We use derivative instruments primarily to manage exposures arising in the normal course of business. Our principal exposures are commodity market risk, benchmark interest rate risk and foreign exchange rate exposures. Our use of derivatives for these risks is integrated into the economic management of our anticipated revenues, anticipated expenses, assets and liabilities. Derivatives may be effective in mitigating these risks (1) that could lead to declines in anticipated revenues or increases in anticipated expenses, or (2) that could cause our asset values to fall or our liabilities to increase. Accordingly, our derivative activity summarized below generally represents an impact that is intended to offset associated revenues, expenses, assets or liabilities that are not included in the tables below.

In all other cases, we record derivatives at fair value on the Consolidated Balance Sheets. We may have derivatives that are (1) cash flow hedges, (2) fair value hedges, or (3) undesignated. Depending on the applicability of hedge accounting and, for SDG&E and SoCalGas and other operations subject to regulatory accounting, the requirement to pass impacts through to customers, the impact of derivative instruments may be offset in OCI (cash flow hedges), on the balance sheet (regulatory offsets), or recognized in earnings (fair value hedges and undesignated derivatives not subject to rate recovery). We classify cash flows from the principal settlements of cross-currency swaps that hedge exposure related to Mexican peso-denominated debt and amounts related to terminations or early settlements of interest rate swaps as financing activities and settlements of other derivative instruments as operating activities on the Consolidated Statements of Cash Flows.

We may designate a derivative as a cash flow hedging instrument if it effectively converts anticipated cash flows associated with revenues or expenses to a fixed dollar amount. We may utilize cash flow hedge accounting for derivative commodity instruments, foreign currency instruments and interest rate instruments. Designating cash flow hedges is dependent on the business context in which the instrument is being used, the effectiveness of the instrument in offsetting the risk of variability of future cash flows of a given revenue or expense item, and other criteria.

Our market risk is primarily related to natural gas and electricity price volatility and the specific physical locations where we transact. We use energy derivatives to manage these risks. The use of energy derivatives in our various businesses depends on the particular energy market, and the operating and regulatory environments applicable to the business, as follows:

▪SDG&E and SoCalGas use natural gas derivatives and SDG&E uses electricity derivatives, for the benefit of customers, with the objective of managing price risk and basis risk, and stabilizing and lowering natural gas and electricity costs. These derivatives include fixed-price natural gas and electricity positions, options, and basis risk instruments, which are either exchange-traded or over-the-counter financial instruments, or bilateral physical transactions. This activity is governed by risk management and transacting activity plans limited by company policy. SDG&E’s risk management and transacting activity plans for electricity derivatives are also required to be filed with, and have been approved by, the CPUC. SoCalGas is also subject to certain regulatory requirements and thresholds related to natural gas procurement under the GCIM. Natural gas and electricity derivative activities are recorded as commodity costs that are offset by regulatory account balances and are recovered in rates. Net commodity cost impacts on the Consolidated Statements of Operations are reflected in Cost of Natural Gas or in Cost of Electric Fuel and Purchased Power.

▪SDG&E is allocated and may purchase CRRs, which serve to reduce the regional electricity price volatility risk that may result from local transmission capacity constraints. Unrealized gains and losses do not impact earnings, as they are offset by regulatory account balances. Realized gains and losses associated with CRRs, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations.

▪Sempra Infrastructure may use natural gas and electricity derivatives, as appropriate, in an effort to optimize the earnings of its assets which support the following businesses: LNG, natural gas pipelines and storage, and power generation. Gains and losses associated with undesignated derivatives are recognized in Energy-Related Businesses Revenues on the Consolidated Statements of Operations.

We are exposed to interest rates primarily as a result of our current and expected use of financing. SDG&E and SoCalGas, as well as Sempra and its other subsidiaries and JVs, periodically enter into interest rate derivative agreements intended to moderate our exposure to interest rates and to lower our overall costs of borrowing. In addition, we may utilize interest rate swaps, typically designated as cash flow hedges, to lock in interest rates on outstanding debt or in anticipation of future financings.

In December 2022, Sempra Infrastructure entered into an undesignated contingent interest rate swap to lock in interest rates on up to $3.5 billion of the variable rate indebtedness from anticipated future project-level debt financing that would be used to pay for construction costs of the PA LNG Phase 1 project. The contingent interest rate swap had a 25-year tenor, and its settlement was conditional upon the closing of project-level debt financing with respect to the PA LNG Phase 1 project. In March 2023, we closed on the project-level debt financing and, shortly thereafter, paid $14 million to cash settle the contingent interest rate swap.

As we discuss in Note 7, a minimum of 60% of the projected amount of term loans outstanding is required to be hedged under the Port Arthur LNG term loan facility agreement. In March 2023, Port Arthur LNG entered into floating-to-fixed interest rate swaps with 17 counterparties to hedge the variability in cash flows related to the SOFR-based component of interest payments on forecasted loans outstanding under the agreement. The notional amounts of the interest rate swaps generally increase in proportion to the forecasted borrowings up to a maximum amount of $4.2 billion prior to the maturity of the term loans on March 20, 2030. Under the interest rate swaps, which are designated as cash flow hedges, Port Arthur LNG receives interest at term SOFR and pays interest at a fixed rate of 3.23% based on amortizing notional amounts maturing in 2048.

We may utilize cross-currency swaps to hedge exposure related to Mexican peso-denominated debt at our Mexican subsidiaries and JVs. These cash flow hedges exchange our Mexican peso-denominated principal and interest payments into the U.S. dollar and swap Mexican fixed interest rates for U.S. fixed interest rates. From time to time, Sempra Infrastructure and its JVs may use other foreign currency derivatives to hedge exposures related to cash flows associated with revenues from contracts denominated in Mexican pesos that are indexed to the U.S. dollar.

We are also exposed to exchange rate movements at our Mexican subsidiaries and JVs, which have U.S. dollar-denominated cash balances, receivables, payables and debt (monetary assets and liabilities) that give rise to Mexican currency exchange rate movements for Mexican income tax purposes. They also have deferred income tax assets and liabilities denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities and certain nonmonetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes. We may utilize foreign currency derivatives as a means to manage the risk of exposure to significant fluctuations in our income tax expense and equity earnings from these impacts; however, we generally do not hedge our deferred income tax assets and liabilities or for inflation.

The Consolidated Balance Sheets reflect the offsetting of net derivative positions and cash collateral with the same counterparty when a legal right of offset exists. The following tables provide the fair values of derivative instruments on the Consolidated Balance Sheets, including the amount of cash collateral receivables that were not offset because the cash collateral was in excess of liability positions.


DERIVATIVE INSTRUMENTS ON THE CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
	December 31, 2023
	Current assets: Fixed-price contracts and other derivatives(1)		Other long-term assets		Other current liabilities		Deferred credits and other
Sempra:
Derivatives designated as hedging instruments:
Interest rate instruments	$	17	$	70	$	—	$	—
Foreign exchange instruments	—		—		(9)		—
Derivatives not designated as hedging instruments:
Commodity contracts not subject to rate recovery	173		52		(170)		(56)
Associated offsetting commodity contracts	(169)		(51)		169		51
Commodity contracts subject to rate recovery	10		8		(228)		(9)
Associated offsetting commodity contracts	(5)		(2)		5		2
Associated offsetting cash collateral	—		—		12		7
Net amounts presented on the balance sheet	26		77		(221)		(5)
Additional cash collateral for commodity contracts not subject to rate recovery	74		—		—		—
Additional cash collateral for commodity contracts subject to rate recovery	22		—		—		—
Total(2)	$	122	$	77	$	(221)	$	(5)
SDG&E:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	9	$	8	$	(18)	$	(9)
Associated offsetting commodity contracts	(5)		(2)		5		2
Associated offsetting cash collateral	—		—		12		7
Net amounts presented on the balance sheet	4		6		(1)		—
Additional cash collateral for commodity contracts subject to rate recovery	21		—		—		—
Total(2)	$	25	$	6	$	(1)	$	—
SoCalGas:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	1	$	—	$	(210)	$	—
Net amounts presented on the balance sheet	1		—		(210)		—
Additional cash collateral for commodity contracts subject to rate recovery	1		—		—		—
Total	$	2	$	—	$	(210)	$	—


DERIVATIVE INSTRUMENTS ON THE CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in millions)
	December 31, 2022
	Current assets: Fixed-price contracts and other derivatives(1)		Other long-term assets		Other current liabilities		Deferred credits and other
Sempra:
Derivatives designated as hedging instruments:
Interest rate instruments	$	10	$	33	$	—	$	—
Foreign exchange instruments	—		—		(7)		(1)
Interest rate and foreign exchange instruments	—		—		(105)		—
Derivatives not designated as hedging instruments:
Commodity contracts not subject to rate recovery	480		133		(399)		(132)
Associated offsetting commodity contracts	(301)		(39)		301		39
Commodity contracts subject to rate recovery	138		27		(97)		(2)
Associated offsetting commodity contracts	(27)		(2)		27		2
Interest rate instrument	33		—		—		—
Net amounts presented on the balance sheet	333		152		(280)		(94)
Additional cash collateral for commodity contracts not subject to rate recovery	451		—		—		—
Additional cash collateral for commodity contracts subject to rate recovery	18		—		—		—
Total(2)	$	802	$	152	$	(280)	$	(94)
SDG&E:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	107	$	27	$	(13)	$	(2)
Associated offsetting commodity contracts	(12)		(2)		12		2
Net amounts presented on the balance sheet	95		25		(1)		—
Additional cash collateral for commodity contracts subject to rate recovery	17		—		—		—
Total(2)	$	112	$	25	$	(1)	$	—
SoCalGas:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	31	$	—	$	(84)	$	—
Associated offsetting commodity contracts	(15)		—		15		—
Net amounts presented on the balance sheet	16		—		(69)		—
Additional cash collateral for commodity contracts subject to rate recovery	1		—		—		—
Total	$	17	$	—	$	(69)	$	—


CASH FLOW HEDGE IMPACTS
(Dollars in millions)
	Pretax gain (loss) recognized in OCI							Pretax (loss) gain reclassified from AOCI into earnings
	Years ended December 31,							Years ended December 31,
	2023		2022		2021		Location	2023		2022		2021
Sempra:
Interest rate instruments	$	45	$	40	$	29	Interest Expense	$	(1)	$	(1)	$	(11)
Interest rate instruments	20		205		71		Equity Earnings(1)	48		(29)		(73)
Foreign exchange instruments	(2)		(8)		11		Revenues: Energy- Related Businesses	(1)		1		(1)
							Other Income, Net	(2)		(1)		—
Foreign exchange instruments	(3)		(5)		8		Equity Earnings(1)	(2)		—		—
Interest rate and foreign exchange instruments	7		25		(4)		Interest Expense	1		2		(1)
							Other Income, Net	6		12		(6)
Total	$	67	$	257	$	115		$	49	$	(16)	$	(92)
SoCalGas:
Interest rate instruments	$	—	$	—	$	—	Interest Expense	$	(1)	$	(1)	$	—

For Sempra, we expect that net gains before NCI of $37 million, which are net of income tax expense, that are currently recorded in AOCI (with net gains of $18 million attributable to NCI) related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. SoCalGas expects that $1 million of losses, net of income tax benefit, that are currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. Actual amounts ultimately reclassified into earnings depend on the interest rates in effect when derivative contracts mature.


UNDESIGNATED DERIVATIVE IMPACTS
(Dollars in millions)
		Pretax gain (loss) on derivatives recognized in earnings
		Years ended December 31,
	Location	2023		2022		2021
Sempra:
Commodity contracts not subject to rate recovery	Revenues: Energy-Related Businesses	$	919	$	(1,116)	$	(203)
Commodity contracts subject to rate recovery	Cost of Natural Gas	(288)		(56)		(25)
Commodity contracts subject to rate recovery	Cost of Electric Fuel and Purchased Power	15		202		31
Interest rate instrument	Interest Expense	(47)		33		—
Foreign exchange instruments	Other Income, Net	—		—		(22)
Total		$	599	$	(937)	$	(219)
SDG&E:
Commodity contracts subject to rate recovery	Cost of Electric Fuel and Purchased Power	$	15	$	202	$	31
SoCalGas:
Commodity contracts subject to rate recovery	Cost of Natural Gas	$	(288)	$	(56)	$	(25)

For Sempra, SDG&E and SoCalGas, certain of our derivative instruments contain credit limits which vary depending on our credit ratings. Generally, these provisions, if applicable, may reduce our credit limit if a specified credit rating agency reduces our ratings. In certain cases, if our credit ratings were to fall below investment grade, the counterparty to these derivative liability instruments could request immediate payment or demand immediate and ongoing full collateralization.

For Sempra, the total fair value of this group of derivative instruments in a liability position at December 31, 2023 and 2022 was $215 million and $106 million, respectively. For SoCalGas, the total fair value of this group of derivative instruments in a liability position at December 31, 2023 and 2022 was $210 million and $69 million, respectively. SDG&E did not have this group of derivative instruments in a liability position at December 31, 2023 or 2022. At December 31, 2023, if the credit ratings of Sempra or SoCalGas were reduced below investment grade, $215 million and $210 million, respectively, of additional assets could be required to be posted as collateral for these derivative contracts.