INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES

We provide our calculations of ETRs in the following table.



INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
	Years ended December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Income tax expense (benefit) from continuing operations	$	315		$	(49	)	$	938

Income from continuing operations before income taxes and equity earnings	$	1,734		$	714		$	1,248
Equity earnings (losses), before income tax⁽¹⁾	30			(236		)	34
Pretax income	$	1,764		$	478		$	1,282

Effective income tax rate	18		%	(10		)%	73		%
SDG&E:
Income tax expense	$	171		$	173		$	155
Income before income taxes	$	945		$	849		$	576
Effective income tax rate	18		%	20		%	27		%
SoCalGas:
Income tax expense	$	120		$	92		$	160
Income before income taxes	$	762		$	493		$	557
Effective income tax rate	16		%	19		%	29		%


⁽¹⁾	We discuss how we recognize equity earnings in Note 6.

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


▪	repairs expenditures related to a certain portion of utility plant fixed assets


▪	the equity portion of AFUDC, which is non-taxable


▪	a portion of the cost of removal of utility plant assets


▪	utility self-developed software expenditures


▪	depreciation on a certain portion of utility plant assets


▪	state income taxes

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

We record income tax (expense) benefit from the transactional effects of foreign currency and inflation. Such effects are partially mitigated by net gains (losses) from foreign currency derivatives that are hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.

We present in the table below reconciliations of net U.S. statutory federal income tax rates to our ETRs.



RECONCILIATION OF FEDERAL INCOME TAX RATES TO EFFECTIVE INCOME TAX RATES

	Years ended December 31,
	2019		2018		2017
Sempra Energy Consolidated:
U.S. federal statutory income tax rate	21	%	21	%	35	%
Foreign exchange and inflation effects⁽¹⁾	4		6		4
Non-U.S. earnings taxed at rates different from the U.S. statutory income tax rate⁽²⁾	3		10		(2	)
Utility depreciation	3		12		7
State income taxes, net of federal income tax benefit	2		(8	)	1
Effects of the TCJA	—		9		48
Compensation-related items	—		3		—
Unrecognized income tax benefits	—		4		—
Noncontrolling interests in tax equity arrangements	—		3		1
Resolution of prior years’ income tax items	—		(1	)	(3	)
Impairment losses at Sempra LNG	—		(32	)	—
Allowance for equity funds used during construction	(1	)	(4	)	(4	)
Amortization of excess deferred income taxes	(1	)	(4	)	—
Tax credits	(2	)	(10	)	(4	)
Utility self-developed software expenditures	(2	)	(7	)	(5	)
Utility repairs expenditures	(3	)	(13	)	(7	)
Excess deferred income taxes outside of ratemaking	(4	)	—		—
Other, net	(2	)	1		2
Effective income tax rate	18	%	(10	)%	73	%
SDG&E:
U.S. federal statutory income tax rate	21	%	21	%	35	%
State income taxes, net of federal income tax benefit	6		5		3
Depreciation	3		3		7
Effects of the TCJA	—		—		5
Resolution of prior years’ income tax items	—		—		(4	)
Allowance for equity funds used during construction	(1	)	(2	)	(4	)
Amortization of excess deferred income taxes	(1	)	(1	)	—
Repairs expenditures	(3	)	(3	)	(8	)
Self-developed software expenditures	(3	)	(2	)	(6	)
Excess deferred income taxes outside of ratemaking	(3	)	—		—
Other, net	(1	)	(1	)	(1	)
Effective income tax rate	18	%	20	%	27	%
SoCalGas:
U.S. federal statutory income tax rate	21	%	21	%	35	%
Depreciation	4		7		9
State income taxes, net of federal income tax benefit	4		2		3
Unrecognized income tax benefits	—		4		—
Compensation-related items	—		1		—
Resolution of prior years’ income tax items	—		(1	)	(2	)
Allowance for equity funds used during construction	(1	)	(2	)	(3	)
Amortization of excess deferred income taxes	(1	)	(2	)	—
Self-developed software expenditures	(2	)	(3	)	(5	)
Repairs expenditures	(4	)	(7	)	(8	)
Excess deferred income taxes outside of ratemaking	(5	)	—		—
Other, net	—		(1	)	—
Effective income tax rate	16	%	19	%	29	%

