historically generated by these businesses.

SOURCES AND USES OF CASH

The following tables include only significant changes in cash flow activities for each of our registrants.

CASH FLOWS FROM OPERATING ACTIVITIES
(Dollars in millions)
Years ended December 31,			Sempra Energy Consolidated									SDG&E						SoCalGas
2020						$	2,591					$	1,389					$	1,526
2019						3,088						1,090						868
Change						$	(497)					$	299					$	658
Change in intercompany activities with discontinued operations (including $403 dividends received from our South American businesses in 2019)						$	(378)
Net increase in Insurance Receivable for Aliso Canyon primarily due to $132 higher accruals and $94 lower insurance proceeds received						(228)												$	(228)
Change in accounts receivable						(224)						$	(119)					(28)
Release of a regulatory liability related to 2016-2018 income tax expense forecasting differences						(175)						(86)						(89)
Change in bad debt regulatory assets						(84)						(51)						(33)
TCJA revenue amortization						(82)						(44)						(38)
Increase in prepaid insurance premiums												(24)
Net increase in Reserves for Aliso Canyon Costs, current and noncurrent, due to $450 higher accruals and $129 lower payments						579												579
Distributions of earnings from Cameron LNG JV in 2020						365
Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets)						352						29						323
SDG&E’s initial shareholder contribution to the Wildfire Fund in September 2019						323						323
Decrease in funding for the Rabbi Trust						141
Higher net margin posted at Sempra LNG’s marketing operations						109
Change in income taxes receivable/payable, net						72						255						345
Change in accounts payable						61												71
Higher distributions of earnings from Oncor Holdings						39
Higher (lower) net income, adjusted for noncash items included in earnings						39						35						(258)
Other						35						(19)						14
Change in net cash flows from discontinued operations primarily due to $1,161 income taxes paid related to the sale of our South American businesses						(1,441)
						$	(497)					$	299					$	658

CASH FLOWS FROM OPERATING ACTIVITIES (CONTINUED)
(Dollars in millions)
Years ended December 31,			Sempra Energy Consolidated									SDG&E						SoCalGas
2019						$	3,088					$	1,090					$	868
2018						3,516						1,584						1,013
Change						$	(428)					$	(494)					$	(145)
Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets)						$	(513)					$	(254)					$	(259)
SDG&E’s initial shareholder contribution to the Wildfire Fund in September 2019						(323)						(323)
Change in income taxes receivable/payable, net, primarily due to higher payments						(254)						(149)						(170)
Net decrease in Reserve for Aliso Canyon Costs due to $119 higher payments and $81 lower accruals						(200)												(200)
Deferred revenue due to the TCJA at the California Utilities in 2018						(123)						(62)						(61)
Cash payments for operating leases in 2019						(101)						(33)						(27)
Decrease in interest payable primarily due to higher payments						(86)
Higher contributions to Rabbi Trust						(81)
Higher net income, adjusted for noncash items included in earnings						442						266						336
Change in intercompany activities with discontinued operations (including $334 higher dividends received from our South American businesses)						308
Change in long-term GHG obligations						185												174
Net decrease in Insurance Receivable for Aliso Canyon Costs due to $84 higher insurance proceeds received and $81 lower accruals						165												165
Higher distributions of earnings from Oncor Holdings						97
Change in accounts payable																		(78)
Lower (higher) purchases of GHG allowances												50						(43)
Other						(38)						11						18
Change in net cash flows from discontinued operations						94
						$	(428)					$	(494)					$	(145)

