OTHER FINANCIAL DATA

3 Months Ended

Sep. 30, 2014

Notes to Consolidated Financial Statements [Abstract]

NOTE 5. OTHER FINANCIAL DATA

U.S. TREASURY GRANTS

At December 31, 2012, we had receivables for U.S. Treasury grants based on eligible costs at certain of our renewable generating facilities. During the first quarter of 2013, the federal government imposed automatic federal budget cuts, known as “sequestration,” as required by The Budget Control Act of 2011. As a result, we recorded a reduction to our grants receivable of $23 million and a reversal of income tax benefit of $5 million during the first quarter of 2013. In June 2013, we received $74 million in cash related to the Copper Mountain Solar 2 grant. We received $164 million in cash for the remaining grant receivable for Mesquite Solar 1 in August 2013.

INVENTORIES

The components of inventories by segment are as follows:

INVENTORY BALANCES
(Dollars in millions)
	Natural Gas				Liquefied Natural Gas				Materials and Supplies				Total
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
SDG&E	$	6	$	3	$	―	$	―	$	64	$	83	$	70	$	86
SoCalGas		192		42		―		―		29		27		221		69
Sempra South American
Utilities		―		―		―		―		36		40		36		40
Sempra Mexico		―		―		6		3		9		9		15		12
Sempra Renewables		―		―		―		―		3		2		3		2
Sempra Natural Gas		121		68		5		5		1		5		127		78
Sempra Energy
Consolidated	$	319	$	113	$	11	$	8	$	142	$	166	$	472	$	287

GOODWILL

We discuss goodwill in Notes 1 and 3 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $1.024 billion at December 31, 2013 to $951 million at September 30, 2014 is due to foreign currency translation at Sempra South American Utilities. We record the offset of this fluctuation in Other Comprehensive Income (Loss).

VARIABLE INTEREST ENTITIES (VIE)

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

the purpose and design of the VIE;
the nature of the VIE’s risks and the risks we absorb;
the power to direct activities that most significantly impact the economic performance of the VIE; and
the obligation to absorb losses or right to receive benefits that could be significant to the VIE.

SDG&E

Tolling Agreements

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 impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on a qualitative approach in which we consider 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, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE, as we discuss below.

Otay Mesa VIE

SDG&E has an agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-MW generating facility. 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. Accordingly, SDG&E and Sempra Energy have consolidated Otay Mesa VIE. Otay Mesa VIE’s equity of $77 million at September 30, 2014 and $91 million at December 31, 2013 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 $327 million at September 30, 2014, 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.

Other Variable Interest Entities

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 at September 30, 2014. 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. In addition, 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 operating 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 U.S. GAAP requirements 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 generally correspond to SDG&E’s Condensed Consolidated Statements of Operations.

AMOUNTS ASSOCIATED WITH OTAY MESA VIE
(Dollars in millions)
	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Operating revenues
Electric	$	―	$	(4)	$	―	$	―
Natural gas		―		―		―		―
Total operating revenues		―		(4)		―		―
Operating expenses
Cost of electric fuel and purchased power		(27)		(27)		(67)		(65)
Operation and maintenance		3		7		13		33
Depreciation and amortization		7		7		21		20
Total operating expenses		(17)		(13)		(33)		(12)
Operating income		17		9		33		12
Interest expense		(5)		(4)		(13)		(11)
Income before income taxes/Net income		12		5		20		1
Earnings attributable to noncontrolling interest		(12)		(5)		(20)		(1)
Earnings	$	―	$	―	$	―	$	―

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

ASSET RETIREMENT OBLIGATIONS

We discuss asset retirement obligations in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

The changes in asset retirement obligations are as follows:

CHANGES IN ASSET RETIREMENT OBLIGATIONS
(Dollars in millions)
		Sempra Energy
		Consolidated				SDG&E				SoCalGas
		2014		2013		2014		2013		2014		2013
Balance at January 1(1)		$	2,152	$	2,056	$	913	$	741	$	1,199	$	1,253
Accretion expense			73		74		33		35		38		37
Liabilities incurred			3		4		―		―		―		―
Reclassification(2)			(6)		―		―		―		―		―
Payments			(15)		(1)		(15)		―		―		―
Revisions, GRC-related(3)			―		(135)		―		(30)		―		(105)
Revisions, other(4)(5)			(34)		181		(59)		207		25		―
Balance at September 30(1)		$	2,173	$	2,179	$	872	$	953	$	1,262	$	1,185
(1)	The current portions of the obligations are included in Other Current Liabilities on the Condensed Consolidated Balance Sheets.
(2)	Reclassification to liability held for sale - asset retirement obligation which is included in Other Current Liabilities on the Condensed Consolidated Balance Sheets, as we discuss in "Sempra Natural Gas – Asset Held for Sale, Power Plant" in Note 3 above.
(3)	The decreases in asset retirement obligations in 2013 at SDG&E and SoCalGas were due to revised estimates related to the 2012 General Rate Case (GRC) that received final approval in May 2013. At SDG&E, these revisions included increases in asset service lives ranging from 2 percent to 7 percent, and lower estimated cost of removal. At SoCalGas, the decrease included increases in asset service lives ranging from 4 percent to 6 percent, partially offset by a higher estimated cost of removal.
(4)	The decrease in asset retirement obligations in 2014 at SDG&E is due to revised estimates in an updated decommissioning cost study for the San Onofre Nuclear Generating Station, which we discuss in Note 9. The increase in asset retirement obligations in 2014 at SoCalGas is related to a change in estimates.
(5)	The increase in asset retirement obligations in 2013 at SDG&E is due to revised estimates recorded in the third quarter of 2013 related to the early decommissioning of SONGS Units 2 and 3 (see Note 9).

