SIGNIFICANT ACCOUNTING POLICIES AND OTHER FINANCIAL DATA

12 Months Ended

Dec. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Significant Accounting Policies And Other Financial Data

SIGNIFICANT ACCOUNTING POLICIES AND OTHER FINANCIAL DATA

PRINCIPLES OF CONSOLIDATION

Sempra Energy

Sempra Energy’s Consolidated Financial Statements include the accounts of Sempra Energy, a California-based energy-services holding company, and its consolidated subsidiaries and VIEs. Sempra Global is the holding company for most of our subsidiaries that are not subject to California or Texas utility regulation. Sempra Energy’s businesses were managed within six separate reportable segments until April 2019 and five separate reportable segments thereafter, which we discuss in Note 17. In the first quarter of 2019, our Sempra LNG & Midstream segment was renamed “Sempra LNG.” This segment name change had no impact on our historical position, results of operations, cash flow or segment level results previously reported. All references in these Notes to our reportable segments are not intended to refer to any legal entity with the same or similar name.

SDG&E

SDG&E’s Consolidated Financial Statements include its accounts and the accounts of a VIE of which SDG&E was the primary beneficiary until August 23, 2019, at which time SDG&E deconsolidated the VIE, as we discuss below in “Variable Interest Entities.” SDG&E’s common stock is wholly owned by Enova, which is a wholly owned subsidiary of Sempra Energy.

SoCalGas

SoCalGas’ common stock is wholly owned by PE, which is a wholly owned subsidiary of Sempra Energy.

In this report, we refer to SDG&E and SoCalGas collectively as the California Utilities.

BASIS OF PRESENTATION

This is a combined report of Sempra Energy, SDG&E and SoCalGas. We provide separate information for SDG&E and SoCalGas as required. References in this report to “we,” “our” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, unless otherwise indicated by the context. We have eliminated intercompany accounts and transactions within the consolidated financial statements of each reporting entity.

Throughout this report, we refer to the following as Consolidated Financial Statements and Notes to Consolidated Financial Statements when discussed together or collectively:

▪ the Consolidated Financial Statements and related Notes of Sempra Energy and its subsidiaries and VIEs;

▪ the Consolidated Financial Statements and related Notes of SDG&E and its VIE (until deconsolidation of the VIE in August 2019); and

▪ the Financial Statements and related Notes of SoCalGas.

Use of Estimates in the Preparation of the Financial Statements

We have prepared our Consolidated Financial Statements in conformity with U.S. GAAP. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including the disclosure of contingent assets and liabilities at the date of the financial statements. Although we believe the estimates and assumptions are reasonable, actual amounts ultimately may differ significantly from those estimates.

Discontinued Operations

In January 2019, our board of directors approved a plan to sell our South American businesses based on our strategic focus on North America. We determined that these businesses, which previously constituted the Sempra South American Utilities segment, and certain activities associated with these businesses, met the held-for-sale criteria. These businesses are presented as discontinued operations, as the planned sales represent a strategic shift that will have a major effect on our operations and financial results. Throughout this report, the financial information for all periods presented has been adjusted to reflect the

presentation of these businesses as discontinued operations, which we discuss further in Note 5. Our discussions in the Notes below relate only to our continuing operations unless otherwise noted.

Subsequent Events

We evaluated events and transactions that occurred after December 31, 2019 through the date the financial statements were issued, and in the opinion of management, the accompanying statements reflect all adjustments and disclosures necessary for a fair presentation.

EFFECTS OF REGULATION

The California Utilities’ accounting policies and financial statements reflect the application of U.S. GAAP provisions governing rate-regulated operations and the policies of the CPUC and the FERC. Under these provisions, a regulated utility records regulatory assets, which are generally costs that would otherwise be charged to expense, if it is probable that, through the ratemaking process, the utility will recover those assets from customers. To the extent that recovery is no longer probable, the related regulatory assets are written off. Regulatory liabilities generally represent amounts collected from customers in advance of the actual expenditure by the utility. If the actual expenditures are less than amounts previously collected from ratepayers, the excess would be refunded to customers, generally by reducing future rates. Regulatory liabilities may also arise from other transactions such as unrealized gains on fixed price contracts and other derivatives or certain deferred income tax benefits that are passed through to customers in future rates. In addition, the California Utilities record regulatory liabilities when the CPUC or the FERC requires a refund to be made to customers or has required that a gain or other transaction of net allowable costs be given to customers over future periods.

Determining probability of recovery of regulatory assets requires significant judgment by management and may include, but is not limited to, consideration of:

▪ the nature of the event giving rise to the assessment

▪ existing statutes and regulatory code

▪ legal precedents

▪ regulatory principles and analogous regulatory actions

▪ testimony presented in regulatory hearings

▪ regulatory orders

▪ a commission-authorized mechanism established for the accumulation of costs

▪ status of applications for rehearings or state court appeals

▪ specific approval from a commission

▪ historical experience

Sempra Mexico’s natural gas distribution utility, Ecogas, also applies U.S. GAAP for rate-regulated utilities to its operations, including the same evaluation of probability of recovery of regulatory assets described above.

We provide information concerning regulatory assets and liabilities in Note 4.

Our Sempra Texas Utilities segment is comprised of our equity method investments in Oncor Holdings, which, at December 31, 2019, owns an 80.25% interest in Oncor, and Sharyland Holdings, which owns 100% of Sharyland Utilities. Oncor and Sharyland Utilities are regulated electric transmission and distribution utilities in Texas and their rates are regulated by the PUCT and certain cities and are subject to regulatory rate-setting processes and annual earnings oversight. Oncor and Sharyland Utilities prepare their financial statements in accordance with the provisions of U.S. GAAP governing rate-regulated operations.

Our Sempra Mexico segment includes the operating companies of our subsidiary, IEnova, as well as certain holding companies and risk management activity. Certain business activities at IEnova are regulated by the CRE and meet the regulatory accounting requirements of U.S. GAAP. Pipeline projects currently under construction at IEnova that meet the regulatory accounting requirements of U.S. GAAP record the impact of AFUDC related to equity. We discuss AFUDC below in “Property, Plant and Equipment.”

FAIR VALUE MEASUREMENTS

We measure certain assets and liabilities at fair value on a recurring basis, primarily nuclear decommissioning and benefit plan trust assets and derivatives. We also measure certain assets at fair value on a non-recurring basis in certain circumstances.

A fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Also, we consider an issuer’s credit standing when measuring its liabilities at fair value.

We establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 – Pricing inputs are unadjusted quoted prices available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 financial instruments primarily consist of listed equities and U.S. government treasury securities, primarily in the NDT and benefit plan trusts, and exchange-traded derivatives.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including:

▪ quoted forward prices for commodities

▪ time value

▪ current market and contractual prices for the underlying instruments

▪ volatility factors

▪ other relevant economic measures

Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Our financial instruments in this category include listed equities, domestic corporate bonds, municipal bonds and other foreign bonds, primarily in the NDT and benefit plan trusts, and non-exchange-traded derivatives such as interest rate instruments and over-the-counter forwards and options.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. Our Level 3 financial instruments consist of CRRs and fixed-price electricity positions at SDG&E.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

Cash equivalents are highly liquid investments with original maturities of three months or less at the date of purchase.

Restricted cash primarily includes:

▪ for SDG&E, funds held by a trustee for Otay Mesa VIE to pay certain operating costs until the deconsolidation of the VIE in August 2019; and

▪ for Sempra Mexico, funds primarily denominated in Mexican pesos to pay for rights-of-way, license fees, permits, topographic surveys and other costs pursuant to trust and debt agreements related to pipeline projects.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Consolidated Balance Sheets to the sum of such amounts reported on the Consolidated Statements of Cash Flows.