CASH FLOWS FROM INVESTING ACTIVITIES
(Dollars in millions)
Years ended December 31,			Sempra Energy Consolidated									SDG&E						SoCalGas
2020						$	553					$	(1,934)					$	(1,843)
2019						(4,593)						(1,522)						(1,438)
Change						$	5,146					$	(412)					$	(405)
Contributions to Oncor Holdings to fund Oncor’s purchase of InfraREIT in May 2019						$	1,067
Distribution from Cameron LNG JV in 2020						753
Contributions to Peruvian businesses in discontinued operations in 2019						583
Contributions to Chilean businesses in discontinued operations in 2019						394
Acquisition of investment in Sharyland Holdings in May 2019						95
Increase in capital expenditures						(968)						$	(420)					$	(404)
Dividends received from Peruvian businesses in discontinued operations in 2019						(583)
Net proceeds from the April 2019 sale of Sempra Renewables’ wind assets and investments						(569)
Dividends received from Chilean businesses in discontinued operations in 2019						(394)
Net proceeds from the February 2019 sale of Sempra LNG’s non-utility natural gas storage assets						(322)
Loan to ESJ JV in 2020						(85)
Other						(8)						8						(1)
Change in net cash flows from discontinued operations mainly due to $5,766 proceeds, net of transaction costs, offset by $502 cash sold from the sale of our South American businesses						5,183
						$	5,146					$	(412)					$	(405)
2019						$	(4,593)					$	(1,522)					$	(1,438)
2018						(12,470)						(1,542)						(1,531)
Change						$	7,877					$	20					$	93
Acquisition of investment in Oncor Holdings in March 2018						$	9,556
Dividends received from Peruvian businesses in discontinued operations in 2019						583
Dividends received from Chilean businesses in discontinued operations in 2019						394
Net proceeds from sale of Sempra LNG’s non-utility natural gas storage assets						322
Lower expenditures for investments in Cameron LNG JV and IMG JV						245
Lower advances to unconsolidated affiliates						79
Higher contributions to Oncor Holdings primarily to fund Oncor’s purchase of InfraREIT in May 2019						(1,357)
Lower net proceeds from sale of certain Sempra Renewables’ assets and investments ($569 in 2019 and $1,571 in 2018)						(1,002)
Contributions to Peruvian businesses in discontinued operations in 2019						(583)
Contributions to Chilean businesses in discontinued operations in 2019						(394)
(Increase) decrease in capital expenditures						(164)						$	20					$	99
Acquisition of investment in Sharyland Holdings in May 2019						(95)
Other						40												(6)
Change in net cash flows from discontinued operations						253
						$	7,877					$	20					$	93

CASH FLOWS FROM FINANCING ACTIVITIES
(Dollars in millions)
Years ended December 31,			Sempra Energy Consolidated									SDG&E						SoCalGas
2020						$	(2,373)					$	797					$	311
2019						1,475						405						562
Change						$	(3,848)					$	392					$	(251)
Change in short-term debt, net						$	(2,415)					$	131					$	(891)
Net proceeds from issuances of common stock from settlement of forward sale agreements in 2019						(1,794)
Higher payments for commercial paper and other short-term debt with maturities greater than 90 days						(1,341)
Higher payments on long-term debt and finance leases						(856)						(236)						(6)
Repurchase of common stock under ASR program in 2020						(500)
Higher repurchases of IEnova stock held by NCI						(221)
Lower issuances of short-term debt with maturities greater than 90 days						(213)
(Higher) lower common dividends paid						(181)						(200)						50
Capital contribution from OMEC LLC in 2019 to repay OMEC’s loan						(175)						(175)
Lower advances from unconsolidated affiliates						(91)
Equity contribution from Sempra Energy to fund initial shareholder contribution to the Wildfire Fund in September 2019												(322)
Higher issuances of long-term debt						1,968						1,198						600
Net proceeds from issuance of series C preferred stock						891
Change in intercompany activities with discontinued operations primarily related to intercompany loans in 2019						266
Other						21						(4)						(4)
Change in net cash flows from discontinued operations primarily from a $250 intercompany loan and $60 net increase in short-term debt in 2020 and $977 equity contribution from Sempra Energy, offset by $1,380 common dividends paid in 2019						793
						$	(3,848)					$	392					$	(251)
2019						$	1,475					$	405					$	562
2018						8,850						(34)						528
Change						$	(7,375)					$	439					$	34
Higher issuances of long-term debt in 2018, including increases at Sempra Energy Consolidated primarily to fund the March 2018 acquisition of investment in Oncor Holdings and at SDG&E from issuance of a new loan by OMEC LLC to partially repay OMEC’s project financing loan						$	(4,826)					$	(218)					$	(600)
Net proceeds from 2018 issuances of mandatory convertible preferred stock						(2,258)
Lower net proceeds from issuances of common stock primarily related to settlements of forward sale agreements						(442)
(Higher) lower payments on long-term debt and finance leases						(217)						218						494
(Higher) lower common dividends paid						(169)						250						(100)
Change in intercompany activities with discontinued operations primarily related to intercompany loans						(157)
Higher payments for commercial paper and other short-term debt with maturities greater than 90 days						(108)
Increase (decrease) in short-term debt, net						740						(249)						234
Higher issuances of commercial paper and other short-term debt with maturities greater than 90 days						195
Advances from unconsolidated affiliates						155
Higher capital contributions from OMEC LLC to repay OMEC’s loan						110						110
Equity contribution from Sempra Energy to fund initial shareholder contribution to the Wildfire Fund in September 2019												322
Other						(31)						6						6
Change in net cash flows from discontinued operations primarily from $1,311 common dividends paid offset by $977 equity contributions received in 2019						(367)
						$	(7,375)					$	439					$	34

Expenditures for PP&E

We invest the majority of our capital expenditures in the California Utilities, primarily for transmission and distribution improvements, including pipeline and wildfire safety. The following table summarizes by segment capital expenditures for the last three years.