PENSION AND OTHER POSTRETIREMENT BENEFITS

Net Periodic Benefit Cost

The following three tables provide the components of net periodic benefit cost:

NET PERIODIC BENEFIT COST – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended September 30,
	2014		2013		2014		2013
Service cost	$	23	$	28	$	6	$	8
Interest cost		39		35		13		10
Expected return on assets		(42)		(39)		(15)		(15)
Amortization of:
Prior service cost (credit)		3		1		(2)		(1)
Actuarial loss		3		11		―		―
Settlements and special termination benefits		5		1		5		―
Regulatory adjustment		6		(14)		5		3
Total net periodic benefit cost	$	37	$	23	$	12	$	5
	Nine months ended September 30,
	2014		2013		2014		2013
Service cost	$	75	$	82	$	18	$	21
Interest cost		121		111		37		33
Expected return on assets		(128)		(121)		(47)		(44)
Amortization of:
Prior service cost (credit)		8		3		(4)		(3)
Actuarial loss		13		41		―		5
Settlements and special termination benefits		14		1		5		―
Regulatory adjustment		(18)		(65)		5		7
Total net periodic benefit cost	$	85	$	52	$	14	$	19

NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended September 30,
	2014		2013		2014		2013
Service cost	$	8	$	8	$	2	$	2
Interest cost		10		9		3		2
Expected return on assets		(13)		(13)		(2)		(3)
Amortization of:
Prior service cost		―		―		―		1
Actuarial loss		1		3		―		―
Settlements and special termination benefits		―		1		5		―
Regulatory adjustment		6		3		4		1
Total net periodic benefit cost	$	12	$	11	$	12	$	3
	Nine months ended September 30,
	2014		2013		2014		2013
Service cost	$	23	$	24	$	5	$	6
Interest cost		32		30		7		6
Expected return on assets		(41)		(39)		(8)		(7)
Amortization of:
Prior service cost		1		1		2		3
Actuarial loss		3		10		―		―
Settlements and special termination benefits		2		1		5		―
Regulatory adjustment		7		(3)		1		1
Total net periodic benefit cost	$	27	$	24	$	12	$	9

NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
	Pension Benefits				Other Postretirement Benefits
	Three months ended September 30,
	2014		2013		2014		2013
Service cost	$	13	$	17	$	4	$	5
Interest cost		24		22		9		8
Expected return on assets		(26)		(24)		(12)		(12)
Amortization of:
Prior service cost (credit)		2		―		(2)		(2)
Actuarial loss		1		6		―		―
Settlement		4		―		―		―
Regulatory adjustment		―		(17)		1		2
Total net periodic benefit cost	$	18	$	4	$	―	$	1
	Nine months ended September 30,
	2014		2013		2014		2013
Service cost	$	45	$	50	$	12	$	13
Interest cost		75		68		28		26
Expected return on assets		(78)		(73)		(38)		(36)
Amortization of:
Prior service cost (credit)		6		1		(6)		(6)
Actuarial loss		5		23		―		4
Settlement		4		―		―		―
Regulatory adjustment		(25)		(62)		4		6
Total net periodic benefit cost	$	32	$	7	$	―	$	7

Benefit Plan Contributions

The following table shows our year-to-date contributions to pension and other postretirement benefit plans and the amounts we expect to contribute in 2014:

	Sempra Energy
(Dollars in millions)	Consolidated		SDG&E		SoCalGas
Contributions through September 30, 2014:
Pension plans	$	95	$	28	$	39
Other postretirement benefit plans		14		12		―
Total expected contributions in 2014:
Pension plans	$	128	$	55	$	40
Other postretirement benefit plans		16		14		―

RABBI TRUST

In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $477 million and $506 million at September 30, 2014 and December 31, 2013, respectively.

EARNINGS PER SHARE

The following table provides the per share computations for our earnings for the three months and nine months ended September 30, 2014 and 2013. 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 September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Numerator:
Earnings/Income attributable to common shares		$	348	$	296	$	864	$	719

Denominator:
Weighted-average common shares
	outstanding for basic EPS		246,137		244,140		245,703		243,682
Dilutive effect of stock options, restricted
	stock awards and restricted stock units		4,634		5,119		4,575		5,041
Weighted-average common shares
	outstanding for diluted EPS		250,771		249,259		250,278		248,723

Earnings per share:
Basic		$	1.41	$	1.21	$	3.52	$	2.95
Diluted			1.39		1.19		3.45		2.89

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, 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 of dilutive common stock equivalents 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 no such antidilutive stock options outstanding during either the three months or nine months ended September 30, 2014 and 2013.