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(Dollars in millions)
	At December 31,
	2019		2018
Sempra Energy Consolidated:
Cash and cash equivalents	$	108	$	102
Restricted cash, current	31		35
Restricted cash, noncurrent	3		21
Cash, cash equivalents and restricted cash in discontinued operations	75		88
Total cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows	$	217	$	246
SDG&E:
Cash and cash equivalents	$	10	$	8
Restricted cash, current	—		11
Restricted cash, noncurrent	—		18
Total cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows	$	10	$	37

COLLECTION ALLOWANCES

We record allowances for the collection of trade and other accounts and notes receivable, which include allowances for doubtful customer accounts and for other receivables. We show the changes in these allowances in the table below:

COLLECTION ALLOWANCES
(Dollars in millions)
	Years ended December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Allowances for collection of receivables at January 1	$	21		$	25		$	29
Provisions for uncollectible accounts	22			10			12
Write-offs of uncollectible accounts	(14		)	(14		)	(16		)
Allowances for collection of receivables at December 31	$	29		$	21		$	25
SDG&E:
Allowances for collection of receivables at January 1	$	11		$	9		$	8
Provisions for uncollectible accounts	10			9			8
Write-offs of uncollectible accounts	(7		)	(7		)	(7		)
Allowances for collection of receivables at December 31	$	14		$	11		$	9
SoCalGas:
Allowances for collection of receivables at January 1	$	10		$	16		$	21
Provisions for uncollectible accounts	12			1			4
Write-offs of uncollectible accounts	(7		)	(7		)	(9		)
Allowances for collection of receivables at December 31	$	15		$	10		$	16

We evaluate accounts receivable collectability using a combination of factors, including past due status based on contractual terms, trends in write-offs, the age of the receivable, counterparty creditworthiness, economic conditions and specific events, such as bankruptcies. Adjustments to collection allowances are made when necessary based on the results of analysis, the aging of receivables, and historical and industry trends.

We write off accounts receivable in the period in which we deem the receivable to be uncollectible. We record recoveries of accounts receivable previously written off when it is known that they will be received.

CONCENTRATION OF CREDIT RISK

Credit risk is the risk of loss that would be incurred as a result of nonperformance by our counterparties on their contractual obligations. We have policies governing the management of credit risk that are administered by the respective credit departments for each of the California Utilities and, on a combined basis, for all non-CPUC regulated affiliates and overseen by their separate risk management committees.

This oversight includes calculating current and potential credit risk on a daily basis and monitoring actual balances in comparison to approved limits. We establish credit limits based on risk and return considerations under terms customarily available in the industry. We avoid concentration of counterparties whenever possible, and we believe our credit policies significantly reduce overall credit risk. These policies include an evaluation of:

▪ prospective counterparties’ financial condition (including credit ratings)

▪ collateral requirements

▪ the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty

▪ downgrade triggers

We believe that we have provided adequate reserves for counterparty nonperformance.

When our development projects become operational, we rely significantly on the ability of suppliers to perform under long-term agreements and on our ability to enforce contract terms in the event of nonperformance. Also, the factors that we consider in evaluating a development project include negotiating customer and supplier agreements and, therefore, we rely on these agreements for future performance. We also may condition our decision to go forward on development projects on first obtaining these customer and supplier agreements.

INVENTORIES

The California Utilities value natural gas inventory using the LIFO method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. These differences are generally temporary, but may become permanent if the natural gas inventory withdrawn from storage during the year is not replaced by year end. The California Utilities generally value materials and supplies at the lower of average cost or net realizable value.

Sempra Mexico and Sempra LNG value natural gas inventory and materials and supplies at the lower of average cost or net realizable value. Sempra Mexico and Sempra LNG value LNG inventory using the first-in first-out method.

The components of inventories are as follows:

INVENTORY BALANCES AT DECEMBER 31
(Dollars in millions)
	Natural gas				LNG				Materials and supplies				Total
	2019		2018		2019		2018		2019		2018		2019		2018
Sempra Energy Consolidated	$	110	$	95	$	9	$	4	$	158	$	159	$	277	$	258
SDG&E	1		—		—		—		93		102		94		102
SoCalGas	90		92		—		—		46		42		136		134

WILDFIRE FUND

On July 12, 2019, the Wildfire Legislation was signed into law. The Wildfire Legislation addresses certain issues related to catastrophic wildfires in the State of California and their impact on electric IOUs. Investor-owned gas distribution utilities such as SoCalGas are not covered by this legislation. The issues addressed include wildfire mitigation, cost recovery standards and requirements, a wildfire fund, a cap on liability, and the establishment of a wildfire safety board.

The Wildfire Legislation requires SDG&E to install at least $215 million of fire risk mitigation capital improvements, which will be the first $215 million of capital included in its wildfire mitigation plan, and recover its financing costs without a ROE.

The Wildfire Legislation established a revised legal standard for the recovery of wildfire costs (Revised Prudent Manager Standard) and established a fund (the Wildfire Fund) to provide liquidity to SDG&E, PG&E and Edison to pay IOU wildfire-related claims in the event that the governmental agency responsible for determining causation determines the applicable IOU’s equipment caused the ignition of a wildfire, the primary insurance coverage is exceeded and certain other conditions are satisfied. The primary purpose of the Wildfire Fund is to pool resources provided by shareholders and ratepayers of the IOUs and make those resources available to reimburse the IOUs for third-party wildfire claims incurred after July 12, 2019, the effective date of the Wildfire Legislation, subject to certain limitations.

An IOU may seek payment from the Wildfire Fund for settled or adjudicated third-party damage claims arising from certain wildfires that exceed, in aggregate in a calendar year, the greater of $1 billion or the IOU’s required amount of insurance coverage as recommended by the Wildfire Fund’s administrator. Wildfire claims approved by the Wildfire Fund’s administrator will be paid

by the Wildfire Fund to the IOU to the extent funds are available. These utilized funds will be subject to review by the CPUC, which will make a determination as to the degree an IOU’s conduct related to an ignition of a wildfire was prudent or imprudent. The Revised Prudent Manager Standard requires that the CPUC apply clear standards when reviewing wildfire liability losses paid when determining the reasonableness of an IOU’s conduct related to an ignition. Under this standard, the conduct under review related to the ignition may include factors within and beyond the IOU’s control, including humidity, temperature and winds. Costs and expenses may be allocated for cost recovery in full or in part. Also, under this standard, an IOU’s conduct will be deemed reasonable if a valid annual safety certification is in place at the time of the ignition, unless a serious doubt is raised, in which case the burden shifts to the utility to dispel that doubt. The IOUs will receive an annual safety certification from the CPUC if they meet various requirements.

If an IOU has maintained a valid annual safety certification, to the extent it is found to be imprudent, claims will be reimbursable by the IOU to the Wildfire Fund up to a cap based on the IOU’s rate base. The aggregate requirement to reimburse the Wildfire Fund over a trailing three calendar year period is capped at 20% of the equity portion of an IOU’s electric transmission and distribution rate base in the year of the prudency determination. SDG&E received its annual safety certification from the CPUC on July 26, 2019, which is valid for 12 months. Based on its 2019 rate base, the liability cap for SDG&E is approximately $900 million, which will be adjusted annually. The liability cap will apply on a rolling three-year basis so long as future annual safety certifications are received and the Wildfire Fund has not been terminated, which could occur if funds are exhausted. Amounts in excess of the liability cap and amounts that are determined to be prudently incurred do not need to be reimbursed by an IOU to the Wildfire Fund. The Wildfire Fund does not have a specified term and coverage will continue until the assets of the Wildfire Fund are exhausted and the Wildfire Fund is terminated, in which case, the remaining funds will be transferred to California’s general fund to be used for fire risk mitigation programs.

The Wildfire Fund could initially be funded up to $10.5 billion by a loan from the State of California Surplus Money Investment Fund. Such lending will subsequently be financed through an anticipated DWR bond, securitized through a dedicated surcharge on ratepayers’ bills attributable to the DWR. In October 2019, the CPUC adopted a decision authorizing a non-bypassable charge to be collected by the IOUs to support the anticipated DWR bond issuance authorized by AB 1054. The CPUC decision also determined that ratepayers of non-participating electrical corporations shall not pay the non-bypassable charge. PG&E has agreed to participate in the Wildfire Fund, subject to bankruptcy court approval. Accordingly, if PG&E is unable to participate in the Wildfire Fund, its customers will not pay the non-bypassable charge, resulting in significantly lower Wildfire Fund contributions from ratepayers than the anticipated $10.5 billion.

The Wildfire Fund could also be funded by up to $7.5 billion in initial shareholder contributions from the IOUs (SDG&E’s share is $322.5 million, PG&E’s share is $4.8 billion and Edison’s share is $2.4 billion). The IOUs could also be required to make annual shareholder contributions to the Wildfire Fund with an aggregate value of $3 billion over a 10-year period (SDG&E’s share is $129 million, PG&E’s share is $1.9 billion and Edison’s share is $945 million). If PG&E is unable to participate in the Wildfire Fund, SDG&E’s and Edison’s aggregate shareholder contributions to the Wildfire Fund will not change and are expected to total approximately $3.8 billion. When estimating the period of benefit of the Wildfire Fund asset that we discuss below, we assume PG&E will participate in the Wildfire Fund. The contributions are not subject to rate recovery.