EXPENDITURES FOR PP&E
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
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
Parent and other			12						9						14
Total			$	4,676					$	3,708					$	3,544

Expenditures for Investments and Acquisitions

In 2019 and 2018, we invested heavily in our Sempra Texas Utilities, which included our March 2018 acquisition of Oncor Holdings and subsequent contributions to Oncor Holdings, primarily to fund Oncor’s purchase of InfraREIT in May 2019. The following table summarizes by segment our investments in various JVs, as well as business and asset acquisitions.

EXPENDITURES FOR INVESTMENTS AND ACQUISITIONS
(Dollars in millions)
			Years ended December 31,
			2020						2019						2018
Sempra Texas Utilities			$	648					$	1,685					$	9,457
Sempra Mexico			—						—						100
Sempra LNG			4						110						275
Sempra Renewables			—						—						5
Parent and other			—						2						331
Total			$	652					$	1,797					$	10,168

Future Capital Expenditures and Investments

The amounts and timing of capital expenditures and certain investments are generally subject to approvals by various regulatory and other governmental and environmental bodies, including the CPUC, the FERC and the PUCT, and various other factors described in this MD&A and in “Part I – Item 1A. Risk Factors.” In 2021, we expect to make capital expenditures and investments of approximately $5.8 billion (which excludes capital expenditures that will be funded by unconsolidated entities), as summarized by segment in the following table.

FUTURE CAPITAL EXPENDITURES AND INVESTMENTS
(Dollars in millions)
			Year ended December 31, 2021
SDG&E			$	2,400
SoCalGas			2,000
Sempra Texas Utilities			200
Sempra Mexico			400
Sempra LNG			800
Total			$	5,800

We expect the majority of our capital expenditures and investments in 2021 will relate to transmission and distribution improvements at our regulated public utilities, the ECA LNG Phase 1 liquefaction export project at Sempra LNG and construction of liquid fuels terminals at Sempra Mexico.

From 2021 through 2025, and subject to the factors described below, which could cause these estimates to vary substantially, Sempra Energy expects to make aggregate capital expenditures and investments of approximately $22.5 billion (which excludes

capital expenditures that will be funded by unconsolidated entities), as follows: $9.6 billion at SDG&E, $9.2 billion at SoCalGas, $0.6 billion at Sempra Texas Utilities, $1.1 billion at Sempra Mexico and $2.0 billion at Sempra LNG. Capital expenditure amounts include capitalized interest and AFUDC related to debt.

Periodically, we review our construction, investment and financing programs and revise them in response to changes in regulation, economic conditions, competition, customer growth, inflation, customer rates, the cost and availability of capital, and safety and environmental requirements.

Our level of capital expenditures and investments in the next few years may vary substantially and will depend on, among other things, the cost and availability of financing, regulatory approvals, changes in U.S. federal tax law and business opportunities providing desirable rates of return. See “Part I – Item 1A. Risk Factors” for a discussion of other factors that could affect future levels of our capital expenditures and investments. We intend to finance our capital expenditures in a manner that will maintain our investment-grade credit ratings and capital structure, but there is no guarantee that we will be able to do so.

Capital Stock Transactions

Sempra Energy

Cash provided by issuances of common and preferred stock was:

▪$902 million in 2020

▪$1.8 billion in 2019

▪$4.5 billion in 2018

Sempra Energy Series C Preferred Stock Offering. In June 2020, we issued 900,000 shares of our 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. We provide additional discussion about this equity offering in Note 13 of the Notes to Consolidated Financial Statements.

Sempra Energy Common Stock Repurchase Program. As we discuss in Note 14 of the Notes to Consolidated Financial Statements, in 2020, we entered into and completed an ASR program under which we paid $500 million to repurchase 4,089,375 shares of our common stock at an average price of $122.27 per share. We funded the $500 million share repurchase with a portion of the proceeds received from the sale of our South American businesses.

