XML 149 R18.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
SHARE-BASED COMPENSATION
 12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement, Noncash Expense [Abstract]  
Share-based Compensation SHARE-BASED COMPENSATION
SEMPRA ENERGY EQUITY COMPENSATION PLANS
Sempra Energy has share-based compensation plans intended to align employee and shareholder objectives related to the long-term growth of Sempra Energy. The plans permit a wide variety of share-based awards, including:
▪
nonqualified stock options
▪
incentive stock options
▪
restricted stock awards
▪
restricted stock units
▪
stock appreciation rights
▪
performance awards
▪
stock payments
▪
dividend equivalents
Eligible employees, including those from the California Utilities, participate in Sempra Energy’s share-based compensation plans as a component of their compensation package.
In the three years ended December 31, 2019, Sempra Energy had the following types of equity awards outstanding:
▪
Nonqualified Stock Options: Options to purchase common stock have an exercise price equal to the market price of the common stock at the date of grant, are service-based, become exercisable over a three-year period (for awards granted in 2019) or over a four-year period (for awards granted in 2010 or earlier), and expire 10 years from the date of grant. Vesting and/or the ability to exercise may be accelerated upon a change in control, in accordance with severance pay agreements or in accordance with the terms of the grant. Options are subject to forfeiture or earlier expiration following termination of employment, subject to certain exceptions.
▪
Performance-Based Restricted Stock Units: These RSU awards generally vest in Sempra Energy common stock at the end of three-year (for awards granted during or after 2015) or four-year performance periods (for awards granted prior to 2015) based on Sempra Energy’s total return to shareholders relative to that of specified market indices or based on the compound annual growth rate of Sempra Energy’s EPS. The comparative market indices for the awards that vest based on total return to shareholders are the S&P 500 Utilities Index and the S&P 500 Index. We use long-term analyst consensus growth estimates for S&P 500 Utilities Index peer companies to develop our targets for awards that vest based on EPS growth.
◦
For awards granted in 2013 or earlier, if Sempra Energy’s total return to shareholders exceeds target levels, up to an additional 50% of the number of granted RSUs may be issued.
◦
For awards granted during or after 2014, up to an additional 100% of the granted RSUs may be issued if total return to shareholders or EPS growth exceeds target levels.
◦
For awards granted in 2015 and 2016 and certain awards granted in 2017 and 2018 that vest based on Sempra Energy’s total return to shareholders, a modifier adds 20% to the award’s payout (as initially calculated based on total return to shareholders relative to that of specified market indices) for total shareholder return performance in the top quartile relative to historical benchmark data for Sempra Energy and reduces the award’s payout by 20% for performance in the bottom quartile. However, in no event will more than an additional 100% of the granted RSUs be issued. If performance falls within the second or third quartiles, the modifier is not triggered, and the payout is based solely on total return to shareholders relative to that of specified market indices.
If Sempra Energy’s total return to shareholders or EPS growth is below the target levels but above threshold performance levels, shares are subject to partial vesting on a pro rata basis.
▪
Other Performance-Based Restricted Stock Units: RSUs were granted in 2014 and 2015 in connection with the creation of Cameron LNG JV.
◦
The 2014 awards vested in 2015 through 2017 as the Compensation Committee of Sempra Energy’s board of directors determined that the objectives of the JV were achieved. Those awards vested on the anniversary of the grant date over a period of either two or three years.
◦
The 2015 awards vested in 2019 as both of the following were achieved: (a) the Compensation Committee of Sempra Energy’s board of directors determined that Sempra Energy achieved positive cumulative net income for fiscal years 2015 through 2017 and (b) Cameron LNG JV commenced commercial operations of the first train.
▪
Service-Based Restricted Stock Units: RSUs may also be service-based; these generally vest over three-year service periods (for awards granted in 2019), or at the end of three-year (for awards granted during 2015 through 2018) or four-year service periods (for awards granted prior to 2015).
For RSU awards, vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable LTIP, in accordance with severance pay agreements, or at the discretion of the Compensation Committee of Sempra Energy’s board of directors. Dividend equivalents on shares subject to RSUs are reinvested to purchase additional common shares that become subject to the same vesting conditions as the RSUs to which the dividends relate.
SHARE-BASED AWARDS AND COMPENSATION EXPENSE
At December 31, 2019, 7,662,352 common shares were authorized and available for future grants of share-based awards. Our practice is to satisfy share-based awards by issuing new shares rather than by open-market purchases.
We measure and recognize compensation expense for all share-based payment awards made to our employees and directors based on estimated fair values on the date of grant. We recognize compensation costs net of an estimated forfeiture rate (based on historical experience) and recognize the compensation costs for nonqualified stock options and RSUs on a straight-line basis over the requisite service period of the award, which is generally three or four years. However, for awards granted to retirement-eligible participants, the expense is recognized over the initial year in which the award was granted as the award requires service through the end of the year in which it was granted. For awards granted to participants who become eligible for retirement during the requisite service period, the expense is recognized over the period between the date of grant and the later of the end of the year in which the award was granted or the date the participant first becomes eligible for retirement. Substantially all awards outstanding are classified as equity instruments; therefore, we recognize additional paid in capital as we recognize the compensation expense associated with the awards. We recognize in earnings the tax benefits (or deficiencies) resulting from tax deductions that are in excess of (or less than) tax benefits related to compensation cost recognized for share-based payments.
Sempra Energy subsidiaries record an expense for the plans to the extent that subsidiary employees participate in the plans and/or the subsidiaries are allocated a portion of the Sempra Energy plans’ corporate staff costs. Total share-based compensation expense for all of Sempra Energy’s share-based awards was comprised as follows:
SHARE-BASED COMPENSATION EXPENSE
(Dollars in millions)
 
Years ended December 31,
 
2019
 
2018
 
2017
Sempra Energy Consolidated:
 
 
 
 
 
Share-based compensation expense, before income taxes(1)
$
66

 
$
76

 
$
78

Income tax benefit(1)
(18
)
 
(21
)
 
(31
)
 
$
48

 
$
55

 
$
47

 
 
 
 
 
 
Capitalized share-based compensation cost
$
11

 
$
10

 
$
9

Excess income tax deficiency
$
4

 
$
15

 
$
—

SDG&E:
 
 
 
 
 
Share-based compensation expense, before income taxes
$
10

 
$
12

 
$
13

Income tax benefit
(3
)
 
(3
)
 
(5
)
 
$
7

 
$
9

 
$
8

 
 
 
 
 
 
Capitalized share-based compensation cost
$
6

 
$
6

 
$
5

Excess income tax deficiency
$
1

 
$
3

 
$
—

SoCalGas:
 

 
 

 
 

Share-based compensation expense, before income taxes
$
15

 
$
16

 
$
17

Income tax benefit
(4
)
 
(5
)
 
(7
)
 
$
11

 
$
11

 
$
10

 
 
 
 
 
 
Capitalized share-based compensation cost
$
5

 
$
4

 
$
4

Excess income tax deficiency
$
1

 
$
2

 
$
—


(1) 
Includes activity of awards issued from the IEnova 2013 LTIP, which settle in cash upon vesting based on the price of IEnova’s common stock.
SEMPRA ENERGY NONQUALIFIED STOCK OPTIONS
We use a Black-Scholes option-pricing model to estimate the fair value of each nonqualified stock option grant. The use of a valuation model requires us to make certain assumptions about selected model inputs. Expected volatility is calculated based on a blend of the historical and implied volatility of Sempra Energy’s common stock price. The average expected term for options is based on the vesting schedule, contractual term of the option, expected employee exercise and post-termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term estimated at the date of the grant. All nonqualified stock options granted prior to 2019 were fully vested and compensation cost on such stock options was fully recognized by December 31, 2014. In January 2019, Sempra Energy’s board of directors granted 261,075 nonqualified stock options that are exercisable over a three-year period. The weighted-average per-share fair value for options
granted was $13.20 in 2019. To calculate this fair value, we used the Black-Scholes model with the following weighted-average assumptions:
KEY ASSUMPTIONS FOR STOCK OPTIONS GRANTED
 
 
Year ended December 31, 2019
Stock price volatility
18.63
%
Expected term
5.34 years

Risk-free rate of return
2.49
%
Annual dividend yield
3.35
%


The following table shows a summary of nonqualified stock options at December 31, 2019 and activity for the year then ended:
NONQUALIFIED STOCK OPTIONS
 
 
 
 
 
 
 
 
 
Common shares under options
 
Weighted- average exercise price
 
Weighted- average remaining contractual term (in years)
 
Aggregate intrinsic value (in millions)
Outstanding at January 1, 2019
56,940

 
$
54.63

 
 
 
 
Granted
261,075

 
$
106.76

 
 
 
 
Exercised
(52,540
)
 
$
54.52

 
 
 
 
Forfeited/canceled
(17,898
)
 
$
106.76

 
 
 
 
Outstanding at December 31, 2019
247,577

 
$
105.86

 
8.85
 
$
11

 
 
 
 
 
 
 
 
Vested or expected to vest at December 31, 2019
237,236

 
$
105.82

 
8.84
 
$
11

Exercisable at December 31, 2019
4,400

 
$
55.90

 
0.01
 
$
—



The aggregate intrinsic value at December 31, 2019 is the total of the difference between Sempra Energy’s closing common stock price and the exercise price for all in-the-money options. The aggregate intrinsic value for nonqualified stock options exercised in the last three years was:
▪
$4 million in 2019
▪
$9 million in 2018
▪
$9 million in 2017
A negligible amount of total compensation cost related to nonvested stock options not yet recognized as of December 31, 2019 is expected to be recognized over a weighted-average period of 2.03 years.
We received cash of $3 million from stock option exercises during 2019.
SEMPRA ENERGY RESTRICTED STOCK UNITS
We use a Monte-Carlo simulation model to estimate the fair value of our RSUs that vest based on Sempra Energy’s total return to shareholders. Our determination of fair value is affected by the historical volatility of the common stock price for Sempra Energy and its peer group companies. The valuation also is affected by the risk-free rates of return and a number of other variables. Below are key assumptions for RSUs granted in the last three years:
KEY ASSUMPTIONS FOR RSUs GRANTED
 
 
Years ended December 31,
 
2019
 
2018
 
2017
Stock price volatility
17.74
%
 
17.46
%
 
17.24
%
Risk-free rate of return
2.46
%
 
2.00
%
 
1.49
%


The following table shows a summary of RSUs at December 31, 2019 and activity for the year then ended:
RESTRICTED STOCK UNITS
 
 
 
 
 
 
 
 
 
 
 
Performance-based
restricted stock units
 
Service-based
restricted stock units
 
Units
 
Weighted- average
grant-date
fair value
 
Units
 
Weighted- average
grant-date
fair value
Nonvested at January 1, 2019
1,242,169

 
$
106.11

 
402,361

 
$
105.01

Granted
389,825

 
$
113.54

 
260,594

 
$
112.50

Vested
(142,820
)
 
$
100.28

 
(209,395
)
 
$
102.68

Forfeited
(402,193
)
 
$
103.34

 
(37,773
)
 
$
110.25

Nonvested at December 31, 2019(1)
1,086,981

 
$
109.85

 
415,787

 
$
119.96

Expected to vest at December 31, 2019
1,066,375

 
$
109.89

 
408,782

 
$
109.65

(1) 
Each RSU represents the right to receive one share of our common stock if applicable performance conditions are satisfied. For all performance-based RSUs, up to an additional 100% of the shares represented by the RSUs may be issued if Sempra Energy exceeds target performance conditions.

In 2019, 2018 and 2017, the total fair value of RSU shares vested during the year was $36 million, $32 million and $45 million, respectively.
The $32 million of total compensation cost related to nonvested RSUs not yet recognized as of December 31, 2019 is expected to be recognized over a weighted-average period of 2.07 years. The weighted-average per-share fair values for performance-based RSUs granted were $105.03 and $110.54 in 2018 and 2017, respectively. The weighted-average per-share fair values for service-based RSUs granted were $107.60 and $101.88 in 2018 and 2017, respectively.