SDG&E paid its initial shareholder contribution of $322.5 million to the Wildfire Fund in September 2019. SDG&E funded this contribution with proceeds from an equity contribution from Sempra Energy. Sempra Energy funded the equity contribution to SDG&E with proceeds from settling forward sale agreements through physical delivery of shares of Sempra Energy common stock in exchange for cash, which we discuss in Note 14. Edison paid its initial shareholder contribution in September 2019.

In a complaint filed in U.S. District Court for the Northern District of California in July 2019, plaintiffs seek to invalidate AB 1054 based on allegations that the legislation violates federal law. The California Attorney General has moved to dismiss the complaint.

Wildfire Fund Asset

SDG&E recorded a Wildfire Fund asset for its commitment to make shareholder contributions totaling $451.5 million, measured at present value as of July 25, 2019 (the date by which both Edison and SDG&E opted to contribute to the Wildfire Fund). SDG&E is amortizing the Wildfire Fund asset to O&M on a straight-line basis over the estimated period of benefit, as adjusted for utilization by the IOUs. The estimated period of benefit of the Wildfire Fund asset, which is 15 years as of December 31, 2019, is based on several assumptions, including, but not limited to:

• historical wildfire experience of each IOU in the State of California, including frequency and severity of the wildfires

• the value of property potentially damaged by wildfires

• the effectiveness of wildfire risk mitigation efforts by each IOU

• liability cap of each IOU

• IOU prudency determination levels

• FERC jurisdictional allocation levels

• insurance coverage levels

The use of different assumptions, or changes to the assumptions used, could have a significant impact on the estimated period of benefit of the Wildfire Fund asset.

We will periodically reevaluate the estimated period of benefit of the Wildfire Fund asset based on actual experience and changes in the above assumptions. SDG&E may recognize a reduction of its Wildfire Fund asset and record a charge against earnings in the period when there is a reduction of the available coverage due to recoverable claims from the IOUs. The reduction to the Wildfire Fund asset may be proportionate to the Wildfire Fund’s consumption (i.e., recoveries for outstanding wildfire claims that are recoverable from the Wildfire Fund, net of anticipated or actual reimbursement to the Wildfire Fund by the responsible IOU, would decrease the Wildfire Fund asset and remaining available coverage). At December 31, 2019, there were no such known claims from the IOUs requiring a reduction of the Wildfire Fund asset.

At December 31, 2019, the current portion of the Wildfire Fund asset was $29 million in Other Current Assets on Sempra Energy’s Consolidated Balance Sheet and in Prepaid Expenses on SDG&E’s Consolidated Balance Sheet, and the noncurrent portion of $392 million was in Wildfire Fund on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets.

Wildfire Fund Obligation

SDG&E recorded a Wildfire Fund obligation for its commitment to make shareholder contributions totaling $451.5 million, measured at present value as of July 25, 2019 (the date by which both Edison and SDG&E opted to contribute to the Wildfire Fund). SDG&E paid its initial shareholder contribution of $322.5 million to the Wildfire Fund in September 2019 and its first annual shareholder contribution of $12.9 million in December 2019. At December 31, 2019, SDG&E expects to make annual shareholder contributions of $12.9 million in each of the next nine years. SDG&E accretes the present value of the Wildfire Fund obligation to O&M until the liability is settled.

At December 31, 2019, the Wildfire Fund obligation was $12.9 million in Other Current Liabilities and $86 million in Deferred Credits and Other on Sempra Energy’s and SDG&E’s Consolidated Balance Sheets.

INCOME TAXES

Income tax expense includes current and deferred income taxes. We record deferred income taxes for temporary differences between the book and the tax basis of assets and liabilities. ITCs from prior years are amortized to income by the California Utilities over the estimated service lives of the properties as required by the CPUC.

Under the regulatory accounting treatment required for flow-through temporary differences, the California Utilities and Sempra Mexico recognize:

▪ regulatory assets to offset deferred income tax liabilities if it is probable that the amounts will be recovered from customers; and

▪ regulatory liabilities to offset deferred income tax assets if it is probable that the amounts will be returned to customers.

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take has to have at least a more-likely-than-not chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more-likely-than-not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefit associated with the position. We recognize a benefit for a tax position that meets the more-likely-than-not criterion at the largest amount of tax benefit that is greater than 50% likely of being realized upon its effective resolution.

Unrecognized income tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our ETR.

In December 2017, the TCJA was signed into law. As a result, all cumulative undistributed earnings from non-U.S. subsidiaries were deemed repatriated and subjected to a one-time U.S. federal deemed repatriation tax. To the extent we intend to repatriate cash to the U.S. from our continuing international operations, we accrue incremental income tax. We currently do not record deferred income taxes for other basis differences between financial statement and income tax investment amounts in non-U.S. subsidiaries to the extent the related cumulative undistributed earnings are indefinitely reinvested. We recognize income tax expense for basis differences related to global intangible low-taxed income as a period cost if and when incurred.

We provide additional information about income taxes in Note 8.

GREENHOUSE GAS ALLOWANCES AND OBLIGATIONS

The California Utilities, Sempra Mexico and Sempra LNG are required by AB 32 to acquire GHG allowances for every metric ton of carbon dioxide equivalent emitted into the atmosphere during electric generation and natural gas transportation. At the California Utilities, many GHG allowances are allocated to us on behalf of our customers at no cost. We record purchased and allocated GHG allowances at the lower of weighted-average cost or market. We measure the compliance obligation, which is based on emissions, at the carrying value of allowances held plus the fair value of additional allowances necessary to satisfy the obligation. The California Utilities balance costs and revenues associated with the GHG program through regulatory balancing accounts. Sempra Mexico and Sempra LNG record the cost of GHG obligations in cost of sales. We remove the assets and liabilities from the balance sheets as the allowances are surrendered.

RENEWABLE ENERGY CERTIFICATES

RECs are energy rights established by governmental agencies for the environmental and social promotion of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source in certain markets.

Retail sellers of electricity obtain RECs through renewable energy PPAs, internal generation or separate purchases in the market to comply with the RPS established by the governmental agencies. RECs provide documentation for the generation of a unit of renewable energy that is used to verify compliance with the RPS. The cost of RECs at SDG&E, which is recoverable in rates, is recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations.

PROPERTY, PLANT AND EQUIPMENT

PP&E is recorded at cost and primarily represents the buildings, equipment and other facilities used by the California Utilities to provide natural gas and electric utility services, and by the Sempra Global businesses in their operations, including construction work in progress. PP&E also includes lease improvements and other equipment at Parent and Other. Our plant costs include labor, materials and contract services and expenditures for replacement parts incurred during a major maintenance outage of a plant. In addition, the cost of utility plant at our rate-regulated businesses and PP&E under regulated projects that meet the regulatory accounting requirements of U.S. GAAP includes AFUDC. The cost of other PP&E includes capitalized interest. Maintenance costs are expensed as incurred. The cost of most retired depreciable utility plant assets less salvage value is charged to accumulated depreciation.

We discuss assets collateralized as security for certain indebtedness in Note 7.

PROPERTY, PLANT AND EQUIPMENT BY MAJOR FUNCTIONAL CATEGORY
(Dollars in millions)
	December 31,				Depreciation rates for years ended December 31,
	2019		2018		2019		2018			2017
SDG&E:
Natural gas operations	$	2,534	$	2,382	2.47	%	2.44	%		2.40	%
Electric distribution	7,985		7,462		3.94		3.91			3.92
Electric transmission(1)	6,577		6,222		2.79		2.76			2.71
Electric generation(2)	2,415		2,967		4.50		4.12			4.05
Other electric(3)	1,492		1,408		6.61		6.43			5.54
Construction work in progress(1)	1,501		1,221		NA		NA			NA
Total SDG&E	22,504		21,662
SoCalGas:
Natural gas operations(4)	18,370		17,268		3.60		3.60			3.63
Other non-utility	34		34		5.08		5.39			5.28
Construction work in progress	958		836		NA		NA			NA
Total SoCalGas	19,362		18,138
Other operating units and parent(5):					Estimated useful lives				Weighted-average useful life
Land and land rights	278		326		16 to 50 years(6)				31
Machinery and equipment:
Generating plants	1,154		869		15 to 20 years				18
LNG terminals	1,134		1,134		43 years				43
Pipelines and storage	3,596		3,413		5 to 50 years				41
Other	180		183		1 to 50 years				6
Construction work in progress	895		451		NA				NA
Other(7)	226		439		3 to 50 years				15
	7,463		6,815
Total Sempra Energy Consolidated	$	49,329	$	46,615

⁽¹⁾  At December 31, 2019, includes $484 million in electric transmission assets and $13 million in construction work in progress related to SDG&E’s 90% interest in the Southwest Powerlink transmission line, jointly owned by SDG&E with other utilities. SDG&E, and each of the other owners, holds its undivided interest as a tenant in common in the property. Each owner is responsible for its share of the project and participates in decisions concerning operations and capital expenditures. SDG&E’s share of operating expenses is included in Sempra Energy’s and SDG&E’s Consolidated Statements of Operations.

