SoCalGas values natural gas inventory by the last-in first-out (LIFO) method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. Temporary LIFO liquidation represents the difference between the carrying value of natural gas inventory withdrawn during the period for delivery to customers and the projected cost of the replacement of that inventory during summer months.

We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess

SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements). SDG&E's obligation to absorb natural gas costs may be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impacts on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility's useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, Sempra Energy and SDG&E consolidate the entity that owns the facility as a VIE, as we discuss below.

SDG&E has a 10-year agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-megawatt (MW) generating facility that began operations in October 2009. In addition to tolling, the agreement provides SDG&E with the option to purchase the power plant at the end of the contract term in 2019, or upon earlier termination of the purchased-power agreement, at a predetermined price subject to adjustments based on performance of the facility. If SDG&E does not exercise its option, under certain circumstances, it may be required to purchase the power plant at a predetermined price, which we refer to as the put option.

The facility owner, Otay Mesa Energy Center LLC (OMEC LLC), is a VIE (Otay Mesa VIE), of which SDG&E is the primary beneficiary. SDG&E has no OMEC LLC voting rights and does not operate OMEC. In addition to the risks absorbed under the tolling agreement, SDG&E absorbs separately through the put option a significant portion of the risk that the value of Otay Mesa VIE could decline. Sempra Energy and SDG&E have consolidated Otay Mesa VIE since the second quarter of 2007. Otay Mesa VIE's equity of $108 million at March 31, 2012 and $102 million at December 31, 2011 is included on the Condensed Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E.

OMEC LLC has a loan outstanding of $352 million at March 31, 2012, the proceeds of which were used for the construction of OMEC. The loan is with third party lenders and is secured by OMEC's property, plant and equipment. SDG&E is not a party to the loan agreement and does not have any additional implicit or explicit financial responsibility to OMEC LLC. The loan fully matures in April 2019 and bears interest at rates varying with market rates. In addition, OMEC LLC has entered into interest rate swap agreements to moderate its exposure to interest rate changes. We provide additional information concerning the interest rate swaps in Note 7.

SDG&E's power procurement is subject to reliability requirements that may require SDG&E to enter into various power purchase arrangements which include variable interests. SDG&E evaluates the respective entities to determine if variable interests exist and, based on the qualitative and quantitative analyses described above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary. SDG&E has determined that no contracts, other than the one relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary as of March 31, 2012. In addition to the tolling agreements described above, other variable interests involve various elements of fuel and power costs, including certain construction costs, tax credits, and other components of cash flow expected to be paid to or received by our counterparties. In most of these cases, the expectation of variability is not substantial, and SDG&E generally does not have the power to direct activities that most significantly impact the economic performance of the other VIEs. If our ongoing evaluation of these VIEs were to conclude that SDG&E becomes the primary beneficiary and consolidation by SDG&E becomes necessary, the effects are not expected to significantly affect the financial position, results of operations, or liquidity of SDG&E. SDG&E is not exposed to losses or gains as a result of these other VIEs, because all such variability would be recovered in rates.

Sempra Energy's other business units also enter into arrangements which could include variable interests. We evaluate these arrangements and applicable entities based upon the qualitative and quantitative analyses described above. Certain of these entities are service companies that are VIEs. As the primary beneficiary of these service companies, we consolidate them. In all other cases, we have determined that these contracts are not variable interests in a VIE and therefore are not subject to the requirements of GAAP concerning the consolidation of VIEs.

The Condensed Consolidated Statements of Operations of Sempra Energy and SDG&E include the following amounts associated with Otay Mesa VIE. The amounts are net of eliminations of transactions between SDG&E and Otay Mesa VIE. The financial statements of other consolidated VIEs are not material to the financial statements of Sempra Energy. The captions on the table below correspond to SDG&E's Condensed Consolidated Statements of Operations.