During the three months and nine months ended September 30, 2014 and 2013, we had no stock options outstanding 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, 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 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 or RSAs from the application of unearned compensation in the treasury stock method for either the three months or nine months ended September 30, 2014 and 2013.

Each performance-based RSU represents the right to receive up to 1.5 shares (2.0 shares for awards granted in 2014) of Sempra Energy common stock based on total shareholder return or EPS growth. RSU awards vest 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 Performance-Based Restricted Stock Unit(2)(3)
90th percentile or above (2014 awards only)		2.0
75th percentile (maximum for awards prior to 2014)		1.5
50th percentile		1.0
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 RSU.
(2)	Participants also receive additional shares for dividend equivalents on shares subject to RSUs, which are deemed reinvested to purchase additional units that become subject to the same vesting conditions as the RSUs to which the dividends relate.
(3)	If performance falls between the tiers shown above, we calculate the payout using linear interpolation.

Beginning in January 2014, we issued performance-based RSUs representing the right to receive up to 2.0 shares of Sempra Energy common stock based on Sempra Energy’s four-year EPS compound annual growth rate beginning January 1, 2014 and ending on December 31, 2017. These RSU awards vest as follows:

Four-Year Earnings Per Share Compound Annual Growth Rate		Number of Sempra Energy Common Shares Received for Each Performance-Based Restricted Stock Unit(1)(2)
8.0% or above		2.0
6.7%		1.5
4.4%		1.0
3.3% or below		―
(1)	Participants also receive additional shares for dividend equivalents on shares subject to RSUs, which are deemed reinvested to purchase additional units that become subject to the same vesting conditions as the RSUs to which the dividends relate.
(2)	If performance falls between the tiers shown above, we calculate the payout using linear interpolation.

Our RSAs, which are solely service-based, and those RSUs that are solely service-based represent the right to receive 1.0 share at the end of the service period and have the same dividend equivalent rights as performance-based RSUs. We include RSAs and those RSUs that are solely service-based in potential dilutive shares at 100 percent, subject to the application of the treasury stock method. We include our performance-based RSUs in potential dilutive shares at zero to up to 200 percent 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 indices, dilutive performance-based RSU shares may vary widely from period-to-period. If it were assumed that performance goals for all RSUs were met at maximum levels and if the treasury stock method were not applied to any of our RSAs or RSUs, the incremental potential dilutive shares would be 844,251 and 971,943 for the three months and nine months ended September 30, 2014, respectively, and 712,941 and 889,420 for the three months and nine months ended September 30, 2013, respectively.

SDG&E PREFERRED STOCK

In September 2013, SDG&E announced that it would redeem all six series of its outstanding shares of contingently redeemable preferred stock. The redemption was completed in October 2013 and, accordingly, we recorded the redemption value, including a $3 million early call premium, as a current liability at September 30, 2013. The early call premium is presented as Call Premium on Preferred Stock of Subsidiary on Sempra Energy’s and Call Premium on Preferred Stock on SDG&E’s Condensed Consolidated Statements of Operations. We provide more detail concerning SDG&E’s preferred stock in Note 11 of the Notes to Consolidated Financial Statements in the Annual Report.

SHARE-BASED COMPENSATION

We discuss our share-based compensation plans in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. We recorded share-based compensation expense, net of income taxes, of $8 million and $6 million for the three months ended September 30, 2014 and 2013, respectively, and $22 million and $17 million for the nine months ended September 30, 2014 and 2013, respectively. Pursuant to our Sempra Energy share-based compensation plans, Sempra Energy’s board of directors granted 444,241 performance-based RSUs and 108,986 service-based RSUs during the nine months ended September 30, 2014, primarily in January. Of the 444,241 performance-based RSUs granted, 355,638 vest based on our four-year comparative total shareholder return performance and 88,603 vest based on our four-year EPS compound annual growth rate performance.

During the nine months ended September 30, 2014, IEnova issued 136,996 RSUs from the IEnova 2013 Long-Term Incentive Plan, under which, awards are cash settled based on the price of IEnova common stock.

CAPITALIZED FINANCING COSTS

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.

Pipeline projects currently under construction by Sempra Mexico that are both regulated by the Comisión Reguladora de Energía (or CRE, the Energy Regulatory Commission) and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC related to equity. Beginning in the fourth quarter of 2013, Sempra Mexico began recording AFUDC related to equity for its Sonora Pipeline project, which was $14 million and $34 million for the three months and nine months ended September 30, 2014, respectively.

The following table shows capitalized financing costs for the three months and nine months ended September 30, 2014 and 2013.

CAPITALIZED FINANCING COSTS
(Dollars in millions)
	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Sempra Energy Consolidated:
AFUDC related to debt	$	5	$	6	$	15	$	17
AFUDC related to equity		28		14		77		44
Other capitalized financing costs		6		9		22		22
Total Sempra Energy Consolidated	$	39	$	29	$	114	$	83
SDG&E:
AFUDC related to debt	$	3	$	4	$	10	$	12
AFUDC related to equity		8		10		26		30
Total SDG&E	$	11	$	14	$	36	$	42
SoCalGas:
AFUDC related to debt	$	2	$	2	$	5	$	5
AFUDC related to equity		7		4		18		14
Total SoCalGas	$	9	$	6	$	23	$	19

COMPREHENSIVE INCOME

The following tables present the changes in Accumulated Other Comprehensive Income (Loss) (AOCI) by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to noncontrolling interests:

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
				Pension and Other
				Postretirement Benefits
		Foreign								Total
		Currency		Unamortized		Unamortized				Accumulated Other
		Translation		Net Actuarial		Prior Service		Financial		Comprehensive
		Adjustments		Gain (Loss)		Credit		Instruments		Income (Loss)
		Three months ended September 30, 2014 and 2013
2014:
Balance as of June 30, 2014		$	(170)	$	(65)	$	―	$	(38)	$	(273)
Other comprehensive loss before
reclassifications			(100)		―		―		(2)		(102)
Amounts reclassified from accumulated other
comprehensive income (loss)			―		5		―		(1)		4
Net other comprehensive income (loss)			(100)		5		―		(3)		(98)
Balance as of September 30, 2014		$	(270)	$	(60)	$	―	$	(41)	$	(371)
2013:
Balance as of June 30, 2013		$	(96)	$	(98)	$	1	$	(26)	$	(219)
Other comprehensive income (loss) before
reclassifications			5		―		―		(6)		(1)
Amounts reclassified from accumulated other
comprehensive income			―		3		―		2		5
Net other comprehensive income (loss)			5		3		―		(4)		4
Balance as of September 30, 2013		$	(91)	$	(95)	$	1	$	(30)	$	(215)

		Nine months ended September 30, 2014 and 2013
2014:
Balance as of December 31, 2013		$	(129)	$	(73)	$	―	$	(26)	$	(228)
Other comprehensive loss before
reclassifications			(141)		―		―		(28)		(169)
Amounts reclassified from accumulated other
comprehensive income			―		13		―		13		26
Net other comprehensive income (loss)			(141)		13		―		(15)		(143)
Balance as of September 30, 2014		$	(270)	$	(60)	$	―	$	(41)	$	(371)
2013:
Balance as of December 31, 2012		$	(240)	$	(102)	$	1	$	(35)	$	(376)
Other comprehensive income (loss) before
reclassifications			(121)		―		―		1		(120)
Amounts reclassified from accumulated other
comprehensive income			270	(2)	7		―		4		281
Net other comprehensive income			149		7		―		5		161
Balance as of September 30, 2013		$	(91)	$	(95)	$	1	$	(30)	$	(215)
(1)	All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.
(2)	Represents cumulative foreign currency translation adjustment related to the impairment of our Argentine investments in 2006, which is substantially offset by an accrued liability established at that time. We provide additional information about these investments in Note 4.

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SAN DIEGO GAS & ELECTRIC COMPANY
(Dollars in millions)
		Pension and Other
		Postretirement Benefits
						Total
		Unamortized		Unamortized		Accumulated Other
		Net Actuarial		Prior Service		Comprehensive
		Gain (Loss)		Credit		Income (Loss)
		Three months ended September 30, 2014 and 2013
2014:
Balance as of June 30, 2014		$	(9)	$	1	$	(8)
Amounts reclassified from accumulated other
comprehensive income			1		―		1
Net other comprehensive income			1		―		1
Balance as of September 30, 2014		$	(8)	$	1	$	(7)
2013:
Balance as of June 30, 2013		$	(11)	$	1	$	(10)
Amounts reclassified from accumulated other
comprehensive income			1		―		1
Net other comprehensive income			1		―		1
Balance as of September 30, 2013		$	(10)	$	1	$	(9)

		Nine months ended September 30, 2014 and 2013
2014:
Balance as of December 31, 2013		$	(10)	$	1	$	(9)
Amounts reclassified from accumulated other
comprehensive income			2		―		2
Net other comprehensive income			2		―		2
Balance as of September 30, 2014		$	(8)	$	1	$	(7)
2013:
Balance as of December 31, 2012		$	(12)	$	1	$	(11)
Amounts reclassified from accumulated other
comprehensive income			2		―		2
Net other comprehensive income			2		―		2
Balance as of September 30, 2013		$	(10)	$	1	$	(9)
(1)	All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SOUTHERN CALIFORNIA GAS COMPANY
(Dollars in millions)
		Pension and Other
		Postretirement Benefits
								Total
		Unamortized		Unamortized				Accumulated Other
		Net Actuarial		Prior Service		Financial		Comprehensive
		Gain (Loss)		Credit		Instruments		Income (Loss)
		Three months ended September 30, 2014 and 2013
2014:
Balance as of June 30, 2014		$	(5)	$	1	$	(14)	$	(18)
Amounts reclassified from accumulated other
comprehensive income			2		―		―		2
Net other comprehensive income			2		―		―		2
Balance as of September 30, 2014		$	(3)	$	1	$	(14)	$	(16)
2013:
Balance as of June 30 and September 30, 2013		$	(4)	$	1	$	(14)	$	(17)

		Nine months ended September 30, 2014 and 2013
2014:
Balance as of December 31, 2013		$	(5)	$	1	$	(14)	$	(18)
Amounts reclassified from accumulated other
comprehensive income			2		―		―		2
Net other comprehensive income			2		―		―		2
Balance as of September 30, 2014		$	(3)	$	1	$	(14)	$	(16)
2013:
Balance as of December 31, 2012		$	(4)	$	1	$	(15)	$	(18)
Amounts reclassified from accumulated other
comprehensive income			―		―		1		1
Net other comprehensive income			―		―		1		1
Balance as of September 30, 2013		$	(4)	$	1	$	(14)	$	(17)
(1)	All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.

RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated		Amounts reclassified
other comprehensive income (loss)		from accumulated other				Affected line item on Condensed
components		comprehensive income (loss)				Consolidated Statements of Operations
		Three months ended September 30,
		2014		2013
Sempra Energy Consolidated:
Financial instruments:
Interest rate and foreign exchange instruments		$	8	$	3	Interest Expense
Interest rate instruments			(5)		―	Gain on Sale of Equity Interests and Assets
Interest rate instruments			2		3	Equity Earnings, Before Income Tax
Commodity contracts not subject						Revenues: Energy-Related
	to rate recovery		(2)		―	Businesses
Total before income tax			3		6
			(1)		(2)	Income Tax Expense
Net of income tax			2		4
			(3)		(2)	Earnings Attributable to Noncontrolling Interests
		$	(1)	$	2

Pension and other postretirement benefits:
Amortization of actuarial loss		$	8	$	5	(1)
			(3)		(2)	Income Tax Expense
Net of income tax		$	5	$	3

Total reclassifications for the period, net of tax		$	4	$	5
SDG&E:
Financial instruments:
Interest rate instruments		$	3	$	2	Interest Expense
			(3)		(2)	Earnings Attributable to Noncontrolling Interest
		$	―	$	―

Pension and other postretirement benefits:
Amortization of actuarial loss		$	1	$	2	(1)
			―		(1)	Income Tax Expense
Net of income tax		$	1	$	1

Total reclassifications for the period, net of tax		$	1	$	1
SoCalGas:
Pension and other postretirement benefits:
Amortization of actuarial loss		$	4	$	―	(1)
			(2)		―	Income Tax Expense
Net of income tax		$	2	$	―

Total reclassifications for the period, net of tax		$	2	$	―
(1)	Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).

RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated		Amount reclassified
other comprehensive income (loss)		from accumulated other				Affected line item on Condensed
components		comprehensive income (loss)				Consolidated Statements of Operations
		Nine months ended September 30,
		2014		2013
Sempra Energy Consolidated:
Foreign currency translation adjustments		$	―	$	270	Equity Earnings, Net of Income Tax(1)

Financial instruments:
Interest rate and foreign exchange instruments		$	17	$	9	Interest Expense
Interest rate instruments			(3)		―	Gain on Sale of Equity Interests and Assets
Interest rate instruments			7		7	Equity Earnings, Before Income Tax
Commodity contracts not subject to						Revenues: Energy-Related
	rate recovery		8		(5)	Businesses
Total before income tax			29		11
			(8)		(1)	Income Tax Expense
Net of income tax			21		10
			(8)		(6)	Earnings Attributable to Noncontrolling Interests
		$	13	$	4

Pension and other postretirement benefits:
Amortization of actuarial loss		$	21	$	12	(2)
			(8)		(5)	Income Tax Expense
Net of income tax		$	13	$	7

Total reclassifications for the period, net of tax		$	26	$	281
SDG&E:
Financial instruments:
Interest rate instruments		$	8	$	6	Interest Expense
			(8)		(6)	Earnings Attributable to Noncontrolling Interest
		$	―	$	―

Pension and other postretirement benefits:
Amortization of actuarial loss		$	3	$	3	(2)
			(1)		(1)	Income Tax Expense
Net of income tax		$	2	$	2

Total reclassifications for the period, net of tax		$	2	$	2
SoCalGas:
Financial instruments:
Interest rate instruments		$	―	$	1	Interest Expense
			―		―	Income Tax Expense
Net of income tax		$	―	$	1

Pension and other postretirement benefits:
Amortization of actuarial loss		$	4	$	―	(2)
			(2)		―	Income Tax Expense
Net of income tax		$	2	$	―

Total reclassifications for the period, net of tax		$	2	$	1
(1)	Represents cumulative foreign currency translation adjustment related to the impairment of our Argentine investments in 2006, which is substantially offset by an accrued liability established at that time. We provide additional information about these investments in Note 4.
(2)	Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).

SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS

The following three tables provide a reconciliation of changes in Sempra Energy’s, SDG&E’s and SoCalGas’ shareholders’ equity and noncontrolling interests for the nine months ended September 30, 2014 and 2013.

SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS ― SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
		Sempra Energy		Non-
		Shareholders’		controlling		Total
		Equity		Interests		Equity
Balance at December 31, 2013	$	11,008	$	842	$	11,850
Comprehensive income		722		66		788
Preferred dividends of subsidiary		(1)		―		(1)
Share-based compensation expense		35		―		35
Common stock dividends declared		(486)		―		(486)
Issuance of common stock		71		―		71
Repurchase of common stock		(38)		―		(38)
Tax benefit related to share-based compensation		22		―		22
Equity contributed by noncontrolling interest		―		1		1
Distributions to noncontrolling interests		―		(85)		(85)
Balance at September 30, 2014	$	11,333	$	824	$	12,157
Balance at December 31, 2012	$	10,282	$	401	$	10,683
Comprehensive income		888		33		921
Preferred dividends of subsidiaries		(5)		―		(5)
Share-based compensation expense		30		―		30
Common stock dividends declared		(460)		―		(460)
Issuance of common stock		57		―		57
Repurchase of common stock		(45)		―		(45)
Tax benefit related to share-based compensation		30		―		30
Sale of noncontrolling interests, net of offering costs		135		439		574
Distributions to noncontrolling interests		―		(28)		(28)
Call premium on preferred stock of subsidiary		(3)		―		(3)
Balance at September 30, 2013	$	10,909	$	845	$	11,754

SHAREHOLDER'S EQUITY AND NONCONTROLLING INTEREST ― SDG&E
(Dollars in millions)
		SDG&E		Non-
		Shareholder’s		controlling		Total
		Equity		Interest		Equity
Balance at December 31, 2013	$	4,628	$	91	$	4,719
Comprehensive income		381		23		404
Distributions to noncontrolling interest		―		(37)		(37)
Balance at September 30, 2014	$	5,009	$	77	$	5,086
Balance at December 31, 2012	$	4,222	$	76	$	4,298
Comprehensive income		294		15		309
Preferred stock dividends declared		(4)		―		(4)
Distributions to noncontrolling interest		―		(12)		(12)
Call premium on preferred stock		(3)		―		(3)
Balance at September 30, 2013	$	4,509	$	79	$	4,588

SHAREHOLDERS' EQUITY ― SOCALGAS
(Dollars in millions)
		SoCalGas
		Shareholders'
		Equity
Balance at December 31, 2013	$	2,549
Comprehensive income		259
Preferred stock dividends declared		(1)
Balance at September 30, 2014	$	2,807
Balance at December 31, 2012	$	2,235
Comprehensive income		268
Preferred stock dividends declared		(1)
Common stock dividends declared		(50)
Balance at September 30, 2013	$	2,452

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. Earnings or losses attributable to noncontrolling interests are separately identified on the Condensed Consolidated Statements of Operations, and comprehensive income or loss attributable to noncontrolling interests is separately identified on the Condensed Consolidated Statements of Comprehensive Income.

Sale of Noncontrolling Interests

In the first quarter of 2013, a Sempra Energy subsidiary IEnova, completed a private offering in the U.S. and outside of Mexico and a concurrent public offering in Mexico of common stock. The aggregate shares of common stock sold in the offerings represent approximately 18.9 percent of IEnova’s outstanding ownership interest. IEnova is reported within the Sempra Mexico reportable segment.

The proceeds from the offerings, net of offering costs, were approximately $574 million in U.S. dollar equivalent. IEnova has used the net proceeds of the offerings primarily for general corporate purposes, and for the funding of its investments and ongoing expansion plans. Consistent with applicable accounting guidance, changes in noncontrolling interests that do not result in a change of control are accounted for as equity transactions. When there are changes in noncontrolling interests of a subsidiary that do not result in a change of control, any difference between carrying value and fair value related to the change in ownership is recorded as an adjustment to shareholders’ equity. As a result of the offerings and overallotment options, we recorded an increase in Sempra Energy’s shareholders’ equity of $135 million in the first quarter of 2013 for the sale of IEnova shares to noncontrolling interests.

IEnova is a separate legal entity comprised primarily of Sempra Energy’s operations in Mexico. IEnova is included within our Sempra Mexico reportable segment, but is not the same in its entirety as the reportable segment. In addition to the IEnova operating companies, the Sempra Mexico segment includes, among other things, certain holding companies and risk management activity. Also, IEnova’s financial results are reported in Mexico under International Financial Reporting Standards (IFRS), as required by the Mexican Stock Exchange (La Bolsa Mexicana de Valores, S.A.B. de C.V., or BMV) where the shares are traded under the symbol IENOVA.

We discuss the IEnova offerings in more detail in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

Preferred Stock

The preferred stock of SoCalGas is presented at Sempra Energy as a noncontrolling interest. In 2013, SDG&E had preferred stock outstanding until it was fully redeemed in October 2013. 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 11 of the Notes to Consolidated Financial Statements in the Annual Report.

At September 30, 2014 and December 31, 2013, we reported the following noncontrolling ownership interests held by others (not including preferred shareholders) recorded in Other Noncontrolling Interests in Total Equity on Sempra Energy’s Condensed Consolidated Balance Sheets:

OTHER NONCONTROLLING INTERESTS
(Dollars in millions)
		Percent Ownership Held by Others			September 30, 2014		December 31, 2013
SDG&E:
Otay Mesa VIE		100	%	$	77	$	91
Sempra South American Utilities:
Chilquinta Energía subsidiaries(1)		23.6 – 43.4			23		27
Luz del Sur		20.2			219		222
Tecsur		9.8			3		3
Sempra Mexico:
IEnova		18.9			444		442
Sempra Natural Gas:
Bay Gas Storage, Ltd.		9.1			23		22
Liberty Gas Storage, LLC		25.0			14		14
Southern Gas Transmission Company		49.0			1		1
Total Sempra Energy				$	804	$	822
(1)	Chilquinta Energía has four subsidiaries with noncontrolling interests held by others. Percentage range reflects the highest and lowest ownership percentages amongst these subsidiaries.

TRANSACTIONS WITH AFFILIATES

Due from Unconsolidated Affiliates – Sempra Energy Consolidated

Sempra South American Utilities has a U.S. dollar-denominated loan to Eletrans S.A. to provide project financing for the construction of transmission lines. Eletrans S.A. is an affiliate of Chilquinta Energía that we discuss in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. At September 30, 2014 and December 31, 2013, the principal balance outstanding was $39 million and $14 million, plus $1 million and a negligible amount of accumulated interest outstanding, respectively, at a fixed interest rate of 4 percent.

In the third quarter of 2014, Sempra Mexico made two four-year, U.S. dollar-denominated loans to an affiliate of Sempra Mexico’s joint venture with PEMEX to finance the Los Ramones Norte pipeline project. At September 30, 2014, these loans have principal balances outstanding aggregating $71 million plus $1 million of accumulated interest. These loans accrue interest at a variable rate based on a 30-day LIBOR plus 450 basis points (4.66 percent at September 30, 2014).

As we discuss in Note 3, in July 2014, Sempra Mexico sold a 50-percent interest in the first phase of the Energía Sierra Juárez wind project. Upon deconsolidation, the newly formed joint venture repaid a portion, in the amount of $18 million, of a previous intercompany loan from Sempra Mexico to Energía Sierra Juárez. The joint venture assumed the obligation to Sempra Mexico for the remainder of the loan, which has a principal balance outstanding at September 30, 2014 of $20 million plus $1 million of accumulated interest. This loan accrues interest at a variable rate based on a 30-day LIBOR plus 637.5 basis points (6.53 percent at September 30, 2014).

At September 30, 2014 and December 31, 2013, Sempra Energy had $3 million and $4 million, respectively, in accounts receivable from various Sempra Renewables joint venture investments.

Service Agreements

Sempra Energy, SDG&E and SoCalGas provide certain services to each other and are charged an allocable share of the cost of such services. Also, from time-to-time, SDG&E and SoCalGas may loan surplus cash to Sempra Energy at interest rates based on one-month commercial paper rates. Amounts due to/from affiliates are as follows:

AMOUNTS DUE TO AND FROM AFFILIATES AT SDG&E AND SOCALGAS
(Dollars in millions)
		September 30,		December 31,
		2014		2013
SDG&E:
Current:
Due from various affiliates		$	1	$	1


Due to Sempra Energy		$	27	$	25
Due to SoCalGas			9		―
Due to various affiliates			―		14
		$	36	$	39

Income taxes due from Sempra Energy(1)		$	27	$	70
SoCalGas:
Current:
Due from Sempra Energy(2)		$	265	$	―
Due from SDG&E			9		―
Due from various affiliates			―		21
		$	274	$	21


Due to Sempra Energy		$	―	$	16


Income taxes due from Sempra Energy(1)		$	21	$	18
(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 separate returns.
(2)	Net receivable includes a loan to Sempra Energy of $281 million at September 30, 2014 at an interest rate of 0.08 percent.

Revenues from unconsolidated affiliates at SDG&E and SoCalGas are as follows:

REVENUES FROM UNCONSOLIDATED AFFILIATES AT SDG&E AND SOCALGAS
(Dollars in millions)
	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014			2013
SDG&E	$	2	$	3	$	8	$	8
SoCalGas		17		17		51		48

OTHER INCOME, NET

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

OTHER INCOME, NET
(Dollars in millions)
		Three months ended				Nine months ended
		September 30,				September 30,
			2014		2013		2014		2013
Sempra Energy Consolidated:
Allowance for equity funds used during construction		$	28	$	14	$	77	$	44
Investment (losses) gains(1)			(3)		(6)		20		16
(Losses) gains on interest rate and foreign exchange instruments, net			(6)		4		3		17
Regulatory interest, net(2)			2		1		5		3
Sundry, net			8		3		13		(1)
Total		$	29	$	16	$	118	$	79
SDG&E:
Allowance for equity funds used during construction		$	8	$	10	$	26	$	30
Regulatory interest, net(2)			2		1		5		3
Sundry, net			(1)		(1)		(2)		(3)
Total		$	9	$	10	$	29	$	30
SoCalGas:
Allowance for equity funds used during construction		$	7	$	4	$	18	$	14
Sundry, net			(1)		(2)		(5)		(5)
Total		$	6	$	2	$	13	$	9
(1)	Represents investment (losses) 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 TAXES

INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
			Effective				Effective
		Income Tax	Income			Income Tax	Income
		Expense	Tax Rate			Expense	Tax Rate
		Three months ended September 30,
		2014				2013
Sempra Energy Consolidated	$	71	16	%	$	117	27	%
SDG&E		65	28			84	38
SoCalGas		44	31			38	27
		Nine months ended September 30,
		2014				2013
Sempra Energy Consolidated	$	291	24	%	$	327	30	%
SDG&E		217	35			147	33
SoCalGas		110	30			107	29

Changes in Income Tax Expense and Effective Income Tax Rates

Sempra Energy Consolidated

The decrease in income tax expense in the three months ended September 30, 2014 was mainly due to a lower effective tax rate, primarily from:

$25 million tax benefit due to the release in 2014 of Louisiana valuation allowance against a deferred tax asset associated with Cameron LNG developments;
higher income tax benefit from Mexican currency translation and inflation adjustments; and
favorable adjustments to prior years’ income tax items in 2014; offset by

$8 million U.S. tax on the repatriation of a portion of current year earnings from certain non-U.S. subsidiaries in Mexico and Peru.