Dividends

Sempra Energy

Sempra Energy paid cash dividends of:

▪$1,174 million for common stock and $157 million for preferred stock in 2020

▪$993 million for common stock and $142 million for preferred stock in 2019

▪$877 million for common stock and $89 million for preferred stock in 2018

On November 18, 2020, Sempra Energy declared a quarterly dividend of $1.045 per share of common stock, $1.50 per share of series A preferred stock and $1.6875 per share of series B preferred stock, all of which were paid on January 15, 2021.

Dividends declared on common stock have increased in each of the last three years due to an increase in the per-share quarterly dividends approved by our board of directors to $1.045 in 2020 ($4.18 annually) from $0.9675 in 2019 ($3.87 annually) and from $0.895 in 2018 ($3.58 annually).

On February 23, 2021, our board of directors approved an increase in Sempra Energy’s quarterly common stock dividend to $1.10 per share ($4.40 annually), the first of which is payable April 15, 2021. In addition, on February 23, 2021, our board of directors declared quarterly dividends of $1.6875 per share on our series B preferred stock and semi-annual dividends of $24.375 per share on our series C preferred stock, both payable on April 15, 2021. All declarations of dividends on our common stock and preferred stock are made at the discretion of the board of directors. While we view dividends as an integral component of shareholder return, the amount of future dividends will depend on earnings, cash flows, financial and legal requirements, and other relevant factors at that time. As a result, Sempra Energy’s dividends on common stock declared on an annual historical basis, including recent historical increases, may not be indicative of future declarations.

SDG&E

In 2020 and 2018, SDG&E paid common stock dividends to Enova and Enova paid corresponding dividends to Sempra Energy of $200 million and $250 million, respectively. SDG&E did not declare or pay common stock dividends in 2019. SDG&E’s dividends on common stock declared on an annual historical basis may not be indicative of future declarations and could be impacted over the next few years in order for SDG&E to maintain its authorized capital structure while managing its capital investment program.

Enova, a wholly owned subsidiary of Sempra Energy, owns all of SDG&E’s outstanding common stock. Accordingly, dividends paid by SDG&E to Enova and dividends paid by Enova to Sempra Energy are eliminated in Sempra Energy’s consolidated financial statements.

SoCalGas

In 2020, 2019 and 2018, SoCalGas paid common stock dividends to PE and PE paid corresponding dividends to Sempra Energy of $100 million, $150 million and $50 million, respectively. SoCalGas’ dividends on common stock declared on an annual historical basis may not be indicative of future declarations and could be impacted over the next few years in order for SoCalGas to maintain its authorized capital structure while managing its capital investment program.

PE, a wholly owned subsidiary of Sempra Energy, owns all of SoCalGas’ outstanding common stock. Accordingly, dividends paid by SoCalGas to PE and dividends paid by PE to Sempra Energy are eliminated in Sempra Energy’s consolidated financial statements.

Dividend Restrictions

The board of directors for each of Sempra Energy, SDG&E and SoCalGas has the discretion to determine whether to declare and, if declared, the amount of any dividends by each such entity. The CPUC’s regulation of SDG&E’s and SoCalGas’ capital structures limits the amounts that are available for loans and dividends to Sempra Energy. At December 31, 2020, based on these regulations, Sempra Energy could have received combined loans and dividends of approximately $717 million from SDG&E and $148 million from SoCalGas.

We provide additional information about dividend restrictions in “Restricted Net Assets” in Note 1 of the Notes to Consolidated Financial Statements.

Book Value Per Common Share

Sempra Energy’s book value per common share on the last day of each of the last three fiscal years was as follows:

▪$70.11 in 2020

▪$60.58 in 2019

▪$54.35 in 2018

The increase in 2020 was primarily due to comprehensive income exceeding dividends, offset by common stock repurchases. In 2019, the increase was primarily due to comprehensive income exceeding dividends and common stock issuances.

Capitalization

Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and equity, was as follows:

TOTAL CAPITALIZATION AND DEBT-TO-CAPITALIZATION RATIOS
(Dollars in millions)
			Sempra Energy
			Consolidated						SDG&E						SoCalGas
			December 31, 2020
Total capitalization			$	49,140					$	15,207					$	10,030
Debt-to-capitalization ratio			49		%				49		%				49		%
			December 31, 2019
Total capitalization			$	47,621					$	13,542					$	9,172
Debt-to-capitalization ratio			54		%				48		%				48		%

Significant changes in 2020 that affected capitalization included the following:

▪Sempra Energy Consolidated: decrease in short-term debt and increase in equity from issuances of common and preferred stock and comprehensive income exceeding dividends.

▪SDG&E: increase in long-term debt and increase in equity from comprehensive income exceeding dividends.