AMOUNTS ASSOCIATED WITH OTAY MESA VIE
(Dollars in millions)
	Three months ended March 31,
	2012		2011

Operating revenues
Electric	$	―	$	―
Natural gas		―		―
Total operating revenues		―		―
Operating expenses
Cost of electric fuel and purchased power		(19)		(17)
Operation and maintenance		4		4
Depreciation and amortization		6		6
Total operating expenses		(9)		(7)
Operating income		9		7
Interest expense		(3)		(3)
Income before income taxes/Net income		6		4
Earnings attributable to noncontrolling interest		(6)		(4)
Earnings	$	―	$	―

We provide additional information regarding Otay Mesa VIE in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

Goodwill is the excess of the purchase price over the fair value of the identifiable net assets of acquired companies measured at the time of acquisition. Goodwill is not amortized but is tested annually on October 1 for impairment. Impairment of goodwill occurs when the carrying amount (book value) of goodwill exceeds its implied fair value. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, and the book value of goodwill is greater than its fair value on the test date, we record a goodwill impairment loss.

Goodwill included on the Sempra Energy Condensed Consolidated Balance Sheets is recorded as follows:

GOODWILL
(Dollars in millions)
			Sempra
			South American		Sempra		Sempra
			Utilities		Mexico		Natural Gas		Total
Balance as of December 31, 2011		$	949	$	25	$	62	$	1,036
Foreign currency translation(1)			35		―		―		35
Balance at March 31, 2012		$	984	$	25	$	62	$	1,071
(1)	We record the offset of this fluctuation to other comprehensive income.

We provide additional information concerning goodwill in Notes 1 and 3 of the Notes to Consolidated Financial Statements in the Annual Report.

The SoCalGas union collective bargaining agreement (CBA) covering wages, hours, working conditions and medical and other benefit plans was ratified on March 1, 2012 and is effective January 1, 2012 through September 30, 2015. The new CBA includes a change in plans offered for post-65 medical benefits. As a result, SoCalGas changed the option for administering the Medicare Part D benefit to an Employer Group Waiver Plan (EGWP). The EGWP allows a plan sponsor to contract with a Medicare Part D sponsor to receive the benefit of the subsidy through reduced premiums. Because this change in benefits is a significant event under GAAP, SoCalGas was required to remeasure the benefit obligations for this postretirement welfare plan as of February 29, 2012 and selected a discount rate of 4.65% for the remeasurement. The effect of the remeasurement was a $66 million decrease in the recorded liability for other postretirement benefits as of March 31, 2012 at SoCalGas and Sempra Energy Consolidated. We discuss the Medicare Part D benefit in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report.

NET PERIODIC BENEFIT COST – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended March 31,				Three months ended March 31,
	2012		2011		2012		2011
Service cost	$	23	$	22	$	8	$	7
Interest cost		41		43		14		17
Expected return on assets		(39)		(37)		(13)		(12)
Amortization of:
Prior service cost		1		1		―		―
Actuarial loss		12		9		3		4
Regulatory adjustment		(30)		(29)		3		2
Total net periodic benefit cost	$	8	$	9	$	15	$	18

NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended March 31,				Three months ended March 31,
	2012		2011		2012		2011
Service cost	$	7	$	7	$	2	$	2
Interest cost		12		13		2		2
Expected return on assets		(12)		(12)		(1)		(2)
Amortization of:
Prior service cost		―		1		1		1
Actuarial loss		4		2		―		―
Regulatory adjustment		(10)		(9)		―		1
Total net periodic benefit cost	$	1	$	2	$	4	$	4

NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended March 31,				Three months ended March 31,
	2012		2011		2012		2011
Service cost	$	13	$	12	$	5	$	5
Interest cost		25		25		11		13
Expected return on assets		(24)		(22)		(11)		(10)
Amortization of:
Prior service cost (credit)		1		1		(1)		(1)
Actuarial loss		6		4		3		5
Regulatory adjustment		(20)		(20)		3		1
Total net periodic benefit cost	$	1	$	―	$	10	$	13

The following table shows our year-to-date contributions to pension and other postretirement benefit plans and the amounts we expect to contribute in 2012:

	Sempra Energy
(Dollars in millions)	Consolidated		SDG&E		SoCalGas
Contributions through March 31, 2012:
Pension plans	$	10	$	―	$	2
Other postretirement benefit plans		15		4		10
Total expected contributions in 2012:
Pension plans	$	218	$	67	$	113
Other postretirement benefit plans		46		14		27