In the first nine months of 2014, the decrease in income tax expense was due to a lower effective tax rate, offset by higher pretax income. Pretax income in 2013 included the loss from the early retirement of San Onofre Nuclear Generating Station (SONGS), offset by the favorable impact of the retroactive application of the 2012 GRC in 2013. The lower effective income tax rate was primarily due to:

$63 million income tax expense in 2013 resulting from a corporate reorganization in connection with the IEnova stock offerings. We discuss the stock offerings above in “Shareholders’ Equity and Noncontrolling Interests – Sale of Noncontrolling Interests;” and
$25 million tax benefit due to the release in 2014 of Louisiana valuation allowance against a deferred tax asset associated with Cameron LNG developments; offset by

$32 million U.S. tax on the repatriation of a portion of current year earnings from certain non-U.S. subsidiaries in Mexico and Peru; and

a $17 million charge to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS that may no longer be recoverable from customers in rates pursuant to the proposed settlement agreement to resolve the California Public Utilities Commission’s (CPUC) Order Instituting Investigation (OII) into the SONGS outage that we discuss in Note 9.

Sempra Energy, SDG&E and SoCalGas record income taxes for interim periods utilizing a forecasted effective tax rate anticipated for the full year, 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 recognized proportionately over the year. The forecasted items, anticipated on a full year basis, may include, among others:

self-developed software expenditures
repairs to certain utility plant fixed assets
renewable energy income tax credits
deferred income tax benefits related to renewable energy projects
exclusions from taxable income of the equity portion of AFUDC
depreciation on a certain portion of utility plant assets

U.S. tax on repatriation of current year earnings from non-U.S. subsidiaries

Items that cannot be reliably forecasted (e.g., adjustments related to prior years’ income tax items, remeasurement of deferred tax asset valuation allowances, Mexican currency translation and inflation adjustments, and deferred income tax benefit associated with the impairment of a book investment) are recorded in the interim period in which they actually occur, which can result in variability to income tax expense.

SDG&E

The decrease in SDG&E’s income tax expense in the three months ended September 30, 2014 was mainly due to a lower effective tax rate, primarily from:

favorable adjustments to prior years’ income tax items in 2014 compared to unfavorable adjustments in 2013; and
lower unfavorable impact on our effective tax rate in 2014 from the reversal through book depreciation of previously recognized tax benefits for a certain portion of utility fixed assets; offset by

lower deductions for self-developed software expenditures.

The increase in SDG&E’s income tax expense in the nine months ended September 30, 2014 was due to higher pretax income and a higher effective tax rate. Pretax income in 2013 included the loss from the early retirement of SONGS, offset by the favorable impact of the retroactive application of the 2012 GRC in 2013. The higher effective tax rate was primarily due to:

the $17 million charge to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS discussed in Note 9;
lower exclusions from taxable income of the equity portion of AFUDC; and
lower deductions for self-developed software expenditures; offset by

favorable adjustments to prior years’ income tax items in 2014 compared to unfavorable adjustments in 2013.

The results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is not included in Sempra Energy’s federal or state income tax returns but is consolidated for financial statement purposes, and therefore, Sempra Energy Consolidated’s and SDG&E’s effective income tax rates are impacted by the VIE’s stand-alone effective income tax rate. We discuss Otay Mesa VIE above in “Variable Interest Entities.”

SoCalGas

The increase in SoCalGas’ income tax expense in the three months ended September 30, 2014 was mainly due to a higher effective tax rate, primarily from:

favorable adjustments to prior years’ income tax items in 2013; and

lower deductions for self-developed software expenditures.

The increase in SoCalGas’ income tax expense in the nine months ended September 30, 2014 was mainly due to a higher effective tax rate, primarily from:

favorable adjustments to prior years’ income tax items in 2013; offset by

higher deductions for certain repairs expenditures that are capitalized for financial statement purposes.

For SDG&E and SoCalGas, the CPUC requires flow-through rate-making treatment for the current income tax benefit or expense arising from certain property-related and other temporary differences between the treatment for financial reporting and income tax, which will reverse over time. Under the regulatory accounting treatment required for these flow-through temporary differences, deferred income tax assets and liabilities are not recorded to deferred income tax expense, but rather to a regulatory asset or liability, which impacts the current effective income tax rate. 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:

repairs expenditures related to a certain portion of utility plant fixed assets
the equity portion of AFUDC
a portion of the cost of removal of utility plant assets
self-developed software expenditures

depreciation on a certain portion of utility plant fixed assets

The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico has similar flow-through treatment.

We provide additional information about our accounting for income taxes in Notes 1 and 6 of the Notes to Consolidated Financial Statements in the Annual Report.