⁽²⁾  Includes capital lease assets of $1.3 billion at December 31, 2018.

⁽³⁾  Includes capital lease assets of $13 million at December 31, 2018.

⁽⁴⁾  Includes capital lease assets of $40 million at December 31, 2018.

⁽⁵⁾  Includes $178 million and $154 million at December 31, 2019 and 2018, respectively, of utility plant, primarily pipelines and other distribution assets at Ecogas.

⁽⁶⁾  Estimated useful lives are for land rights.

⁽⁷⁾  Includes capital lease assets of $136 million and associated leasehold improvements of $24 million at December 31, 2018 related to our corporate headquarters build-to-suit arrangement, which is accounted for as a ROU asset as of January 1, 2019 upon adoption of the lease standard.

Depreciation expense is computed using the straight-line method over the asset’s estimated composite useful life, the CPUC-prescribed period for the California Utilities, or the remaining term of the site leases, whichever is shortest.

DEPRECIATION EXPENSE
(Dollars in millions)
	Years ended December 31,
	2019		2018		2017
Sempra Energy Consolidated	$	1,551	$	1,470	$	1,368
SDG&E	757		686		621
SoCalGas	598		553		514

ACCUMULATED DEPRECIATION
(Dollars in millions)
	December 31,
	2019		2018
SDG&E:
Accumulated depreciation:
Electric(1)	$	4,705	$	4,558
Natural gas	832		794
Total SDG&E	5,537		5,352
SoCalGas:
Accumulated depreciation of natural gas utility plant in service(2)	6,023		5,685
Accumulated depreciation – other non-utility	15		14
Total SoCalGas	6,038		5,699
Other operating units and parent and other:
Accumulated depreciation – other(3)	1,302		1,125
Total Sempra Energy Consolidated	$	12,877	$	12,176

⁽¹⁾  Includes accumulated depreciation for capital lease assets of $48 million at December 31, 2018. Includes $263 million at December 31, 2019 related to SDG&E’s 90% interest in the Southwest Powerlink transmission line, jointly owned by SDG&E and other utilities.

⁽²⁾  Includes accumulated depreciation for capital lease assets of $37 million at December 31, 2018.

⁽³⁾  Includes accumulated depreciation for capital lease assets of $10 million and associated leasehold improvements of $3 million at December 31, 2018 related to our corporate headquarters’ build-to-suit arrangement, which is accounted for as a ROU asset as of January 1, 2019. Includes $49 million and $43 million at December 31, 2019 and 2018, respectively, of accumulated depreciation for utility plant at Ecogas.

The California Utilities finance their construction projects with debt and equity funds. The CPUC and the FERC allow the recovery of the cost of these funds by the capitalization of AFUDC, calculated using rates authorized by the CPUC and the FERC, as a cost component of PP&E. The California Utilities earn a return on the capitalized AFUDC after the utility property is placed in service and recover the AFUDC from their customers over the expected useful lives of the assets.

Pipeline projects currently under construction by Sempra Mexico that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC.

We capitalize interest costs incurred to finance capital projects and interest at equity method investments that have not commenced planned principal operations.

The table below summarizes capitalized interest and AFUDC.

CAPITALIZED FINANCING COSTS
(Dollars in millions)
	Years ended December 31,
	2019		2018		2017
Sempra Energy Consolidated	$	183	$	193	$	247
SDG&E	75		82		85
SoCalGas	47		48		60

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill is the excess of the purchase price over the fair value of the identifiable net assets of acquired companies measured at the time of acquisition. Goodwill is not amortized, but we test it for impairment annually on October 1 or whenever events or changes in circumstances necessitate an evaluation. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, and the book value of goodwill is greater than its fair value on the test date, we record a goodwill impairment loss.

For our annual goodwill impairment testing, under current U.S. GAAP guidance we have the option to first make a qualitative assessment of whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount before applying the two-step, quantitative goodwill impairment test. If we elect to perform the qualitative assessment, we evaluate relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, changes in key personnel and the overall financial performance of the reporting unit. If, after assessing these

qualitative factors, we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we perform the two-step goodwill impairment test. When we perform the two-step, quantitative goodwill impairment test, we exercise judgment to develop estimates of the fair value of the reporting unit and the corresponding goodwill. Our fair value estimates are developed from the perspective of a knowledgeable market participant. We consider observable transactions in the marketplace for similar investments, if available, as well as an income-based approach such as discounted cash flow analysis. A discounted cash flow analysis may be based directly on anticipated future revenues and expenses and may be performed based on free cash flows generated within the reporting unit. Critical assumptions that affect our estimates of fair value may include:

▪ consideration of market transactions

▪ future cash flows

▪ the appropriate risk-adjusted discount rate

▪ country risk

▪ entity risk

Goodwill of $1,602 million at December 31, 2019 and 2018 relates to the 2016 acquisitions of IEnova Pipelines and Ventika wind power generation facilities at Sempra Mexico.

Other Intangible Assets

Other Intangible Assets included on the Sempra Energy Consolidated Balance Sheets are as follows:

OTHER INTANGIBLE ASSETS
(Dollars in millions)
	Amortization period (years)	December 31,
		2019			2018
Renewable energy transmission and consumption permit	19	$	154		$	154
O&M agreement	23	66			66
Other	10 years to indefinite	30			30
		250			250
Less accumulated amortization:
Renewable energy transmission and consumption permit		(24		)	(16		)
O&M agreement		(6		)	(3		)
Other		(7		)	(7		)
		(37		)	(26		)
		$	213		$	224

Other Intangible Assets at December 31, 2019 primarily includes:

▪ a renewable energy transmission and consumption permit previously granted by the CRE that was acquired in connection with the acquisition of the Ventika wind power generation facilities; and

▪ a favorable O&M agreement acquired in connection with the acquisition of DEN, which we discuss in Note 5.

Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense for intangible assets in 2019, 2018 and 2017 was $11 million, $16 million and $18 million, respectively. We estimate the amortization expense for the next five years to be $12 million per year.

LONG-LIVED ASSETS

We test long-lived assets for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include intangible assets subject to amortization, but do not include investments in unconsolidated entities. Events or changes in circumstances that indicate that the carrying amount of a long-lived asset may not be recoverable may include:

▪ significant decreases in the market price of an asset;

▪ a significant adverse change in the extent or manner in which we use an asset or in its physical condition;

▪ a significant adverse change in legal or regulatory factors or in the business climate that could affect the value of an asset;

▪ a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of continuing losses associated with the use of a long-lived asset; and

▪ a current expectation that, more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the fair value of the asset. This evaluation is performed at the lowest level for which separately identifiable cash flows exist.

VARIABLE INTEREST ENTITIES

We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based on 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 the right to receive benefits that could be significant to the VIE.

We will continue to evaluate our VIEs for any changes that may impact our determination of whether an entity is a VIE and if we are the primary beneficiary.

SDG&E

SDG&E’s power procurement is subject to reliability requirements that may require SDG&E to enter into various PPAs that 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.

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 on 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.

SDG&E determined that none of its contracts resulted in SDG&E being the primary beneficiary of a VIE at December 31, 2019. In addition to tolling agreements, other variable interests involve various elements of fuel and power costs, and other components of cash flows 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 could be significant to the financial position and liquidity of SDG&E and Sempra Energy. We provide additional information about PPAs with power plant facilities that are VIEs of which SDG&E is not the primary beneficiary in Note 16.