The following table provides the per share computations for our earnings for the three months ended March 31, 2012 and 2011. Basic earnings per common share (EPS) is calculated by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions, except per share amounts; shares in thousands)
		Three months ended March 31,
		2012		2011(1)
Numerator:
Earnings/Income attributable to common shareholders		$	236	$	254

Denominator:
Weighted-average common shares outstanding for basic EPS			240,566		240,128
Dilutive effect of stock options, restricted stock awards and restricted stock units			3,195		1,775
Weighted-average common shares outstanding for diluted EPS			243,761		241,903

Earnings per share:
Basic		$	0.98	$	1.06
Diluted		$	0.97	$	1.05
(1)	As adjusted for the retrospective effect of a change in accounting principle as we discuss in Note 1.

The dilution from common stock options is based on the treasury stock method. Under this method, proceeds based on the exercise price plus unearned compensation and windfall tax benefits recognized and minus tax shortfalls recognized are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits are tax deductions we would receive upon the assumed exercise of stock options in excess of the deferred income taxes we recorded related to the compensation expense on the stock options. Tax shortfalls occur when the assumed tax deductions are less than recorded deferred income taxes. The calculation excludes options for which the exercise price on common stock was greater than the average market price during the period (out-of-the-money options). We had 767,833 and 2,120,225 such antidilutive stock options outstanding during the three months ended March 31, 2012 and 2011, respectively.

We had no stock options outstanding during the three months ended March 31, 2012 and 10,800 stock options outstanding during the three months ended March 31, 2011 that were antidilutive because of the unearned compensation and windfall tax benefits included in the assumed proceeds under the treasury stock method.

The dilution from unvested restricted stock awards (RSAs) and restricted stock units (RSUs) is also based on the treasury stock method. Proceeds equal to the unearned compensation and windfall tax benefits recognized and minus tax shortfalls recognized related to the awards and units are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits recognized or tax shortfalls recognized are the difference between tax deductions we would receive upon the assumed vesting of RSAs or RSUs and the deferred income taxes we recorded related to the compensation expense on such awards and units. There were no antidilutive RSUs from the application of unearned compensation in the treasury stock method for the three months ended March 31, 2012 and 997,609 such antidilutive RSUs for the three months ended March 31, 2011. There were 15,932 such antidilutive RSAs for the three months ended March 31, 2012 and none for the three months ended March 31, 2011.

Each performance based RSU represents the right to receive between zero and 1.5 shares of Sempra Energy common stock based on Sempra Energy's four-year cumulative total shareholder return compared to the Standard & Poor's (S&P) 500 Utilities Index, as follows:

Four-Year Cumulative Total Shareholder Return Ranking versus S&P 500 Utilities Index(1)	Number of Sempra Energy Common Shares Received for Each Restricted Stock Unit(2)
75th Percentile or Above	1.5
50th Percentile	1
35th Percentile or Below	―
(1) If Sempra Energy ranks at or above the 50th percentile compared to the S&P 500 Index, participants will receive a minimum of 1.0 share for each restricted stock unit.
(2) Participants may also receive additional shares for dividend equivalents on shares subject to restricted stock units, which are reinvested to purchase additional shares that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.

RSAs have a maximum potential of 100 percent vesting. We include our performance based RSAs and RSUs in potential dilutive shares at zero to 100 percent and zero to 150 percent, respectively, to the extent that they currently meet the performance requirements for vesting, subject to the application of the treasury stock method. Due to market fluctuations of both Sempra Energy stock and the comparative index, dilutive RSA and RSU shares may vary widely from period-to-period. We include our RSAs, which are service based, in potential dilutive shares at 100 percent.

RSUs and RSAs may be excluded from potential dilutive shares by the application of unearned compensation in the treasury stock method or because performance goals are currently not met. The maximum excluded RSUs and RSAs, assuming performance goals were met at maximum levels, were 3,191,073 and 3,959,911 for the three months ended March 31, 2012 and 2011, respectively

In September 2010, we entered into a share repurchase program under which we prepaid $500 million to repurchase shares of our common stock in a share forward transaction. The program was completed in March 2011 with a total of 9,574,435 shares repurchased at an average price of $52.22 per share. Our outstanding shares used to calculate earnings per share were reduced by the number of shares repurchased when they were delivered to us, and the $500 million purchase price was recorded as a reduction in shareholders' equity upon its prepayment. We received 5,670,006 shares during the quarter ended September 30, 2010; 2,407,994 shares on October 4, 2010 and 1,496,435 shares on March 22, 2011. We discuss the repurchase program further in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.