▪SoCalGas: increase in long-term debt and increase in equity from comprehensive income exceeding dividends.

COMMITMENTS

The following tables summarize undiscounted principal contractual commitments at December 31, 2020 for Sempra Energy Consolidated, SDG&E and SoCalGas. We provide additional information about commitments above and in Notes 1, 7, 9, 15 and 16 of the Notes to Consolidated Financial Statements.

UNDISCOUNTED PRINCIPAL CONTRACTUAL COMMITMENTS – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
			2021						2022 and 2023						2024 and 2025						Thereafter						Total
Long-term debt			$	1,504					$	2,632					$	1,875					$	16,248					$	22,259
Interest on long-term debt(1)			845						1,614						1,442						11,111						15,012
Operating leases			73						119						91						415						698
Finance leases			206						406						391						2,465						3,468
Purchased-power contracts – fixed payments			222						381						233						794						1,630
Purchased-power contracts – estimated variable payments			363						726						724						3,610						5,423
Natural gas contracts(2)			280						422						319						1,032						2,053
LNG contract(3)			320						811						776						1,452						3,359
Construction commitments			525						41						32						98						696
SONGS decommissioning			110						146						89						697						1,042
Other asset retirement obligations			66						146						154						11,768						12,134
Sunrise Powerlink wildfire mitigation fund			4						8						8						279						299
Pension and other postretirement benefit obligations(4)			251						461						477						922						2,111
Wildfire Fund obligation			13						26						26						38						103
Environmental commitments(5)			12						19						9						58						98
Other			70						44						24						98						236
Total			$	4,864					$	8,002					$	6,670					$	51,085					$	70,621

(1) We calculate expected interest payments using the stated interest rate for fixed-rate obligations, including floating-to-fixed interest rate swaps and cross-currency swaps. We calculate expected interest payments for variable-rate obligations based on forecast rates in effect at December 31, 2020.

(2) Includes $30 million of estimated variable payments.

(3) 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.

(4) Amounts represent expected company contributions to the plans for the next 10 years.

(5) Excludes amounts related to the Leak that are recorded in Reserve for Aliso Canyon Costs and that are not currently known or reasonably estimable.

UNDISCOUNTED PRINCIPAL CONTRACTUAL COMMITMENTS – SDG&E
(Dollars in millions)
			2021						2022 and 2023						2024 and 2025						Thereafter						Total
Long-term debt			$	585					$	468					$	—					$	5,200					$	6,253
Interest on long-term debt(1)			230						438						411						2,875						3,954
Operating leases			30						39						20						22						111
Finance leases			194						388						374						2,453						3,409
Purchased-power contracts – fixed payments			222						381						233						794						1,630
Purchased-power contracts – estimated variable payments			363						726						724						3,610						5,423
Construction commitments			2						2						2						19						25
SONGS decommissioning			110						146						89						697						1,042
Other asset retirement obligations			7						12						14						1,250						1,283
Sunrise Powerlink wildfire mitigation fund			4						8						8						279						299
Pension and other postretirement benefit obligations(2)			54						106						58						92						310
Wildfire Fund obligation			13						26						26						38						103
Environmental commitments			2						4						4						46						56
Other			4						7						7						48						66
Total			$	1,820					$	2,751					$	1,970					$	17,423					$	23,964

(1) SDG&E calculates expected interest payments using the stated interest rate for fixed-rate obligations. We calculate expected interest payments for variable-rate obligations based on forecast rates in effect at December 31, 2020.

(2) Amounts represent expected SDG&E contributions to the plans for the next 10 years.

UNDISCOUNTED PRINCIPAL CONTRACTUAL COMMITMENTS – SOCALGAS
(Dollars in millions)
			2021						2022 and 2023						2024 and 2025						Thereafter						Total
Long-term debt			$	—					$	300					$	850					$	3,609					$	4,759
Interest on long-term debt(1)			167						334						303						2,115						2,919
Natural gas contracts			175						249						171						359						954
Operating leases			19						30						20						8						77
Finance leases			12						18						17						12						59
Environmental commitments(2)			10						15						5						11						41
Pension and other postretirement benefit obligations(3)			158						306						378						731						1,573
Asset retirement obligations			59						134						140						10,240						10,573
Other			2						4						4						34						44
Total			$	602					$	1,390					$	1,888					$	17,119					$	20,999

(1) SoCalGas calculates expected interest payments using the stated interest rate for fixed-rate obligations. We calculate expected interest payments for variable-rate obligations based on forecast rates in effect at December 31, 2020.