Otay Mesa VIE

Through October 3, 2019, SDG&E had a tolling agreement to purchase power generated at OMEC, a 605-MW generating facility owned by OMEC LLC, which is a VIE that we refer to as Otay Mesa VIE. Under the terms of a related agreement, OMEC LLC could have required SDG&E to purchase the power plant (referred to as the put option) on or before October 3, 2019 for $280 million, subject to adjustments, or upon earlier termination of the PPA. SDG&E determined that it was the primary beneficiary of Otay Mesa VIE, and therefore, SDG&E and Sempra Energy consolidated Otay Mesa VIE.

In October 2018, SDG&E and OMEC LLC signed a resource adequacy capacity agreement for a term that would commence at the expiration of the current tolling agreement in October 2019 and end in August 2024. The capacity agreement was approved by OMEC LLC’s lenders and the CPUC in December 2018 and February 2019, respectively. However, given certain then pending requests for rehearing of the CPUC’s decision approving the capacity agreement, on March 28, 2019, OMEC LLC exercised the put option requiring SDG&E to purchase the power plant. On August 6, 2019, the CPUC denied the rehearing requests, and on August 23, 2019, SDG&E and OMEC LLC executed an amended resource adequacy capacity agreement that irrevocably rescinded exercise of the put option. SDG&E and Sempra Energy deconsolidated Otay Mesa VIE on August 23, 2019. No gain or loss was recognized upon deconsolidation.

Prior to deconsolidation, on August 14, 2019, OMEC LLC paid in full its variable-rate loan that was scheduled to mature in August 2024, which we describe in Note 7.

Otay Mesa VIE’s equity of $100 million at December 31, 2018 is included on the Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E.

The following table summarizes the deconsolidation:

DECONSOLIDATION OF OTAY MESA VIE
(Dollars in millions)
	August 23, 2019
Cash and cash equivalents	$	8
Accounts receivable, net	11
Inventories	4
Total current assets	23
Property, plant and equipment, net	272
Other noncurrent assets	27
Total assets	$	322
Accounts payable	$	10
Other current liabilities	2
Total current liabilities	12
Asset retirement obligations	2
Deferred credits and other	27
Total deferred credits and other liabilities	29
Noncontrolling interest	281
Total liabilities and equity	$	322

Sempra Texas Utilities

On March 9, 2018, we completed the acquisition of an indirect, 100% interest in Oncor Holdings, a VIE that, at December 31, 2019, owns an 80.25% interest in Oncor. Sempra Energy is not the primary beneficiary of the VIE because of the structural and operational ring-fencing and governance measures in place that prevent us from having the power to direct the significant activities of Oncor Holdings. As a result, we do not consolidate Oncor Holdings and instead account for our ownership interest as an equity method investment. See Notes 5 and 6 for additional information about our equity method investment in Oncor Holdings and restrictions on our ability to influence its activities. Our maximum exposure to loss, which fluctuates over time, from our interest in Oncor Holdings does not exceed the carrying value of our investment, which was $11,519 million at December 31, 2019 and $9,652 million at December 31, 2018.

Sempra Mexico

Sempra Mexico’s businesses also enter into arrangements that could include variable interests. We evaluate these arrangements

and applicable entities based on the qualitative and quantitative analyses described above. Certain of these entities are service or project companies that are VIEs because the total equity at risk is not sufficient for the entities to finance their activities without additional subordinated financial support. As the primary beneficiary of these companies, we consolidate them. The assets of these VIEs totaled approximately $126 million at December 31, 2019 and $286 million at December 31, 2018 and consisted primarily of PP&E and other long-term assets. Our maximum exposure to loss is equal to the carrying value of these assets.

Sempra Renewables

Certain of Sempra Renewables’ wind and solar power generation projects were held by limited liability companies whose members were Sempra Renewables and financial institutions. The financial institutions were noncontrolling tax equity investors to which earnings, tax attributes and cash flows were allocated in accordance with the respective limited liability company agreements. These entities were VIEs and Sempra Energy was the primary beneficiary, generally due to Sempra Energy’s power as the operator of the renewable energy projects to direct the activities that most significantly impacted the economic performance of these VIEs. As the primary beneficiary of these tax equity limited liability companies, we consolidated them. We sold the solar entities in December 2018 and summarize the impact of the deconsolidation of these solar and other Sempra Renewables entities in Note 5. We sold the wind entities in April 2019. At December 31, 2018, Sempra Energy’s Consolidated Balance Sheet includes $301 million in Assets Held for Sale, $9 million in Liabilities Held for Sale, and equity of $158 million in Other Noncontrolling Interests associated with these wind entities.

Sempra LNG

Cameron LNG JV is a VIE principally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary of the VIE because we do not have the power to direct the most significant activities of Cameron LNG JV, and therefore we account for our investment in Cameron LNG JV under the equity method. The carrying value of our investment, including amounts recognized in AOCI related to interest-rate cash flow hedges at Cameron LNG JV, was $1,256 million at December 31, 2019 and $1,271 million at December 31, 2018. Our maximum exposure to loss, which fluctuates over time, includes the carrying value of our investment and guarantees that we discuss in Note 6.

ASSET RETIREMENT OBLIGATIONS

For tangible long-lived assets, we record AROs for the present value of liabilities of future costs expected to be incurred when assets are retired from service, if the retirement process is legally required and if a reasonable estimate of fair value can be made. We also record a liability if a legal obligation to perform an asset retirement exists and can be reasonably estimated, but performance is conditional upon a future event. We record the estimated retirement cost over the life of the related asset by depreciating the asset retirement cost (measured as the present value of the obligation at the time the asset is placed into service), and accreting the obligation until the liability is settled. Our rate-regulated entities, including the California Utilities, record regulatory assets or liabilities as a result of the timing difference between the recognition of costs in accordance with U.S. GAAP and costs recovered through the rate-making process.

We have recorded AROs related to various assets, including:

SDG&E and SoCalGas

▪ fuel and storage tanks

▪ natural gas transmission and distribution systems

▪ hazardous waste storage facilities

▪ asbestos-containing construction materials

SDG&E

▪ nuclear power facilities

▪ electric transmission and distribution systems

▪ energy storage systems

▪ power generation plants

SoCalGas

▪ underground natural gas storage facilities and wells

All Other Sempra Energy Businesses

▪ natural gas transportation and distribution systems

▪ power generation plants

▪ LNG facility

▪ LPG terminal

The changes in ARO are as follows:

CHANGES IN ASSET RETIREMENT OBLIGATIONS
(Dollars in millions)
	Sempra Energy Consolidated						SDG&E						SoCalGas
	2019			2018			2019			2018			2019			2018
Balance as of January 1(1)	$	2,972		$	2,876		$	874		$	839		$	2,063		$	1,953
Accretion expense	123			121			39			39			81			78
Liabilities incurred	2			7			—			—			—			—
Deconsolidation and reclassification(2)	(2		)	(61		)	(2		)	—			—			—
Payments	(46		)	(42		)	(44		)	(39		)	(2		)	(3		)
Revisions	34			71			(1		)	35			35			35
Balance at December 31(1)	$	3,083		$	2,972		$	866		$	874		$	2,177		$	2,063

⁽¹⁾  Current portion of the ARO for Sempra Energy Consolidated is included in Other Current Liabilities on the Consolidated Balance Sheets.

⁽²⁾ 

In 2018, we reclassified $6 million at Sempra Renewables and $8 million at Sempra LNG to liabilities held for sale, and $5 million related to TdM from liabilities held for sale, and deconsolidated $52 million at Sempra Renewables, as we discuss in Note 5. Liabilities held for sale are included in Other Current Liabilities on the Sempra Energy Consolidated Balance Sheets.

CONTINGENCIES

We accrue losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. For loss contingencies, we accrue the loss if an event has occurred on or before the balance sheet date and:

▪ information available through the date we file our financial statements indicates it is probable that a loss has been incurred, given the likelihood of uncertain future events; and

▪ the amount of the loss can be reasonably estimated.

We do not accrue contingencies that might result in gains. We continuously assess contingencies for litigation claims, environmental remediation and other events.

LEGAL FEES

Legal fees that are associated with a past event for which a liability has been recorded are accrued when it is probable that fees also will be incurred and amounts are estimable.

COMPREHENSIVE INCOME

Comprehensive income includes all changes in the equity of a business enterprise (except those resulting from investments by owners and distributions to owners), including:

▪ foreign currency translation adjustments

▪ certain hedging activities

▪ changes in unamortized net actuarial gain or loss and prior service cost related to pension and other postretirement benefits plans

▪ unrealized gains or losses on available-for-sale securities

The Consolidated Statements of Comprehensive Income (Loss) show the changes in the components of OCI, including the amounts attributable to NCI. The following tables present the changes in AOCI by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to NCI:

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
(Dollars in millions)
	Foreign currency translation adjustments			Financial instruments			Pension and other postretirement benefits			Total accumulated other comprehensive income (loss)
Sempra Energy Consolidated(2):
Balance as of December 31, 2016	$	(527	)	$	(125	)	$	(96	)	$	(748	)
OCI before reclassifications	107			(4		)	—			103
Amounts reclassified from AOCI	—			7			12			19
Net OCI	107			3			12			122
Balance as of December 31, 2017	(420		)	(122		)	(84		)	(626		)
Cumulative-effect adjustment from change in accounting principle	—			(3		)	—			(3		)
OCI before reclassifications	(144		)	40			(52		)	(156		)
Amounts reclassified from AOCI	—			3			18			21
Net OCI	(144		)	43			(34		)	(135		)
Balance as of December 31, 2018	(564		)	(82		)	(118		)	(764		)
Cumulative-effect adjustment from change in accounting principle	—			(25		)	(17		)	(42		)
OCI before reclassifications(3)	(43		)	(116		)	(18		)	(177		)
Amounts reclassified from AOCI(3)	—			8			36			44
Net OCI	(43		)	(108		)	18			(133		)
Balance as of December 31, 2019	$	(607	)	$	(215	)	$	(117	)	$	(939	)
SDG&E:
Balance as of December 31, 2016							$	(8	)	$	(8	)
OCI before reclassifications							(1		)	(1		)
Amounts reclassified from AOCI							1			1
Net OCI							—			—
Balance as of December 31, 2017							(8		)	(8		)
OCI before reclassifications							(6		)	(6		)
Amounts reclassified from AOCI							4			4
Net OCI							(2		)	(2		)
Balance as of December 31, 2018							(10		)	(10		)
Cumulative-effect adjustment from change in accounting principle							(2		)	(2		)
OCI before reclassifications							(5		)	(5		)
Amounts reclassified from AOCI							1			1
Net OCI							(4		)	(4		)
Balance as of December 31, 2019							$	(16	)	$	(16	)
SoCalGas:
Balance as of December 31, 2016				$	(13	)	$	(9	)	$	(22	)
Amounts reclassified from AOCI				—			1			1
Net OCI				—			1			1
Balance as of December 31, 2017				(13		)	(8		)	(21		)
OCI before reclassifications				—			(1		)	(1		)
Amounts reclassified from AOCI				1			1			2
Net OCI				1			—			1
Balance as of December 31, 2018				(12		)	(8		)	(20		)
Cumulative-effect adjustment from change in accounting principle				(2		)	(2		)	(4		)
OCI before reclassifications(3)				—			(4		)	(4		)
Amounts reclassified from AOCI(3)				1			4			5
Net OCI				1			—			1
Balance as of December 31, 2019				$	(13	)	$	(10	)	$	(23	)

⁽¹⁾  All amounts are net of income tax, if subject to tax, and exclude NCI.

⁽²⁾  Includes discontinued operations.

⁽³⁾  Pension and Other Postretirement Benefits and Total AOCI include a $4 million transfer of liabilities from SoCalGas to Sempra Energy related to the nonqualified pension plan.

RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated other comprehensive income (loss) components	Amounts reclassified from accumulated other comprehensive income (loss)									Affected line item on Consolidated Statements of Operations
	Years ended December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Financial instruments:
Interest rate and foreign exchange instruments(1)	$	3		$	—		$	(4	)	Interest Expense
	(9		)	(2		)	—			Other Income, Net
Interest rate instruments	10			9			—			Gain on Sale of Assets
Interest rate and foreign exchange instruments	5			7			20			Equity Earnings
Foreign exchange instruments	2			(1		)	(2		)	Revenues: Energy-Related Businesses
Commodity contracts not subject to rate recovery	—			—			9			Revenues: Energy-Related Businesses
Total before income tax	11			13			23
	(2		)	(4		)	(6		)	Income Tax (Expense) Benefit
Net of income tax	9			9			17
	(1		)	(6		)	(10		)	Earnings Attributable to Noncontrolling Interests
	$	8		$	3		$	7
Pension and other postretirement benefits(2):
Amortization of actuarial loss	$	12		$	11		$	10		Other Income, Net
Amortization of actuarial loss	1			1			—			Income (Loss) from Discontinued Operations, Net of Income Tax
Amortization of prior service cost	3			2			1			Other Income, Net
Settlement charges	28			12			8			Other Income, Net
Total before income tax	44			26			19
	(12		)	(8		)	(7		)	Income Tax (Expense) Benefit
Net of income tax	$	32		$	18		$	12
Total reclassifications for the period, net of tax	$	40		$	21		$	19
SDG&E:
Financial instruments:
Interest rate instruments(1)	$	3		$	7		$	13		Interest Expense
	(3		)	(7		)	(13		)	Earnings Attributable to Noncontrolling Interest
	$	—		$	—		$	—
Pension and other postretirement benefits(2):
Amortization of actuarial loss	$	—		$	1		$	1		Other Income, Net
Amortization of prior service cost	1			—			—			Other Income, Net
Settlement charges	—			4			—			Other Income, Net
Total before income tax	1			5			1
	—			(1		)	—			Income Tax Expense
Net of income tax	$	1		$	4		$	1
Total reclassifications for the period, net of tax	$	1		$	4		$	1
SoCalGas:
Financial instruments:
Interest rate instruments	$	1		$	1		$	—		Interest Expense
Pension and other postretirement benefits(2):
Amortization of actuarial loss	$	1		$	—		$	—		Other Income, Net
Amortization of prior service cost	—			1			1			Other Income, Net
Total before income tax	1			1			1
	(1		)	—			—			Income Tax Expense
Net of income tax	$	—		$	1		$	1
Total reclassifications for the period, net of tax	$	1		$	2		$	1

⁽¹⁾  Amounts include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE.

⁽²⁾ 

Amounts are included in the computation of net periodic benefit cost (see “Net Periodic Benefit Cost” in Note 9).

NONCONTROLLING INTERESTS

Ownership interests in a consolidated entity that are held by unconsolidated owners are accounted for and reported as NCI.

SoCalGas Preferred Stock

The preferred stock at SoCalGas is presented at Sempra Energy as NCI. Sempra Energy records charges against income related to NCI for preferred stock dividends declared by SoCalGas. We provide additional information regarding SoCalGas’ preferred stock in Note 13.

Other Noncontrolling Interests

SDG&E

As we discuss in “Variable Interest Entities” above, in August 2019, SDG&E and Sempra Energy deconsolidated Otay Mesa VIE after SDG&E determined that it is no longer the primary beneficiary of the VIE.

Sempra Mexico

In 2019, IEnova repurchased 2,620,000 shares of its outstanding common stock held by NCI for approximately $10 million, resulting in an increase in Sempra Energy’s ownership interest in IEnova from 66.5% to 66.6%.

In 2018, IEnova repurchased 2,000,000 shares of its outstanding common stock held by NCI for approximately $7 million, resulting in an increase in Sempra Energy’s ownership interest in IEnova from 66.4% to 66.5%.

Sempra Renewables

In April 2019, Sempra Renewables sold its remaining wind assets and investments, which included its wind tax equity arrangements. The remaining interest in PXiSE Energy Solutions, LLC was subsumed into Parent and other.

Sempra LNG

Sempra LNG and IEnova are developing a proposed natural gas liquefaction project at the site of IEnova’s existing ECA LNG Regasification terminal. Sempra LNG consolidates the ECA LNG JV proposed liquefaction project. Thus, Sempra Energy’s NCI in IEnova’s 50% interest in the proposed project is reported at Sempra LNG.

In February 2019, Sempra LNG purchased for $20 million the 9.1% minority interest in Bay Gas immediately prior to the sale of 100% of Bay Gas, which we discuss in Note 5.

The following table provides information about noncontrolling ownership interests held by others (not including preferred shareholders) recorded in Other Noncontrolling Interests in Total Equity on Sempra Energy’s Consolidated Balance Sheets:

OTHER NONCONTROLLING INTERESTS
(Dollars in millions)
	Percent ownership held by noncontrolling interests				Equity (deficit) held by noncontrolling interests
	December 31,				December 31,
	2019		2018		2019			2018
SDG&E:
Otay Mesa VIE	—	%	100	%	$	—		$	100
Sempra Mexico:
IEnova	33.4		33.5		1,608			1,592
IEnova subsidiaries(1)	10.0 - 46.3		10.0 - 49.0		15			13
Sempra Renewables:
Tax equity arrangements – wind(2)	NA		NA		—			158
PXiSE Energy Solutions, LLC(3)	NA		11.1		—			1
Sempra LNG:
Bay Gas	—		9.1		—			18
Liberty Gas Storage, LLC	24.6		24.6		(13		)	(12		)
ECA LNG JV	16.7		—		12			—
Parent and other:
PXiSE Energy Solutions, LLC(3)	20.0		NA		1			—
Discontinued Operations:
Chilquinta Energía subsidiaries(1)	19.7 - 43.4		19.7 - 43.4		23			23
Luz del Sur	16.4		16.4		205			193
Tecsur	9.8		9.8		5			4
Total Sempra Energy					$	1,856		$	2,090

⁽¹⁾  IEnova and Chilquinta Energía have subsidiaries with NCI held by others. Percentage range reflects the highest and lowest ownership percentages among these subsidiaries.

⁽²⁾  Net income or loss attributable to NCI is computed using the HLBV method and is not based on ownership percentages.

⁽³⁾ 

In April 2019, PXiSE Energy Solutions, LLC was subsumed into Parent and other.

REVENUES

See Note 3 for a description of significant accounting policies for revenues.

OPERATION AND MAINTENANCE EXPENSES

Operation and Maintenance includes O&M and general and administrative costs, consisting primarily of personnel costs, purchased materials and services, litigation expense and rent.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The majority of our operations in South America as well as our natural gas distribution utility in Mexico, Ecogas, use their local currency as their functional currency. The assets and liabilities of their foreign operations are translated into U.S. dollars at current exchange rates at the end of the reporting period, and revenues and expenses are translated at average exchange rates for the year. The resulting noncash translation adjustments do not enter into the calculation of earnings or retained earnings, but are reflected in OCI and in AOCI.

Cash flows of these consolidated foreign subsidiaries are translated into U.S. dollars using average exchange rates for the period. We report the effect of exchange rate changes on cash balances held in foreign currencies in “Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash” on the Sempra Energy Consolidated Statements of Cash Flows.

Currency transaction gains (losses) in a currency other than Sempra Mexico’s functional currency were $21 million, $(6) million and $(33) million for the years ended December 31, 2019, 2018 and 2017, respectively, and are included in Other Income, Net, on

the Sempra Energy Consolidated Statements of Operations. Currency transaction gains (losses) in a currency other than Sempra South American Utilities’ functional currency are included in discontinued operations.

TRANSACTIONS WITH AFFILIATES

We summarize amounts due from and to unconsolidated affiliates at Sempra Energy Consolidated, SDG&E and SoCalGas in the following table.

AMOUNTS DUE FROM (TO) UNCONSOLIDATED AFFILIATES
(Dollars in millions)
	December 31,
	2019			2018
Sempra Energy Consolidated:
Total due from various unconsolidated affiliates – current	$	32		$	37
Sempra Mexico(1):
IMG JV – Note due March 15, 2022(2)	$	742		$	641
Energía Sierra Juárez – Note(3)	—			3
Total due from unconsolidated affiliates – noncurrent	$	742		$	644
Total due to various unconsolidated affiliates – current	$	(5	)	$	(10	)
Sempra Mexico(1):
TAG Pipelines Norte, S. de R.L. de C.V. – Note due December 20, 2021(4)	$	(39	)	$	(37	)
TAG JV – 5.74% Note due December 17, 2029(5)	(156		)	—
Total due to unconsolidated affiliates – noncurrent	$	(195	)	$	(37	)
SDG&E:
Sempra Energy	$	(37	)	$	(43	)
SoCalGas	(10		)	(6		)
Various affiliates	(6		)	(12		)
Total due to unconsolidated affiliates – current	$	(53	)	$	(61	)
Income taxes due from Sempra Energy(6)	$	130		$	5
SoCalGas:
SDG&E	$	10		$	6
Various affiliates	1			1
Total due from unconsolidated affiliates – current	$	11		$	7
Sempra Energy	$	(45	)	$	(34	)
Various affiliates	(2		)	—
Total due to unconsolidated affiliates – current	$	(47	)	$	(34	)
Income taxes due from (to) Sempra Energy(6)	$	152		$	(4	)

⁽¹⁾  Amounts include principal balances plus accumulated interest outstanding.

⁽²⁾  Mexican peso-denominated revolving line of credit for up to 14.2 billion Mexican pesos or approximately $751 million U.S. dollar-equivalent, at a variable interest rate based on the 91-day Interbank Equilibrium Interest Rate plus 220 bps (9.65% at December 31, 2019), to finance construction of the natural gas marine pipeline.

⁽³⁾  U.S. dollar-denominated loan at a variable interest rate based on the 30-day LIBOR plus 637.5 bps (8.89% at December 31, 2018).

⁽⁴⁾  U.S. dollar-denominated loan at a variable interest rate based on 6-month LIBOR plus 290 bps (4.81% at December 31, 2019).

⁽⁵⁾  U.S. dollar-denominated loan at a fixed interest rate.

⁽⁶⁾  SDG&E and SoCalGas are included in the consolidated income tax return of Sempra Energy and their respective income tax expense is computed as an amount equal to that which would result from each company having always filed a separate return.

The following table summarizes revenues and cost of sales from unconsolidated affiliates.

REVENUES AND COST OF SALES FROM UNCONSOLIDATED AFFILIATES
(Dollars in millions)
	Years ended December 31,
	2019		2018		2017
Revenues:
Sempra Energy Consolidated	$	52	$	64	$	43
SDG&E	6		5		8
SoCalGas	69		64		74
Cost of Sales:
Sempra Energy Consolidated	$	50	$	46	$	47
SDG&E	74		73		71
SoCalGas	8		—		—

California Utilities

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 make short-term advances of surplus cash to Sempra Energy at interest rates based on the federal funds effective rate plus a margin of 13 to 20 bps, depending on the loan balance.

SoCalGas provides natural gas transportation and storage services for SDG&E and charges SDG&E for such services monthly. SoCalGas records revenues and SDG&E records a corresponding amount to cost of sales.

SDG&E and SoCalGas charge one another, as well as other Sempra Energy affiliates, for shared asset depreciation. SoCalGas and SDG&E record revenues and the affiliates record corresponding amounts to O&M.

The natural gas supply for SDG&E’s and SoCalGas’ core natural gas customers is purchased by SoCalGas as a combined procurement portfolio managed by SoCalGas. Core customers are primarily residential and small commercial and industrial customers. This core gas procurement function is considered a shared service; therefore, revenues and costs related to SDG&E are presented net in SoCalGas’ Statements of Operations.

SDG&E has a 20-year contract for up to 155 MW of renewable power supplied from the Energía Sierra Juárez wind power generation facility. Energía Sierra Juárez is a 50% owned and unconsolidated JV of Sempra Mexico.

Sempra Mexico

Sempra Mexico, through its wholly owned subsidiaries, DEN and IEnova Pipelines, provides operating and maintenance services to TAG Pipelines Norte, S. de. R.L. de C.V., and also provides personnel under an administrative services arrangement to TAG Pipelines Norte, S. de. R.L. de C.V and TAG JV.

Sempra LNG

Sempra LNG provides project administration and operating and maintenance services to Cameron LNG JV, and also provides personnel under an administrative services arrangement. Sempra LNG has an agreement to provide transportation services to Cameron LNG JV for capacity on the Cameron Interstate Pipeline. Sempra Energy has provided guarantees to its Cameron LNG JV, as we discuss in Note 6.

RESTRICTED NET ASSETS

Sempra Energy Consolidated

As we discuss below, the California Utilities and certain other Sempra Energy subsidiaries have restrictions on the amount of funds that can be transferred to Sempra Energy by dividend, advance or loan as a result of conditions imposed by various regulators. Additionally, certain other Sempra Energy subsidiaries are subject to various financial and other covenants and other restrictions contained in debt and credit agreements (described in Note 7) and in other agreements that limit the amount of funds that can be transferred to Sempra Energy. At December 31, 2019, Sempra Energy was in compliance with all covenants related to its debt agreements.

At December 31, 2019, the amount of restricted net assets of consolidated entities of Sempra Energy, including the California Utilities discussed below, that may not be distributed to Sempra Energy in the form of a loan or dividend is $10.4 billion. Additionally, the amount of restricted net assets of our unconsolidated entities is $21.5 billion. Although the restrictions cap the amount of funding that the various operating subsidiaries can provide to Sempra Energy, we do not believe these restrictions will have a significant impact on our ability to access cash to pay dividends and fund operating needs.

As we discuss in Note 6, $634 million of Sempra Energy’s consolidated retained earnings represents undistributed earnings of equity method investments at December 31, 2019.

California Utilities

The CPUC’s regulation of the California Utilities’ capital structures limits the amounts available for dividends and loans to Sempra Energy. At December 31, 2019, Sempra Energy could have received combined loans and dividends of approximately $885 million from SDG&E and approximately $742 million from SoCalGas.

The payment and amount of future dividends by SDG&E and SoCalGas are at the discretion of their respective boards of directors. The following restrictions limit the amount of retained earnings that may be paid as common stock dividends or loaned to Sempra Energy from either utility:

▪ The CPUC requires that SDG&E’s and SoCalGas’ common equity ratios be no lower than one percentage point below the CPUC-authorized percentage of each entity’s authorized capital structure. The authorized percentage at December 31, 2019 is 52% at both SDG&E and SoCalGas.

▪ SDG&E and SoCalGas each have a revolving credit line that requires it to maintain a ratio of consolidated indebtedness to consolidated capitalization (as defined in the agreements) of no more than 65%, as we discuss in Note 7.

Based on these restrictions, at December 31, 2019, SDG&E’s restricted net assets were $6.2 billion and SoCalGas’ restricted net assets were $4.0 billion, which could not be transferred to Sempra Energy.

Sempra Texas Utilities

Sempra Texas Utilities owns an indirect, 100% interest in Oncor Holdings, which, at December 31, 2019, owns an 80.25% interest in Oncor. As we discuss in Note 6, we account for our investment in Oncor Holdings under the equity method. Significant restrictions at Oncor that limit the amount that may be paid as dividends to Sempra Energy include:

▪ In connection with the ring-fencing measures, governance mechanisms and commitments that we describe in Note 6, Oncor may not pay any dividends or make any other distributions (except for contractual tax payments) if a majority of its independent directors or a minority member director determines that it is in the best interests of Oncor to retain such amounts to meet expected future requirements.

▪ Oncor must remain in compliance with the debt-to-equity ratio established by the PUCT for ratemaking purposes and may not pay dividends or other distributions (except for contractual tax payments) if that payment would cause it to exceed its PUCT authorized debt-to-equity ratio (57.5% debt to 42.5% equity as of December 31, 2019).

▪ If the credit rating on Oncor’s senior secured debt by any of the three major credit rating agencies falls below BBB (or the equivalent), Oncor will suspend dividends and other distributions (except for contractual tax payments), unless otherwise allowed by the PUCT. At December 31, 2019, all of Oncor’s senior secured ratings were above BBB.

▪ Oncor’s revolving credit line, note purchase agreements, and term loan credit agreements require it to maintain a consolidated senior debt-to-capitalization ratio of no more than 65% and observe certain affirmative covenants. At December 31, 2019, Oncor was in compliance with these covenants.

Based on these restrictions, at December 31, 2019, Oncor’s restricted net assets were $10.9 billion, which could not be transferred to Sempra Energy.

As we discuss in Note 5, we acquired an indirect, 50% interest in Sharyland Holdings, which owns a 100% interest in Sharyland Utilities, in May 2019. Significant restrictions related to this equity method investment include:

▪ Sharyland Utilities may not pay dividends or make other distributions (except for contractual payments) without the consent of the JV partner.

▪ Sharyland Utilities must remain in compliance with the debt-to-equity ratio established by the PUCT for ratemaking purposes and may not pay dividends or other distributions (except for contractual tax payments) if that payment would cause its debt-to-equity ratio to exceed 55% debt to 45% equity, which was authorized by the PUCT.

▪ Sharyland Utilities has a revolving credit line and a term loan credit agreement that require it to maintain a consolidated debt-to-capitalization ratio of no more than 70% and observe certain customary reporting requirements and other affirmative covenants. At December 31, 2019, Sharyland Utilities was in compliance with these and all other covenants.

Based on these restrictions, at December 31, 2019, Sharyland Utilities’ restricted net assets were $115 million, which could not be transferred to its owners.

Sempra Mexico

Significant restrictions at Sempra Mexico include:

▪ Mexico requires domestic corporations to maintain minimum legal reserves as a percentage of capital stock, resulting in restricted net assets of $178 million at Sempra Energy’s consolidated Mexican subsidiaries at December 31, 2019.

▪ Wholly owned IEnova Pipelines has a long-term debt agreement that requires it to maintain a reserve account to pay the projects’ debt. Under this restriction, net assets totaling $17 million are restricted at December 31, 2019.

▪ Wholly owned Ventika has long-term debt agreements that require it to maintain reserve accounts to pay the projects’ debt. The debt agreements may limit the project companies’ ability to incur liens, incur additional indebtedness, make investments, pay cash dividends and undertake certain additional actions. Under these restrictions, net assets totaling $14 million are restricted at December 31, 2019.

▪ Energía Sierra Juárez, a 50% owned and unconsolidated JV of Sempra Mexico, has long-term debt agreements that require the establishment and funding of project and reserve accounts to which the proceeds of loans, letter of credit borrowings, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The long-term debt agreements also limit the JV’s ability to incur liens, incur additional indebtedness, make acquisitions and undertake certain actions. Under these restrictions, net assets totaling $15 million are restricted at December 31, 2019.

▪ TAG JV, a 50% owned and unconsolidated JV of Sempra Mexico, has a long-term debt agreement that requires it to maintain a reserve account to pay the projects’ debt. Under these restrictions, net assets totaling $171 million are restricted at December 31, 2019.

Sempra LNG

Sempra LNG has an equity method investment in Cameron LNG JV, which has debt agreements that require the establishment and funding of project accounts to which the proceeds of loans, project revenues and other amounts are deposited and applied in accordance with the debt agreements. The debt agreements require the JV to maintain reserve accounts in order to pay the project debt service, and also contain restrictions related to the payment of dividends and other distributions to the members of the JV. To support Cameron LNG JV’s obligations under its debt agreements, Cameron LNG JV has granted security over all of its assets, subject to customary exceptions, and all equity interests in Cameron LNG JV have been pledged to HSBC Bank USA, National Association, as security trustee for the benefit of all of Cameron LNG JV’s creditors. We discuss Cameron LNG JV’s debt agreements and the associated Sempra Energy guarantees in Note 6. Under these restrictions, total assets of Cameron LNG JV of approximately $10.3 billion are restricted at December 31, 2019.

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

OTHER INCOME, NET
(Dollars in millions)
	Years ended December 31,
	2019			2018			2017
Sempra Energy Consolidated:
Allowance for equity funds used during construction	$	94		$	98		$	168
Investment gains (losses)(1)	61			(6		)	56
Gains on interest rate and foreign exchange instruments, net	34			7			47
Foreign currency transaction gains (losses), net(2)	21			(6		)	(33		)
Non-service component of net periodic benefit cost	(132		)	(35		)	(20		)
Penalties related to billing practices OII	(8		)	—			—
Interest on regulatory balancing accounts, net	14			2			3
Sundry, net	(7		)	(2		)	(1		)
Total	$	77		$	58		$	220
SDG&E:
Allowance for equity funds used during construction	$	56		$	61		$	63
Non-service component of net periodic benefit (cost) credit	(20		)	(6		)	4
Interest on regulatory balancing accounts, net	13			4			3
Sundry, net	(10		)	(3		)	—
Total	$	39		$	56		$	70
SoCalGas:
Allowance for equity funds used during construction	$	34		$	36		$	44
Non-service component of net periodic benefit cost	(72		)	(10		)	(5		)
Penalties related to billing practices OII	(8		)	—			—
Interest on regulatory balancing accounts, net	1			(2		)	—
Sundry, net	(10		)	(9		)	(8		)
Total	$	(55	)	$	15		$	31

⁽¹⁾  Represents investment gains (losses) 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, recorded in O&M on the Consolidated Statements of Operations.

⁽²⁾ 

Includes gains of $30 million in 2019 and losses of $3 million and $35 million in 2018 and 2017, respectively, from translation to U.S. dollars of a Mexican peso-denominated loan to IMG JV, which are offset by corresponding amounts included in Equity Earnings on the Consolidated Statements of Operations.