We discuss our share-based compensation plans in Note 9 of the Notes to Consolidated Financial Statements in the Annual Report. We recorded share-based compensation expense, net of income taxes, of $5 million and $6 million for the three months ended March 31, 2012 and 2011, respectively. Pursuant to our share-based compensation plans, we granted 905,868 RSUs and 15,932 RSAs during the three months ended March 31, 2012, primarily in January.

Capitalized financing costs include capitalized interest costs and, primarily at the California Utilities, an allowance for funds used during construction (AFUDC) related to both debt and equity financing of construction projects. The following table shows capitalized financing costs for the three months ended March 31, 2012 and 2011.

CAPITALIZED FINANCING COSTS
(Dollars in millions)
	Three months ended March 31,
	2012		2011
Sempra Energy Consolidated:
AFUDC related to debt	$	14	$	8
AFUDC related to equity		35		19
Other capitalized financing costs		11		6
Total Sempra Energy Consolidated	$	60	$	33
SDG&E:
AFUDC related to debt	$	12	$	6
AFUDC related to equity		29		15
Total SDG&E	$	41	$	21
SoCalGas:
AFUDC related to debt	$	2	$	2
AFUDC related to equity		6		4
Total SoCalGas	$	8	$	6

The amounts for comprehensive income in the Condensed Consolidated Statements of Comprehensive Income are net of income tax expense (benefit) as follows:

INCOME TAX EXPENSE (BENEFIT) ASSOCIATED WITH OTHER COMPREHENSIVE INCOME
(Dollars in millions)
	Three months ended March 31,
	2012						2011
			Non-						Non-
	Sempra		controlling				Sempra		controlling
	Energy		Interests		Total		Energy		Interests		Total
Sempra Energy Consolidated:
Net actuarial gain	$	1	$	―	$	1	$	1	$	―	$	1
Financial instruments		3		―		3		1		―		1

Income tax amounts associated with other comprehensive income during the three months ended March 31, 2012 and 2011 at SDG&E and SoCalGas were negligible.

The following two tables provide a reconciliation of Sempra Energy's and SDG&E's shareholders' equity and noncontrolling interests for the three months ended March 31, 2012 and 2011.

SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
(Dollars in millions)
		Sempra
		Energy		Non-
		Shareholders’		controlling		Total
		Equity		Interests		Equity
Balance at December 31, 2011	$	9,775	$	403	$	10,178
Comprehensive income		309		17		326
Preferred dividends of subsidiaries		(2)		―		(2)
Share-based compensation expense		11		―		11
Common stock dividends declared		(144)		―		(144)
Issuance of common stock		13		―		13
Repurchase of common stock		(16)		―		(16)
Common stock released from ESOP		6		―		6
Distributions to noncontrolling interests		―		(2)		(2)
Balance at March 31, 2012	$	9,952	$	418	$	10,370
Balance at December 31, 2010	$	8,990	$	211	$	9,201
Comprehensive income		254		5		259
Preferred dividends of subsidiaries		(2)		―		(2)
Share-based compensation expense		11		―		11
Common stock dividends declared		(115)		―		(115)
Issuance of common stock		15		―		15
Tax benefit related to share-based compensation		2		―		2
Repurchase of common stock		(17)		―		(17)
Common stock released from ESOP		7		―		7
Equity contributed by noncontrolling interests		―		1		1
Balance at March 31, 2011	$	9,145	$	217	$	9,362