(2) Excludes amounts related to the Leak.

(3) Amounts represent expected SoCalGas contributions to the plans for the next 10 years.

The tables above exclude contracts between consolidated affiliates, intercompany debt and employment contracts.

The tables also exclude income tax liabilities at December 31, 2020 of:

▪$99 million for Sempra Energy Consolidated

▪$13 million for SDG&E

▪$68 million for SoCalGas

These liabilities relate to uncertain tax positions and were excluded from the tables because we are unable to reasonably estimate the timing and amount of future payments due to uncertainties in the effective settlement of tax positions. We provide additional information about unrecognized income tax benefits in Note 8 of the Notes to Consolidated Financial Statements.

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.

OFF-BALANCE SHEET ARRANGEMENTS

In August 2014 and December 2019, Sempra Energy provided guarantees for 50.2% of Cameron LNG JV’s financing obligations for a maximum amount of up to $4.0 billion. The guarantees will terminate upon satisfaction of certain conditions, including all three trains achieving financial completion by September 30, 2021 (with up to an additional 365-day extension beyond such date permitted in cases of force majeure). However, if Cameron LNG JV fails to satisfy the financial completion criteria, a demand could be made under the guarantee for Sempra Energy’s 50.2% share of Cameron LNG JV’s obligations under the financing arrangements then due and payable, which could have a material adverse impact on Sempra Energy’s liquidity. We discuss these guarantees above in “Overview – Sempra LNG – Cameron LNG JV Three-Train Liquefaction Project (Phase 1),” in Note 6 of the Notes to Consolidated Financial Statements and “Part I – Item 1A. Risk Factors.”

In July 2020, Sempra Energy entered into a Support Agreement, which contains a guarantee and represents a variable interest, for the benefit of CFIN with a maximum exposure to loss of $979 million. The guarantee will terminate upon full repayment of the guaranteed debt by 2039, including repayment following an event in which the guaranteed debt is put to Sempra Energy. We discuss this guarantee in Notes 1, 6 and 12 of the Notes to Consolidated Financial Statements.

SDG&E has entered into PPAs and tolling agreements that are variable interests. Our investments in Oncor Holdings and Cameron LNG JV are variable interests. Sempra Energy’s other businesses may also enter into arrangements that could include variable interests. We discuss variable interests in Note 1 of the Notes to Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management views certain accounting policies as critical because their application is the most relevant, judgmental, and/or material to our financial position and results of operations, and/or because they require the use of material judgments and estimates.

We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements. We discuss choices among alternative accounting policies that are material to our financial statements and information concerning significant estimates with the Audit Committee of the Sempra Energy board of directors.

CONTINGENCIES

Sempra Energy, SDG&E, SoCalGas

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

▪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.

Details of our issues in this area are discussed in Note 16 of the Notes to Consolidated Financial Statements.

REGULATORY ACCOUNTING

Sempra Energy, SDG&E, SoCalGas

As regulated entities, the California Utilities’ customer rates, as set and monitored by regulators, are designed to recover the cost of providing service and provide the opportunity to earn a reasonable return on their investments. The California Utilities record 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 that asset from customers in future rates. Similarly, regulatory liabilities are recorded for amounts recovered in rates in advance or in excess of costs incurred. The California Utilities assess probabilities of future rate recovery associated with regulatory account balances at the end of each reporting period and whenever new and/or unusual events occur, such as:

▪changes in the regulatory and political environment or the utility’s competitive position

▪issuance of a regulatory commission order

▪passage of new legislation

To the extent that circumstances associated with regulatory balances change, the regulatory balances are evaluated and adjusted if appropriate.

Adverse legislative or regulatory actions could materially impact the amounts of our regulatory assets and liabilities and could materially adversely impact our financial statements. Details of the California Utilities’ regulatory assets and liabilities and additional factors that management considers when assessing probabilities associated with regulatory balances are discussed in Notes 1, 4, 15 and 16 of the Notes to Consolidated Financial Statements.

INCOME TAXES

Sempra Energy, SDG&E, SoCalGas

Our income tax expense and related balance sheet amounts involve significant management judgments and estimates. Amounts of deferred income tax assets and liabilities, as well as current and noncurrent accruals, involve judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities. When we evaluate the anticipated resolution of income tax issues, we consider:

▪past resolutions of the same or similar issue

▪the status of any income tax examination in progress

▪positions taken by taxing authorities with other taxpayers with similar issues

The likelihood of deferred income tax recovery is based on analyses of the deferred income tax assets and our expectation of future taxable income, based on our strategic planning.

Actual income taxes could vary from estimated amounts because of:

▪future impacts of various items, including changes in tax laws, regulations, interpretations and rulings

▪our financial condition in future periods

▪the resolution of various income tax issues between us and taxing and regulatory authorities

For an uncertain position to qualify for benefit recognition, the position must 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%. If we do not have a more-likely-than-not position with respect to a tax position, then we do not recognize any of the potential tax benefit associated with the position. A tax position that meets the more-likely-than-not recognition is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective resolution of the tax position.

Unrecognized 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 results of operations, financial position and cash flows.

We discuss details of our issues in this area and additional information related to accounting for income taxes, including uncertainty in income taxes, in Note 8 of the Notes to Consolidated Financial Statements.

DERIVATIVES AND HEDGE ACCOUNTING

Sempra Energy, SDG&E, SoCalGas

We record derivative instruments for which we do not apply a scope exception at fair value on the balance sheet. Depending on the purpose for the contract and the applicability of hedge or regulatory accounting, the changes in fair value of derivatives may be recorded in earnings, on the balance sheet, or in OCI. We also use the normal purchase or sale exception for certain derivative contracts. Whenever possible, we use exchange quoted prices or other third-party pricing to estimate fair values; if no such data is available, we use internally developed models and other techniques. The assumed collectability of derivative assets considers events specific to a given counterparty, the counterparty’s credit worthiness, and the tenor of the transaction.

The application of hedge accounting and normal purchase or sale accounting for certain derivatives is determined on a contract-by-contract basis. Significant changes in assumptions in our cash flow hedges, such as the amount and/or timing of forecasted transactions, could cause unrealized gains or losses (mark-to-market) to be reclassified out of AOCI to earnings, which may

materially impact our results of operations. Additionally, changes in assumed physical delivery on contracts for which we elected normal purchase or sale accounting may result in “tainting” of the election, which may (1) preclude us from making this election in future transactions and (2) impact Sempra Energy’s results of operations. The impacts of derivatives and hedge accounting on the California Utilities’ results of operations are typically not significant because regulatory accounting principles generally apply to their contracts. We provide details of our derivative instruments and our fair value approaches in Notes 11 and 12, respectively, of the Notes to Consolidated Financial Statements.

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Sempra Energy, SDG&E, SoCalGas

To measure our pension and other postretirement obligations, costs and liabilities, we rely on several assumptions. We consider current market conditions, including interest rates, in making these assumptions. We review these assumptions annually and update when appropriate.

The critical assumptions used to develop the required estimates include the following key factors:

▪discount rates

▪expected return on plan assets

▪health care cost trend rates

▪mortality rates

▪rate of compensation increases

▪termination and retirement rates

▪utilization of postretirement welfare benefits

▪payout elections (lump sum or annuity)

▪lump sum interest rates

The actuarial assumptions we use may differ materially from actual results due to:

▪return on plan assets

▪changing market and economic conditions

▪higher or lower withdrawal rates

▪longer or shorter participant life spans

▪more or fewer lump sum versus annuity payout elections made by plan participants

▪higher or lower retirement rates

These differences, other than those related to the California Utilities’ plans, where rate recovery offsets the effects of the assumptions on earnings, may result in a significant impact to the amount of pension and other postretirement benefit expense we record. For plans other than those at the California Utilities, the approximate annual effect on earnings of a 100 bps increase or decrease in the assumed discount rate would be less than $1 million and the effect of a 100 bps increase or decrease in the assumed rate of return on plan assets would be less than $2 million. We provide details of our pension and other postretirement benefit plans in Note 9 of the Notes to Consolidated Financial Statements.

ASSET RETIREMENT OBLIGATIONS

Sempra Energy, SDG&E

SDG&E’s legal AROs related to the decommissioning of SONGS are estimated based on a site-specific study performed no less than every three years. The estimate of the obligations includes:

▪estimated decommissioning costs, including labor, equipment, material and other disposal costs

▪inflation adjustment applied to estimated cash flows

▪discount rate based on a credit-adjusted risk-free rate

▪actual decommissioning costs, progress to date and expected duration of decommissioning activities

Changes in the estimated decommissioning costs, or in the assumptions and judgments made by management underlying these estimates, could cause revisions to the estimated total cost associated with retiring the assets. SDG&E’s nuclear decommissioning expenses are subject to rate recovery and, therefore, rate-making accounting treatment is applied to SDG&E’s nuclear

decommissioning activities. SDG&E recognizes a regulatory asset, or liability, to the extent that its SONGS ARO exceeds, or is less than, the amount collected from customers and the amount earned in SDG&E’s NDT.

We provide additional detail in Note 15 of the Notes to Consolidated Financial Statements.

IMPAIRMENT TESTING OF LONG-LIVED ASSETS

Sempra Energy

Whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable, we consider if the estimated future undiscounted cash flows are less than the carrying amount of the asset. If so, we estimate the fair value of the asset to determine the extent to which carrying value exceeds fair value. For such an estimate, we may consider data from multiple valuation methods, including data from market participants. We exercise judgment to estimate the future cash flows and the useful life of a long-lived asset and to determine our intent to use the asset. Our intent to use or dispose of a long-lived asset is subject to re-evaluation and can change over time.

Events or changes in circumstances that indicate that the carrying amount of a long-lived asset may not be recoverable may include:

▪significant decreases in the market price of an asset;

▪a significant adverse change in the extent or manner in which we use an asset or in its physical condition;

▪a significant adverse change in legal or regulatory factors or in the business climate that could affect the value of an asset;

▪a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of continuing losses associated with the use of a long-lived asset; and

▪a current expectation that, more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

If an impairment test is required, the fair value of a long-lived asset can vary if differing estimates and assumptions are used in the valuation techniques applied as indicated by changing market or other conditions. We discuss impairment of long-lived assets in Note 1 of the Notes to Consolidated Financial Statements.

IMPAIRMENT TESTING OF GOODWILL

Sempra Energy

On an annual basis or whenever events or changes in circumstances necessitate an evaluation, we consider whether goodwill may be impaired. For our annual goodwill impairment testing, 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.

When determining if goodwill is impaired, the fair value of the reporting unit can vary if differing estimates and assumptions are used in the valuation techniques applied as indicated by changing market or other conditions. As a result, recognizing a goodwill impairment may or may not be required. When we perform the quantitative goodwill impairment test, we exercise judgment to develop estimates of the fair value of the reporting unit and compare that to its carrying value. Our fair value estimates are developed from the perspective of a knowledgeable market participant. We consider observable transactions in the marketplace for similar investments, if available, as well as an income-based approach such as a discounted cash flow analysis. A discounted cash flow analysis may be based directly on anticipated future revenues and expenses and may be performed based on free cash flows generated within the reporting unit. Critical assumptions that affect our estimates of fair value may include:

▪consideration of market transactions

▪future cash flows

▪the appropriate risk-adjusted discount rate

▪country risk

▪entity risk

In 2020, we performed a quantitative goodwill impairment test and determined that the estimated fair values of our reporting units in Mexico to which goodwill was allocated was substantially above their carrying values as of October 1, 2020, our goodwill impairment testing date. We discuss goodwill in Note 1 of the Notes to Consolidated Financial Statements.

CARRYING VALUE OF EQUITY METHOD INVESTMENTS

Sempra Energy

We generally account for investments under the equity method when we have significant influence over, but do not have control of, the investee.

We consider whether the fair value of each equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary. To help evaluate whether a decline in fair value below carrying value has occurred and if the decline is other than temporary, we may develop fair value estimates for the investment. Our fair value estimates are developed from the perspective of a knowledgeable market participant. In the absence of observable transactions in the marketplace for similar investments, we consider an income-based approach such as a discounted cash flow analysis or, with less weighting, the replacement cost of the underlying net assets. A discounted cash flow analysis may be based directly on anticipated future distributions from the investment, or may be performed based on free cash flows generated within the entity and adjusted for our ownership share total. For certain investments, critical assumptions may include, but are not limited to, transportation rates for natural gas, the appropriate risk-adjusted discount rate and the availability and costs of natural gas and LNG.

In addition, for our indirect investment in Oncor, critical assumptions may also include the effects of ratemaking, such as the results of regulator decisions on rates and recovery of regulated investments and costs. The risk assumptions applied by other market participants to value the investments could vary significantly or the appropriate approaches could be weighted differently. These differences could impact whether or not the fair value of the investment is less than its carrying value, and if so, whether that condition is other than temporary. This could result in an impairment charge and, in cases where an impairment charge has been recorded, additional loss or gain upon sale in the case of a sale transaction.

We provide additional details in Notes 6 and 12 of the Notes to Consolidated Financial Statements.

NEW ACCOUNTING STANDARDS

We discuss the relevant pronouncements that have recently had or may have a significant effect on our financial statements and/or disclosures in Note 2 of the Notes to Consolidated Financial Statements.