⁽¹⁾

Due to fluctuation of the Mexican peso against the U.S. dollar. We record income tax expense (benefit) from the transactional effects of foreign currency and inflation because of appreciation (depreciation) of the Mexican peso. We also recognize gains (losses) in Other Income, Net, on the Consolidated Statements of Operations from foreign currency derivatives that are partially hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.


⁽²⁾	Related to operations in Mexico.

In December 2017, the TCJA was signed into law. This legislation significantly changed the IRC. The TCJA reduced the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. Deferred income tax assets and liabilities, including NOLs, were remeasured at the income tax rate expected to apply when those temporary differences reverse. The effects of the change to the income tax rate were recognized in the period when the change was enacted. This remeasurement resulted in significant reductions in deferred income tax balances at Sempra Energy Consolidated, SDG&E and SoCalGas in 2017.

The remeasurement of deferred income tax balances at SDG&E and SoCalGas resulted in excess deferred income taxes that previously have been collected from ratepayers at the higher rate. As we discuss in Note 4, these excess deferred income taxes have been recorded as regulatory liabilities and will generally be refunded to ratepayers in accordance with the IRC’s normalization provisions and as determined by the CPUC and the FERC. In a January 2019 decision, the CPUC directed certain excess deferred income tax balances generated by activities outside of ratemaking be allocated to shareholders rather than ratepayers. As a result, SDG&E and SoCalGas recorded income tax benefits of $31 million and $38 million, respectively, from the release of a portion of the regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances.

The TCJA imposed a one-time tax for deemed repatriation of cumulative undistributed earnings of non-U.S. subsidiaries. In addition to the deemed repatriation tax, we accrued U.S. state and non-U.S. withholding tax on our expected future repatriation of foreign undistributed earnings.

We recorded the effects of the TCJA in 2017 using our best estimates and the information available to us through the date those financial statements were issued. In 2018, we adjusted our 2017 provisional estimates and completed our accounting for the income tax effects of the TCJA.

The table below summarizes the effects of the TCJA in 2018 and 2017:



EFFECTS OF THE TAX CUTS AND JOBS ACT OF 2017
(Dollars in millions)
	Sempra Energy Consolidated			SDG&E			SoCalGas
2018:
Consolidated Balance Sheets:
Increase (decrease) in net deferred income tax liabilities due to remeasurement	$	16		$	(38	)	$	5
Increase (decrease) in net regulatory liabilities from remeasurement of deferred income tax assets and liabilities	$	33		$	38		$	(5	)

Consolidated Statements of Operations:
Income tax expense related to remeasurement of deferred income tax assets and liabilities	$	49		$	—		$	—
Income tax benefit related to deemed repatriation	(8		)	—			—
Total increase in income tax expense	$	41		$	—		$	—
2017:
Consolidated Balance Sheets:
Decrease in net deferred income tax liabilities due to remeasurement	$	(2,220	)	$	(1,400	)	$	(972	)
Increase in net regulatory liabilities from remeasurement of deferred income tax assets and liabilities	$	2,402		$	1,428		$	974

Consolidated Statements of Operations:
Income tax expense related to remeasurement of deferred income tax assets and liabilities	$	182		$	28		$	2
Income tax expense related to deemed repatriation	328			—			—
U.S. state and non-U.S. withholding tax expense related to expected future repatriation of foreign earnings	109			—			—
Total increase in income tax expense	$	619		$	28		$	2

In January 2019, our board of directors approved a plan to sell our South American businesses, as we discuss in Note 5. Prior to this decision, our repatriation estimate excluded post-2017 earnings and other basis differences related to our South American businesses. Because of our decision to sell our South American businesses, we no longer assert indefinite reinvestment of these basis differences and have recorded the following in discontinued operations in the year ended December 31, 2019:


▪	$89 million income tax benefit primarily related to outside basis differences existing as of the January 25, 2019 approval of our plan to sell our South American businesses; and


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

We expect to repatriate approximately $4 billion of foreign undistributed earnings in the foreseeable future, and have accrued $157 million of U.S. state deferred income tax liability for repatriations that we expect will begin in 2020 as cash is generated. In 2019 and 2018, we repatriated approximately $254 million and $338 million, respectively, to the U.S.

We have not recorded deferred income taxes with respect to remaining basis differences of approximately $600 million between financial statement and income tax investment amounts in our non-U.S. subsidiaries because we consider them to be indefinitely reinvested as of December 31, 2019. The remaining basis differences are calculated pursuant to U.S. federal tax law, which may differ from tax law in California and foreign jurisdictions. It is currently not practicable to determine the hypothetical amount of tax that might be payable if the underlying basis differences were realized.

The table below presents the geographic components of pretax income.



PRETAX INCOME – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Years ended December 31,
	2019		2018			2017
By geographic components:
U.S.	$	1,191	$	(102	)	$	878
Non-U.S.	573		580			404
Total⁽¹⁾	$	1,764	$	478		$	1,282


⁽¹⁾	See “Income Tax Expense (Benefit) and Effective Income Tax Rates” table above for calculation of pretax income.

U.S. pretax income was lower in 2018 compared to 2019 and 2017 due to the 2018 impairment of certain assets at Sempra LNG and Sempra Renewables (discussed in Notes 5 and 12), offset by the 2018 gain on the sale of assets at Sempra Renewables (discussed in Note 5) and the 2017 write-off of SDG&E’s wildfire regulatory asset (discussed in Note 16).

The components of income tax expense are as follows.



INCOME TAX EXPENSE (BENEFIT)
(Dollars in millions)
	Years ended December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Current:
U.S. federal	$	—		$	(1	)	$	4
U.S. state	(14		)	67			—
Non-U.S.	140			127			45
Total	126			193			49
Deferred:
U.S. federal	87			(121		)	566
U.S. state	21			(183		)	154
Non-U.S.	84			66			169
Total	192			(238		)	889
Deferred investment tax credits	(3		)	(4		)	—
Total income tax expense (benefit)	$	315		$	(49	)	$	938
SDG&E:
Current:
U.S. federal	$	35		$	104		$	100
U.S. state	31			30			65
Total	66			134			165
Deferred:
U.S. federal	75			17			29
U.S. state	32			24			(41		)
Total	107			41			(12		)
Deferred investment tax credits	(2		)	(2		)	2
Total income tax expense	$	171		$	173		$	155
SoCalGas:
Current:
U.S. federal	$	8		$	4		$	—
U.S. state	24			10			23
Total	32			14			23
Deferred:
U.S. federal	79			78			144
U.S. state	10			2			(5		)
Total	89			80			139
Deferred investment tax credits	(1		)	(2		)	(2		)
Total income tax expense	$	120		$	92		$	160

The tables below present the components of deferred income taxes:



DEFERRED INCOME TAXES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	December 31,
	2019		2018
Deferred income tax liabilities:
Differences in financial and tax bases of fixed assets, investments and other assets⁽¹⁾	$	4,052	$	3,517
U.S. state and non-U.S. withholding tax on repatriation of foreign earnings	153		382
Regulatory balancing accounts	468		359
Right-of-use assets – operating leases	131		—
Property taxes	44		41
Other deferred income tax liabilities	93		133
Total deferred income tax liabilities	4,941		4,432
Deferred income tax assets:
Tax credits	1,136		1,114
Net operating losses	911		723
Postretirement benefits	200		261
Compensation-related items	161		170
Operating lease liabilities	131		—
Other deferred income tax assets	72		82
Accrued expenses not yet deductible	52		66
Deferred income tax assets before valuation allowances	2,663		2,416
Less: valuation allowances	144		164
Total deferred income tax assets	2,519		2,252
Net deferred income tax liability⁽²⁾	$	2,422	$	2,180


⁽¹⁾	In addition to the financial over tax basis differences in fixed assets, the amount also includes financial over tax basis differences in various interests in partnerships and certain subsidiaries.


⁽²⁾	At December 31, 2019 and 2018, includes $155 million and $141 million, respectively, recorded as a noncurrent asset and $2,577 million and $2,321 million, respectively, recorded as a noncurrent liability on the Consolidated Balance Sheets.



DEFERRED INCOME TAXES – SDG&E AND SOCALGAS
(Dollars in millions)
	SDG&E				SoCalGas
	December 31,				December 31,
	2019		2018		2019		2018
Deferred income tax liabilities:
Differences in financial and tax bases of utility plant and other assets	$	1,735	$	1,578	$	1,246	$	1,077
Regulatory balancing accounts	141		84		327		283
Right-of-use assets – operating leases	32		—		22		—
Property taxes	30		29		14		13
Other	14		10		1		2
Total deferred income tax liabilities	1,952		1,701		1,610		1,375
Deferred income tax assets:
Tax credits	6		6		3		3
Postretirement benefits	37		58		120		140
Compensation-related items	6		5		25		25
Operating lease liabilities	32		—		22		—
State income taxes	7		6		8		3
Accrued expenses not yet deductible	9		4		15		13
Other	7		6		14		14
Total deferred income tax assets	104		85		207		198
Net deferred income tax liability	$	1,848	$	1,616	$	1,403	$	1,177

The following table summarizes our unused NOLs and tax credit carryforwards.



NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
(Dollars in millions)
	Unused amount at December 31, 2019		Year expiration begins
Sempra Energy Consolidated:
U.S. federal:
NOLs⁽¹⁾	$	3,475	2031
General business tax credits⁽¹⁾	433		2032
Foreign tax credits⁽²⁾	624		2024
U.S. state⁽²⁾:
NOLs	3,025		2020
General business tax credits	90		2020
Non-U.S.⁽²⁾ – NOLs	115		2020


⁽¹⁾	We have recorded deferred income tax benefits on these NOLs and tax credits, in total, because we currently believe they will be realized on a more-likely-than-not-basis.


⁽²⁾	We have not recorded deferred income tax benefits on a portion of these NOLs and tax credits because we currently believe they will not be realized on a more-likely-than-not-basis, as discussed below.

A valuation allowance is recorded when, based on more-likely-than-not criteria, negative evidence outweighs positive evidence with regard to our ability to realize a deferred income tax asset in the future. Of the valuation allowances recorded to date, the negative evidence outweighs the positive evidence primarily due to cumulative pretax losses in various U.S. state and non-U.S. jurisdictions resulting in deferred income tax assets that we currently do not believe will be realized on a more-likely-than-not basis. The following table provides the valuation allowances that we recorded against a portion of our total deferred income tax assets shown above in the “Deferred Income Taxes – Sempra Energy Consolidated” table.



VALUATION ALLOWANCES
(Dollars in millions)
	December 31,
	2019		2018
Sempra Energy Consolidated:
U.S. federal	$	90	$	109
U.S. state	33		35
Non-U.S.	21		20
	$	144	$	164

Following is a reconciliation of the changes in unrecognized income tax benefits and the potential effect on our ETR for the years ended December 31:



RECONCILIATION OF UNRECOGNIZED INCOME TAX BENEFITS
(Dollars in millions)
	2019			2018			2017
Sempra Energy Consolidated:
Balance at January 1	$	119		$	89		$	90
Increase in prior period tax positions	5			7			22
Decrease in prior period tax positions	—			(1		)	(15		)
Increase in current period tax positions	2			24			4
Settlements with taxing authorities	(32		)	—			(12		)
Expiration of statutes of limitations	(1		)	—			—
Balance at December 31	$	93		$	119		$	89
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate⁽¹⁾	$	(81	)	$	(107	)	$	(77	)
increase the effective tax rate⁽¹⁾	27			24			20
SDG&E:
Balance at January 1	$	11		$	10		$	22
Increase in prior period tax positions	1			1			9
Decrease in prior period tax positions	—			—			(11		)
Settlements with taxing authorities	—			—			(10		)
Balance at December 31	$	12		$	11		$	10
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate⁽¹⁾	$	(9	)	$	(9	)	$	(7	)
increase the effective tax rate⁽¹⁾	1			1			1
SoCalGas:
Balance at January 1	$	61		$	35		$	29
Increase in prior period tax positions	1			2			3
Increase in current period tax positions	2			24			4
Settlements with taxing authorities	—			—			(1		)
Balance at December 31	$	64		$	61		$	35
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate⁽¹⁾	$	(55	)	$	(51	)	$	(26	)
increase the effective tax rate⁽¹⁾	26			23			20


⁽¹⁾	Includes temporary book and tax differences that are treated as flow-through for ratemaking purposes, as discussed above.

It is reasonably possible that within the next 12 months, unrecognized income tax benefits could decrease due to the following:



POSSIBLE DECREASES IN UNRECOGNIZED INCOME TAX BENEFITS WITHIN 12 MONTHS
(Dollars in millions)
	At December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Expiration of statutes of limitations on tax assessments	$	—		$	(1	)	$	—
Potential resolution of audit issues with various U.S. federal, state and local and non-U.S. taxing authorities	(8		)	(40		)	(8		)
	$	(8	)	$	(41	)	$	(8	)
SDG&E:
Potential resolution of audit issues with various U.S. federal, state and local taxing authorities	$	(6	)	$	(6	)	$	(6	)
SoCalGas:
Potential resolution of audit issues with various U.S. federal, state and local taxing authorities	$	(2	)	$	(2	)	$	(2	)

Amounts accrued for interest and penalties associated with unrecognized income tax benefits are included in Income Tax Expense on the Consolidated Statements of Operations. Sempra Energy Consolidated accrued $1 million for interest expense and penalties at December 31, 2019 and 2018, respectively, on the Consolidated Balance Sheets, and recorded $1 million of interest expense and penalties in 2018 and negligible amounts in each of 2019 and 2017 on the Consolidated Statements of Operations. SDG&E and SoCalGas each accrued negligible amounts for interest expense and penalties at December 31, 2019 and 2018 on the Consolidated Balance Sheets, and recorded negligible amounts of interest expense and penalties in each of 2019, 2018 and 2017 on the Consolidated Statements of Operations.

INCOME TAX AUDITS

Sempra Energy is subject to U.S. federal income tax as well as income tax of multiple state and non-U.S. jurisdictions. We remain subject to examination for U.S. federal tax years after 2015. We are subject to examination by major state tax jurisdictions for tax years after 2010. Certain major non-U.S. income tax returns for tax years 2012 through the present are open to examination. We are also open to examination for non-U.S. income tax returns related to our prior interest in our commodities business, which we divested in 2010, for years 1999 through 2010.

SDG&E and SoCalGas are subject to U.S. federal income tax and state income tax. They remain subject to examination for U.S. federal tax years after 2015 and state tax years after 2010.

In addition, Sempra Energy has filed a protest to contest proposed state audit adjustments for tax years 2009 and 2010. The pre-2011 tax years for our major state tax jurisdictions are closed to new issues; therefore, no additional tax may be assessed by the taxing authorities for these tax years.