INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2019

Schedule of Effective Income Tax Rate Reconciliation

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.

Schedule of Impact of Changes in Legislation

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

Schedule Of Geographic Components Of Income Before Income Taxes And Equity Earnings Of Certain Unconsolidated Subsidiaries

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.

Schedule Of Components Of Income Tax Expense

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

Schedule Of Components Of Deferred Tax Assets And Liabilities

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

Summary of Tax Credit Carryforwards

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.

Summary of Operating Loss Carryforwards

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.

Summary of Income Tax Contingencies

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.

Summary of Positions for which Significant Change in Unrecognized Tax Benefits is Reasonably Possible

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	)