SHAREHOLDER’S EQUITY AND NONCONTROLLING INTEREST
(Dollars in millions)
		SDG&E		Non-
		Shareholder’s		controlling		Total
		Equity		Interest		Equity
Balance at December 31, 2011	$	3,739	$	102	$	3,841
Comprehensive income		106		6		112
Preferred stock dividends declared		(1)		―		(1)
Balance at March 31, 2012	$	3,844	$	108	$	3,952
Balance at December 31, 2010	$	3,108	$	113	$	3,221
Comprehensive income		90		5		95
Preferred stock dividends declared		(1)		―		(1)
Capital contribution		200		―		200
Equity contributed by noncontrolling interest		―		1		1
Balance at March 31, 2011	$	3,397	$	119	$	3,516

Ownership interests that are held by owners other than Sempra Energy and SDG&E in subsidiaries or entities consolidated by them are accounted for and reported as noncontrolling interests. As a result, noncontrolling interests are reported as a separate component of equity on the Condensed Consolidated Balance Sheets. Net income or loss attributable to the noncontrolling interests is separately identified on the Condensed Consolidated Statements of Operations, and comprehensive income attributable to the noncontrolling interests is separately identified on the Condensed Consolidated Statements of Comprehensive Income.

The preferred stock of SoCalGas is presented at Sempra Energy as a noncontrolling interest at March 31, 2012 and December 31, 2011. The preferred stock of SDG&E is contingently redeemable preferred stock. At Sempra Energy, the preferred stock dividends of both SDG&E and SoCalGas are charges against income related to noncontrolling interests. We provide additional information concerning preferred stock in Note 12 of the Notes to Consolidated Financial Statements in the Annual Report. At March 31, 2012 and December 31, 2011, Sempra Energy Consolidated reported the following other noncontrolling ownership interests held by others:

OWNERSHIP INTERESTS HELD BY OTHERS
(Dollars in millions)
		Percent Ownership Held by Others			March 31, 2012		December 31, 2011
Bay Gas Storage, Ltd.(1)		9	%	$	18	$	17
Southern Gas Transmission Company(1)		49			1		1
Liberty Gas Storage, LLC(1)		25			9		9
Tecsur		10			3		4
Luz del Sur		20			222		216
Chilquinta Energía subsidiaries		15 - 43			37		34
Otay Mesa VIE (at SDG&E)		100			108		102
Total Sempra Energy				$	398	$	383
(1)	Part of Sempra Natural Gas.

Sempra South American Utilities has a U.S. dollar-denominated loan to Camuzzi Gas del Sur S.A., an affiliate of the segment's Argentine investments, which we discuss in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. The loan has an $18 million principal balance outstanding plus $6 million of accumulated interest at a variable interest rate (7.58 percent as of March 31, 2012). In June 2011, the maturity date of the loan was extended from June 2011 to June 30, 2012. The loan was fully reserved at March 31, 2012 and December 31, 2011.

Sempra Energy, at Parent and Other, has an investment in bonds issued by Chilquinta Energía that we discuss in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra Energy, SDG&E and SoCalGas provide certain services to each other and are charged an allocable share of the cost of such services. Amounts due to/from affiliates are as follows:

AMOUNTS DUE TO AND FROM AFFILIATES AT SDG&E AND SOCALGAS
(Dollars in millions)
		March 31,		December 31,
		2012		2011
SDG&E
Current:
Due from SoCalGas		$	―	$	2
Due from various affiliates			1		65
		$	1	$	67

Due to Sempra Energy		$	25	$	14
Due to SoCalGas			11		―
		$	36	$	14

Income taxes due from Sempra Energy(1)		$	85	$	97

SoCalGas
Current:
Due from Sempra Energy		$	218	$	23
Due from SDG&E			11		―
Due from various affiliates			―		17
		$	229	$	40

Due to SDG&E		$	―	$	2

Income taxes due (to) from Sempra Energy(1)		$	(9)	$	17
(1)	SDG&E and SoCalGas are included in the consolidated income tax return of Sempra Energy and are allocated income tax expense from Sempra Energy in an amount equal to that which would result from the companies’ having always filed a separate return.

Several of our segments have engaged in transactions with RBS Sempra Commodities. As a result of the divestiture of substantially all of RBS Sempra Commodities' businesses, transactions between our segments and RBS Sempra Commodities were assigned over time to the buyers of the joint venture businesses. The assignments of the related contracts were substantially completed by May 1, 2011. Amounts in our Condensed Consolidated Statements of Operations related to these transactions are as follows:

AMOUNTS RECORDED FOR TRANSACTIONS
WITH RBS SEMPRA COMMODITIES
(Dollars in millions)
	Three months ended March 31, 2011
Revenues:
Sempra Mexico	$	33
Sempra Natural Gas		12

Cost of natural gas:
Sempra Mexico	$	58
Sempra Natural Gas		3

Other Income, Net on the Condensed Consolidated Statements of Operations consists of the following:

OTHER INCOME, NET
(Dollars in millions)
		Three months ended March 31,
		2012		2011
Sempra Energy Consolidated:
Allowance for equity funds used during construction		$	35	$	19
Investment gains(1)			19		8
Gains on interest rate and foreign exchange instruments, net			11		10
Regulatory interest, net(2)			1		―
Sundry, net			9		6
Total		$	75	$	43
SDG&E:
Allowance for equity funds used during construction		$	29	$	15
Regulatory interest, net(2)			1		―
Sundry, net			―		1
Total		$	30	$	16
SoCalGas:
Allowance for equity funds used during construction		$	6	$	4
Sundry, net			(2)		(1)
Total		$	4	$	3
(1)	Represents investment gains on dedicated assets in support of our executive retirement and deferred compensation plans. These amounts are partially offset by corresponding changes in compensation expense related to the plans.
(2)	Interest on regulatory balancing accounts.

INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
		Three months ended March 31,
		2012				2011
		Income Tax	Effective Income			Income Tax	Effective Income
		Expense	Tax Rate			Expense	Tax Rate
Sempra Energy Consolidated	$	117	33	%	$	114	33	%
SDG&E		60	35			49	34
SoCalGas		40	38			37	35

While our effective tax rate for the three months ended March 31, 2012 remained unchanged from the prior year, it was impacted by:

Sempra Energy, SDG&E and SoCalGas record income taxes for interim periods utilizing a forecasted effective tax rate, as required by U.S. GAAP. The income tax effect of items that can be reliably forecasted are factored into the forecasted effective tax rate and their impact is spread evenly over the year. The forecasted items may include, among others, self-developed software, renewable energy income tax credits, exclusions from taxable income of the equity portion of AFUDC, and depreciation on a certain portion of utility plant assets. Items that cannot be reliably forecasted (e.g., adjustments related to prior years' income tax issues, Mexican currency translation and inflation adjustments, etc.) are recorded in the interim period in which they actually occur, which can result in variability to income tax expense.

Our plan for assets placed into service in 2012 includes assets that were under construction in 2011. We have used grant accounting for these assets in anticipation of applying for cash grants. Grant accounting for cash grants is very similar to the deferral method of accounting for investment tax credits, the primary difference being the recording of a grant receivable instead of an income tax receivable.

Under the deferral method of accounting for ITC and under grant accounting for cash grants, a deferred income tax benefit, on day one, is reflected in income tax expense by recording a deferred tax asset when renewable energy assets are placed in service. This deferred tax asset results from the day-one difference in the income tax basis and financial statement basis of the renewable energy assets, referred to as the “day-one basis difference.” The financial statement basis of the assets is reduced by 100 percent of the ITC or grant expected; U.S. Federal income tax basis is reduced by only 50 percent for both ITC and grants; and state income tax basis is reduced 50 percent for grants and not at all for ITC.

The increase in SDG&E's effective income tax rate for the three months ended March 31, 2012 was primarily due to:

Results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is consolidated, and therefore, their effective income tax rates are impacted by the VIE's stand-alone effective income tax rate.

The increase in SoCalGas' effective income tax rate for the three months ended March 31, 2012 was primarily due to:

The California Public Utilities Commission (CPUC) requires flow-through rate-making treatment for the current income tax benefit or expense arising from certain property-related and other temporary differences between the treatment for financial reporting and income tax, which will reverse over time. Under the regulatory accounting treatment required for these flow-through temporary differences, deferred income taxes are not recorded to deferred income tax expense, but rather to a regulatory asset or liability. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the effective income tax rate. The following items are subject to flow-through treatment: