EX-13 14 ex13.htm EXHIBIT 13.1 Unassociated Document
SEMPRA ENERGY FINANCIAL REPORT
TABLE OF CONTENTS
 
 
 
Page
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2
Our Business
2
Executive Summary
9
Business Strategy
9
Key Events and Issues in 2013
9
Results of Operations
11
Overall Results of Operations of Sempra Energy and Factors Affecting the Results
11
Segment Results
14
Changes in Revenues, Costs and Earnings
20
Transactions with Affiliates
39
Book Value Per Share
39
Capital Resources and Liquidity
39
Overview
39
Cash Flows from Operating Activities
43
Cash Flows from Investing Activities
46
Cash Flows from Financing Activities
51
Credit Ratings
58
Factors Influencing Future Performance
58
California Utilities
58
Sempra International
63
Sempra U.S. Gas & Power
65
Other Sempra Energy Matters
68
Litigation
69
Market Risk
69
Critical Accounting Policies and Estimates, and Key Noncash Performance Indicators
72
New Accounting Standards
78
Information Regarding Forward-Looking Statements
79
Common Stock Data
 
80
Performance Graph – Comparative Total Shareholder Returns
 
81
Five-Year Summaries
 
82
Controls and Procedures
84
Evaluation of Disclosure Controls and Procedures
84
Management’s Report on Internal Control over Financial Reporting
84
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
85
Reports of Independent Registered Public Accounting Firm
 
86
Consolidated Financial Statements
92
Sempra Energy
92
San Diego Gas & Electric Company
100
Southern California Gas Company
107
Notes to Consolidated Financial Statements
 
113
Glossary
 
240
 
This Financial Report is a combined report for the following separate companies (each a separate Securities and Exchange Commission registrant):
   
Sempra Energy
San Diego Gas & Electric Company
Southern California Gas Company
 

 
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
We provide below:
 
§  
A description of our business
 
§  
An executive summary
 
§  
A discussion and analysis of our operating results for 2011 through 2013
 
§  
Information about our capital resources and liquidity
 
§  
Major factors expected to influence our future operating results
 
§  
A discussion of market risk affecting our businesses
 
§  
A table of accounting policies that we consider critical to our financial condition and results of operations
 
You should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in this Annual Report, and in “Risk Factors” contained in our 2013 Annual Report on Form 10-K.
 

 

OUR BUSINESS
 

Sempra Energy is a Fortune 500 energy-services holding company whose operating units develop energy infrastructure, operate utilities and provide related services to their customers. Our operations are divided principally between our California Utilities, which are San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), and Sempra International and Sempra U.S. Gas & Power. SDG&E and SoCalGas are separate, reportable segments. Sempra International includes two reportable segments – Sempra South American Utilities and Sempra Mexico. Sempra U.S. Gas & Power also includes two reportable segments – Sempra Renewables and Sempra Natural Gas. (See Figure 1.)
 
 

[a002.gif]


Figure 1: Sempra Energy’s Operating Units and Reportable Segments


This report includes information for the following separate registrants:
 
§  
Sempra Energy and its consolidated entities
 
§  
SDG&E
 
§  
SoCalGas
 
References to “we,” “our” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, collectively, unless otherwise indicated by its context. All references to “Sempra International” and “Sempra U.S. Gas & Power,” and to their respective principal segments, are not intended to refer to any legal entity with the same or similar name.
 
In the first quarter of 2013, a Sempra Energy subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), completed a private offering in the U.S. and outside of Mexico and concurrent public offering in Mexico of common stock. IEnova is a separate legal entity, formerly known as Sempra México, S.A. de C.V., comprised primarily of Sempra Energy’s operations in Mexico. IEnova is included within our Sempra Mexico reportable segment, but is not the same in its entirety as the reportable segment. In addition to the IEnova operating companies, the Sempra Mexico segment includes, among other things, certain holding companies and risk management activity. Also, IEnova’s financial results are reported in Mexico under International Financial Reporting Standards (IFRS), as required by the Mexican Stock Exchange (La Bolsa Mexicana de Valores, S.A.B. de C.V., BMV) where the shares are traded under the symbol IENOVA. We discuss the offerings and IEnova further in Note 1 of the Notes to Consolidated Financial Statements.
 
RBS Sempra Commodities LLP (RBS Sempra Commodities) is a joint venture partnership that held commodities-marketing businesses previously owned by us. We and The Royal Bank of Scotland plc (RBS), our partner in the joint venture, sold substantially all of the partnership’s businesses and assets in four separate transactions completed in 2010 and early 2011. We discuss these transactions and other matters concerning the partnership in Notes 4, 5 and 15 of the Notes to Consolidated Financial Statements. We account for our remaining investment in RBS Sempra Commodities under the equity method and report our share of partnership earnings and other associated costs in Parent and Other.
 
RBS Sempra Commodities had various agreements with our Sempra Mexico and Sempra Natural Gas segments. These agreements were substantially assigned to certain buyers of the RBS Sempra Commodities businesses by May 1, 2011.
 
Below are summary descriptions of our operating units and their reportable segments.
 
 
SEMPRA ENERGY OPERATING UNITS AND REPORTABLE SEGMENTS
 

CALIFORNIA UTILITIES
   
 
MARKET
SERVICE TERRITORY
SAN DIEGO GAS & ELECTRIC COMPANY (SDG&E)
A regulated public utility; infrastructure supports electric generation, transmission and distribution, and natural gas distribution
§ Provides electricity to 3.4 million consumers (1.4 million meters)
 
§ Provides natural gas to 3.2 million consumers (0.9 million meters)
 
 
Serves the county of San Diego, California and an adjacent portion of southern Orange County covering 4,100 square miles
SOUTHERN CALIFORNIA GAS COMPANY (SOCALGAS)
A regulated public utility; infrastructure supports natural gas distribution, transmission and storage
§ Residential, commercial, industrial, utility electric generation and wholesale customers
 
§ Covers a population of 21.3 million (5.8 million meters)
 
 
Southern California and portions of central California (excluding San Diego County, the city of Long Beach and the desert area of San Bernardino County) covering 20,000 square miles

 
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our Sempra International or Sempra U.S. Gas & Power operating units described below.
 

 
SDG&E
 
SDG&E provides electricity to 3.4 million consumers and natural gas to 3.2 million consumers. It delivers the electricity through 1.4 million meters in San Diego County and an adjacent portion of southern Orange County, California. SDG&E’s electric energy is purchased from others or generated from its own electric generation facilities and, prior to the second quarter of 2012, its 20-percent interest in the San Onofre Nuclear Generating Station (SONGS). Due to operating issues, SONGS was taken offline in the first quarter of 2012, and in June 2013, Southern California Edison Company (Edison), the majority owner and operator of SONGS, made the decision to permanently retire the facility. We discuss the SONGS retirement and related issues in “Factors Influencing Future Performance” below and in Note 13 of the Notes to Consolidated Financial Statements. SDG&E’s electric generation facilities include Palomar Energy Center, Miramar Energy Center, Desert Star Energy Center (purchased from Sempra Natural Gas in October 2011) and Cuyamaca Peak Energy Plant (purchased in January 2012). SDG&E also delivers natural gas through 0.9 million meters in San Diego County and transports electricity and natural gas for others. SDG&E’s service territory encompasses 4,100 square miles.
 
Sempra Energy indirectly owns all of the common stock of SDG&E. SDG&E had publicly held preferred stock that was redeemed in October 2013. We discuss the redemption in Note 11 of the Notes to Consolidated Financial Statements.
 
SDG&E’s financial statements include a variable interest entity (VIE), Otay Mesa Energy Center LLC (Otay Mesa VIE), of which SDG&E is the primary beneficiary. As we discuss in Note 1 of the Notes to Consolidated Financial Statements under “Variable Interest Entities,” SDG&E has a long-term power purchase agreement with Otay Mesa VIE.
 
 
SoCalGas
 
SoCalGas is the nation’s largest natural gas distribution utility. It owns and operates a natural gas distribution, transmission and storage system that supplies natural gas throughout its approximately 20,000 square miles of service territory.  Its service territory extends from San Luis Obispo, California in the north to the Mexican border in the south, excluding San Diego County, the city of Long Beach and the desert area of San Bernardino County. SoCalGas provides natural gas service to residential, commercial, industrial, utility electric generation and wholesale customers through 5.8 million meters, covering a population of 21.3 million.
 
Sempra Energy indirectly owns all of the common stock of SoCalGas. SoCalGas has publicly held preferred stock. The preferred stock has liquidation preferences totaling $22 million and represents less than 1% of the ordinary voting power of SoCalGas shares.
 
We provide here descriptions of our Sempra International and Sempra U.S. Gas & Power businesses, primarily operations relating to 2013, 2012 and 2011 earnings. We provide additional information regarding development projects at each of their segments in “Factors Influencing Future Performance” below.
 
 

 
SEMPRA INTERNATIONAL
   
 
MARKET
GEOGRAPHIC REGION
SEMPRA SOUTH AMERICAN UTILITIES
Infrastructure supports electric transmission and distribution
§ Provides electricity to approximately 640,000 customers in Chile and 996,000 customers in Peru
 
 
§ Chile
 
§ Peru
 
 
 
SEMPRA MEXICO
Develops, owns and operates, or holds interests in:
§ natural gas transmission pipelines and propane and ethane systems
 
§ a natural gas distribution utility
 
§ electric generation facilities, including wind
 
§ a terminal for the import of liquefied natural gas (LNG)
 
§ marketing operations for the purchase of LNG and the purchase and sale of natural gas
 
 
§ Natural gas
 
§ Wholesale electricity
 
§ Liquefied natural gas
 
 
 
§ Mexico
 
 
 

 

 
Sempra International
 
Sempra South American Utilities
 
Sempra South American Utilities operates electric transmission and distribution utilities in Chile and Peru, and until June 2013, owned interests in utilities in Argentina. We discuss the sale of the two Argentine natural gas utility holding companies in Note 4 of the Notes to Consolidated Financial Statements.
 
On April 6, 2011, Sempra South American Utilities completed the acquisition of AEI’s interests in Chilquinta Energía S.A. (Chilquinta Energía) in Chile and Luz del Sur S.A.A. (Luz del Sur) in Peru. Upon completion of the transaction, Sempra South American Utilities owned 100 percent of Chilquinta Energía and approximately 76 percent of Luz del Sur, and consolidated the companies. Pursuant to a tender offer that was completed in September 2011, Sempra South American Utilities now owns 79.82 percent of Luz del Sur, as we discuss in Note 3 of the Notes to Consolidated Financial Statements. The remaining shares of Luz del Sur are held by institutional investors and the general public. Prior to the acquisition in 2011, we accounted for our 50-percent interest in Chilquinta Energía and approximately 38-percent interest in Luz del Sur as equity method investments.
 
Chilquinta Energía is an electric distribution utility serving approximately 640,000 customers in the cities of Valparaiso and Viña del Mar in central Chile. Luz del Sur is an electric distribution utility that serves approximately 996,000 customers in the southern zone of metropolitan Lima, Peru, and delivers approximately one-third of all power used in the country. As part of the transaction, Sempra South American Utilities also acquired AEI’s interests in two energy-services companies, Tecnored S.A. (Tecnored) and Tecsur S.A. (Tecsur).
 
Sempra Mexico
 
Gas Business
 
Pipelines. Sempra Mexico develops, owns and operates natural gas transmission pipelines and propane and ethane systems in Mexico. These facilities are contracted under long-term, U.S. dollar-based agreements with Petróleos Mexicanos (or PEMEX, the Mexican state-owned oil company), the Federal Electricity Commission (Comisión Federal de Electricidad, or CFE), Shell México Gas Natural (Shell), Gazprom Marketing & Trading Mexico (Gazprom) and other similar counterparties. Its natural gas pipeline systems had a contracted capacity for up to 4,540 million cubic feet (MMcf) per day in 2013.
 
Sempra Mexico also owns a 50-percent interest in Gasoductos de Chihuahua, a joint venture with PEMEX that operates several natural gas pipelines and propane systems in Mexico.
 
Pipeline projects currently under construction by Sempra Mexico that are both regulated by the Comisión Reguladora de Energía (or CRE, the Energy Regulatory Commission) and meet the regulatory accounting requirements of accounting principles generally accepted in the United States (U.S. GAAP) record the impact of allowance for funds used during construction (AFUDC) related to equity. Beginning in the fourth quarter of 2013, Sempra Mexico began recording AFUDC equity for its Sonora Pipeline project. Sempra Mexico’s joint venture with PEMEX also began recording AFUDC equity for its Los Ramones I Pipeline project in the fourth quarter of 2013.
 
LNG. Sempra Mexico’s Energía Costa Azul LNG terminal in Baja California, Mexico is capable of processing 1 billion cubic feet (Bcf) of natural gas per day. The Energía Costa Azul facility generates revenue under capacity services agreements with Shell and Gazprom, expiring in 2028, that permit them, together, to use one-half of the terminal’s capacity.
 
In connection with Sempra Natural Gas’ LNG purchase agreement with Tangguh PSC Contractors (Tangguh PSC), which we discuss below, Sempra Mexico purchases from Sempra Natural Gas the LNG delivered to Energía Costa Azul by Tangguh PSC. Sempra Mexico uses the natural gas produced from this LNG to supply a contract through 2022 for the sale of an average of approximately 150 MMcf per day of natural gas to Mexico’s national electric company, the CFE, at prices that are based on the Southern California border index. If LNG volumes received from Tangguh PSC are not sufficient to satisfy the commitment to the CFE, Sempra Mexico may purchase natural gas from Sempra Natural Gas’ natural gas marketing operations.
 
Natural Gas Distribution. Sempra Mexico’s natural gas distribution utility, Ecogas Mexico, S de RL de CV (Ecogas), operates in three separate areas in Mexico, and had approximately 99,000 customers and sales volume of 65 MMcf per day in 2013.
 
Power Business
 
Natural Gas-Fired Generation. Sempra Mexico’s Termoeléctrica de Mexicali, a 625-megawatt (MW) natural gas-fired power plant, is located in Mexicali, Baja California, Mexico. In January 2013, Sempra Mexico’s Termoeléctrica de Mexicali entered into an Energy Management Agreement (EMA), effective January 1, 2012, with our Sempra Natural Gas segment for energy marketing, scheduling and other related services to support its sales of generated power into the California electricity market. Under the EMA, Termoeléctrica de Mexicali pays fees to Sempra Natural Gas for these revenue-generating services. Termoeléctrica de Mexicali also purchases fuel from Sempra Natural Gas. J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures) and J.P. Morgan Mexico facilitate the natural gas transactions between the segments. Sempra Mexico records revenue for the sale of power generated by Termoeléctrica de Mexicali, and records cost of sales for the purchases of natural gas and energy management services provided by Sempra Natural Gas.
 
The EMA replaced a similar agreement that was in effect in prior years, under which Sempra Mexico recorded revenue for the sale of power generated by Termoeléctrica de Mexicali to Sempra Natural Gas, and recorded cost of sales for the purchases from Sempra Natural Gas of natural gas to fuel the facility. J.P. Morgan Ventures and J.P. Morgan Mexico facilitated the natural gas transactions between the segments.
 
Wind Power Generation. Sempra Mexico is developing a wind power generation project, Energía Sierra Juárez, in Baja California, Mexico, which is designed to provide up to 1,200 MW of capacity if fully developed. In April 2011, SDG&E entered into a 20-year contract for up to 156 MW of renewable power supplied from the first phase of the project, which we expect to be fully operational in the first quarter of 2015. Sempra Mexico intends to finance and develop the project within the framework of a joint venture.
 

 
SEMPRA U.S. GAS & POWER
   
 
MARKET
GEOGRAPHIC REGION
SEMPRA RENEWABLES
Develops, owns, operates, or holds interests in renewable energy generation projects
§ Wholesale electricity
 
 
§ U.S.A.
 
 
 
SEMPRA NATURAL GAS
Develops, owns and operates, or holds interests in:
§ a natural gas-fired electric generation asset
 
§ natural gas pipelines and storage facilities
 
§ natural gas distribution utilities
 
§ a terminal in the U.S. for the import and export of LNG and sale of natural gas
 
§ marketing operations
 
 
§ Wholesale electricity
 
§ Natural gas
 
§ Liquefied natural gas
 
 
 
§ U.S.A.
 
 
 
 

 
 
Sempra U.S. Gas & Power
 
Sempra Renewables
 
The following table provides information about the Sempra Renewables solar and wind energy generation facilities that were operational as of December 31, 2013. The generating capacity of these facilities is fully contracted under long-term power purchase agreements (PPA) for the periods indicated in the table.
 
The majority of Sempra Renewables’ wind farm assets also earn production tax credits (PTC) based on the number of megawatt hours of electricity they generate. A PTC is a federal subsidy that effectively pays wind producers a flat rate for making clean energy and enables wind producers like Sempra Renewables to pass on the benefit to its customers. Because PTCs last for ten years after project completion, any wind turbine that was under construction before the end of 2013 will still earn a full decade of PTCs. For each of the years ended December 31, 2013, 2012 and 2011, PTCs represented a large portion of our wind farm earnings, often exceeding earnings from operations. 
 

SEMPRA RENEWABLES OPERATING FACILITIES
Capacity in Megawatts (MW) at December 31, 2013
Name
Generating Capacity
 
 
PPA Term in Years
 
First In Service
 
Location
Wholly owned facility:
           
Copper Mountain Solar 1
10/48
 
20
2008/2010
 
Boulder City, Nevada
             
Jointly owned facilities(1):
           
Auwahi Wind Farm
11
 
20
2012
 
Maui, Hawaii
Cedar Creek 2 Wind Farm
125
 
25
2011
 
New Raymer, Colorado
Copper Mountain Solar 2
46
 
25
2012
 
Boulder City, Nevada
Flat Ridge 2 Wind Farm
235
 
20 and 25
2012
 
Wichita, Kansas
Fowler Ridge 2 Wind Farm
100
 
20
2009
 
Benton County, Indiana
Mehoopany Wind Farm
71
 
20
2012
 
Wyoming County, Pennsylvania
Mesquite Solar 1
21/54
(2)
20
2011/2012
 
Arlington, Arizona
            Total MW in operation 721           
(1)
Sempra Renewables has a 50-percent interest in each of these facilities and accounts for them as equity method investments. The generating capacity represents Sempra Renewables’ share only.
(2)
 
Total generating capacity of 42 MW/108 MW was placed in service in 2011 and 2012, respectively. The capacity noted in the above table represents Sempra Renewables’ share only.
 
 
 
The first phase of Copper Mountain Solar 2 (CMS 2) of 92 MW was placed in service in November 2012. Mesquite Solar 1’s (MS 1) 150-MW photovoltaic solar installation went fully into service in December 2012. In the third quarter of 2013, Sempra Renewables sold 50-percent equity interests in these facilities to Consolidated Edison Development (ConEdison Development). We discuss these sales further in Notes 3 and 5 of the Notes to Consolidated Financial Statements.
 
Sempra Natural Gas
 
Generation. Sempra Natural Gas sells electricity under short-term and long-term contracts and into the spot market and other competitive markets. While it may also purchase electricity in the open market to satisfy its contractual obligations, Sempra Natural Gas generally purchases natural gas to fuel its Mesquite Power natural gas-fired power plant, described below, and Sempra Mexico’s Termoeléctrica de Mexicali power plant, described above. The Mesquite Power plant is a 1,250-MW facility located in Arlington, Arizona. In February 2013, Sempra Natural Gas sold one 625-MW block of Mesquite Power to the Salt River Project Agricultural Improvement and Power District for $371 million. In January 2014, management approved a plan to market and sell the remaining 625-MW block of the plant. We expect to complete the sale in 2014.
 
In June 2011, Sempra Natural Gas entered into a 25-year contract with various members of Southwest Public Power Resources Group (SPPR Group), an association of 40 not-for-profit utilities in Arizona and southern Nevada, for 240 MW of electricity from the Mesquite Power plant. This contract was amended in early 2013 to increase the capacity to 271 MW. Under the terms of the agreement, Sempra Natural Gas will provide 21 participating SPPR Group members with firm, day-ahead dispatchable power delivered to the Palo Verde hub beginning in January 2015. This contract may be assigned to the buyer of the remaining 625-MW block of Mesquite Power.
 
Sempra Natural Gas also has various power sale transactions intended to hedge its generation capacity. Through 2013, Sempra Natural Gas sold its power to various counterparties, including J.P. Morgan Ventures. Contracts with J.P. Morgan Ventures were initially with RBS Sempra Commodities. In connection with the 2010 sale of businesses within RBS Sempra Commodities, substantially all of these transactions with RBS Sempra Commodities were assigned to J.P. Morgan Ventures by May 1, 2011. In addition, Sempra Natural Gas has power sale transactions for various quantities of power for delivery in 2013 and 2014. Finally, Sempra Natural Gas has sold certain quantities of expected future generation output under long-term contracts. The remaining output of our natural gas-fired generation facilities, including that of Sempra Mexico’s Termoeléctrica de Mexicali power plant, is available to be sold into energy markets on a day-to-day basis.
 
In January 2013, Sempra Natural Gas entered into an EMA, effective January 1, 2012, with Sempra Mexico to provide energy marketing, scheduling and other related services to Sempra Mexico’s Termoeléctrica de Mexicali to support its sales of generated power into the California electricity market. We discuss the EMA in “Sempra Mexico – Power Business” above.
 
Sempra Natural Gas sold its El Dorado (renamed Desert Star) natural gas-fired generation plant (excluding the solar facility) to SDG&E on October 1, 2011. This sale, pursuant to an option to acquire the plant that was exercised by SDG&E in 2007, coincided with the end of a contract with the California Department of Water Resources (DWR). Prior to September 30, 2011, the Mesquite Power plant and the El Dorado generation plant, along with Sempra Mexico’s Termoeléctrica de Mexicali power plant, sold the majority of their output under this long-term purchased-power contract with the DWR which provided for 1,200 MW to be supplied during all hours and an additional 400 MW during on-peak hours, and which ended on September 30, 2011.
 
Transportation and Storage. Sempra Natural Gas owns and operates, or holds interests in, natural gas underground storage and related pipeline facilities in Alabama, Louisiana and Mississippi. Sempra Natural Gas provides natural gas marketing, trading and risk management services through the utilization and optimization of contracted natural gas supply, transportation and storage capacity, as well as optimizing its assets in the short-term services market.
 
Sempra Natural Gas, Tallgrass Energy Partners, L.P. (Tallgrass) and Phillips 66 jointly own, through Rockies Express Pipeline LLC (Rockies Express), the Rockies Express Pipeline (REX) that links the Rocky Mountain region to the upper Midwest and the eastern United States. Our ownership interest in the pipeline is 25 percent. Tallgrass purchased its 50-percent equity interest in Rockies Express from Kinder Morgan Energy Partners, L.P. (Kinder Morgan or KMP) in November 2012, as we discuss in Notes 4 and 10 of the Notes to Consolidated Financial Statements. Sempra Rockies Marketing has an agreement through November 2019 with Rockies Express for 200 MMcf per day of capacity on REX, which has a total capacity of 1.8 Bcf per day. Sempra Rockies Marketing released a portion of its capacity to RBS Sempra Commodities, which capacity was assigned to J.P. Morgan Ventures effective January 1, 2011 in connection with the sale of businesses within RBS Sempra Commodities. This contract expired on December 31, 2013. Sempra Rockies Marketing has entered into new capacity release arrangements, but these new agreements and any additional capacity release agreements that we may enter into may not be sufficient to offset all of our capacity payments to Rockies Express.
 
In 2012, we recorded a noncash impairment charge of $239 million after-tax to write down our investment in the partnership that operates REX. We discuss our investment in Rockies Express and the impairments in Notes 4 and 10 of the Notes to Consolidated Financial Statements.
 
Distribution.  Sempra Natural Gas owns and operates Mobile Gas Service Corporation (Mobile Gas) and Willmut Gas Company (Willmut Gas), regulated natural gas distribution utilities in southwest Alabama and in Mississippi, respectively. Mobile Gas and Willmut Gas serve approximately 87,000 customers and 19,000 customers, respectively. Sempra Natural Gas acquired Willmut Gas in May 2012, as we discuss in Note 3 of the Notes to Consolidated Financial Statements.
 
LNG. Sempra Natural Gas’ Cameron LNG regasification terminal in Hackberry, Louisiana is capable of processing 1.5 Bcf of natural gas per day. Cameron LNG generates revenue under a terminal services agreement for approximately 3.75 Bcf of natural gas storage and associated send-out rights of approximately 600 MMcf of natural gas per day through 2029. The agreement allows the customer to pay Sempra Natural Gas capacity reservation and usage fees to use its facilities to receive, store and regasify the customer’s LNG. Sempra Natural Gas also may enter into short-term and/or long-term supply agreements to purchase LNG to be received, stored and regasified at its terminal for sale to other parties. Sempra Natural Gas is currently progressing with the development of a natural gas liquefaction and LNG export facility at the Cameron LNG terminal. We discuss these activities below in “Factors Influencing Future Performance.”
 
Sempra Natural Gas has an LNG purchase agreement with Tangguh PSC for the supply of the equivalent of 500 MMcf of natural gas per day from Tangguh PSC’s Indonesian liquefaction facility with delivery to Sempra Mexico’s Energía Costa Azul receipt terminal at a price based on the Southern California border index for natural gas. Sempra Natural Gas may also record revenues from non-delivery of cargoes under the provisions of the contract with Tangguh PSC that allow for deliveries to be diverted to other global markets in exchange for cash differential payments.
 
 
REGULATION OF OUR UTILITIES
 
SDG&E and SoCalGas are regulated by federal, state and local governmental agencies. The primary regulatory agency is the California Public Utilities Commission (CPUC). The CPUC regulates the California Utilities’ rates and operations in California, except for SDG&E’s electric transmission operations. The Federal Energy Regulatory Commission (FERC) regulates SDG&E’s electric transmission operations. The FERC also regulates interstate transportation of natural gas and various related matters.
 
The Nuclear Regulatory Commission (NRC) regulates SONGS, in which SDG&E owns a 20-percent interest. Municipalities and other local authorities may influence decisions affecting the location of utility assets, including natural gas pipelines and electric lines. Some of Sempra Energy’s other operating units are also regulated by the FERC, various state commissions and local governmental entities, and similar authorities in countries other than the United States.
 
Our South American utilities are regulated by federal and local governmental agencies. The National Energy Commission (Comisión Nacional de Energía, or CNE) regulates Chilquinta Energía in Chile. The Energy and Mining Investment Supervisory Body (Organismo Supervisor de la Inversión en Energía y Minería, or OSINERGMIN) of the National Electricity Office under the Ministry of Energy and Mines regulates Luz del Sur in Peru.  
 
Ecogas, our natural gas distribution utility in northern Mexico, is subject to regulation by the CRE and by the labor and environmental agencies of city, state and federal governments in Mexico.
 
Mobile Gas, our natural gas distribution utility serving southwest Alabama, is regulated by the Alabama Public Service Commission. Willmut Gas, our natural gas distribution utility serving customers in Hattiesburg, Mississippi, is regulated by the Mississippi Public Service Commission.
 

 

EXECUTIVE SUMMARY
 

 
BUSINESS STRATEGY
 
Our focus is to increase shareholder value and meet customer needs by sustaining the financial strength, operational flexibility and skilled workforce needed to operate a safe, stable and successful portfolio of integrated energy businesses.
 
The key components of our strategy include the following three disciplined growth platforms:
 
§  
U.S. utilities
 
§  
South American utilities and Mexican midstream
 
§  
U.S. natural gas midstream and renewables
 
Our organization is aligned based on these platforms to obtain the greatest long-term value through tangible growth primarily focused on regulated and contracted assets.
 
 
KEY EVENTS AND ISSUES IN 2013
 
Below are key events and issues that affected our business in 2013; some of these may continue to affect our future results. Each event/issue includes the page number you may reference for additional details.
 
§  
In February 2013, IEnova publicly offered and sold in Mexico notes totaling $408 million (U.S. equivalent). Then, in March 2013, IEnova sold 18.9 percent of its common shares in a private offering in the U.S. and outside of Mexico and in a concurrent initial public offering in Mexico for net proceeds of $574 million (U.S. equivalent) (133).
 
§  
In February 2013, Sempra Natural Gas completed the sale of one 625-MW block of its Mesquite Power plant to the Salt River Project Agricultural Improvement and Power District for $371 million in cash (144).
 
§  
In May 2013, the CPUC approved a final decision in the California Utilities’ 2012 General Rate Case (2012 GRC). In the second quarter of 2013, SDG&E and SoCalGas recorded earnings of $52 million and $25 million, respectively, from the retroactive impact for full-year 2012 as a result of the final decision (213).
 
§  
In June 2013, Southern California Edison announced that it would permanently retire SONGS, which has been offline since early 2012 due to operating issues. Consequently, we recorded a $200 million pretax loss from plant closure representing the portion of SDG&E’s net investment in the facility and SDG&E’s associated costs incurred through the closure date, including replacement power costs, that management estimates may not be recovered in rates (208).
 
§  
In June 2013, Eletrans II S.A., a joint venture between Sempra South American Utilities’ Chilquinta Energía and Sociedad Austral de Electricidad Sociedad Anónima (SAESA), was awarded the construction of two 220-kilovolt (kV) transmission lines in Chile (64).
 
§  
In October 2013, SDG&E redeemed all six series of its outstanding shares of contingently redeemable preferred stock for $83 million (including call premium and accrued dividends) (205).
 
§  
SDG&E continued to settle claims related to the 2007 California wildfire litigation; there are approximately 40 cases left to be resolved (220).
 

§  
Updates for projects at Sempra Mexico’s IEnova subsidiary:
 
□  
In January 2013, PEMEX announced that the first phase of the Los Ramones Pipeline project, or Los Ramones I, was assigned to and will be developed by our joint venture with PEMEX; construction began in January 2014. Los Ramones I will be a 70-mile natural gas pipeline from the northern portion of the state of Tamaulipas bordering the United States to Los Ramones in the Mexican state of Nuevo León (65).
 
□  
In the third quarter of 2013, IEnova began construction on the first phase, or approximately 300 miles, of the Sonora Pipeline, a 500-mile natural gas pipeline network in northern Mexico (65).
 
□  
In the third quarter of 2013, through its joint venture with PEMEX, IEnova began construction on the Ethane Pipeline, a 140-mile pipeline to transport ethane from Tabasco, Mexico to Veracruz, Mexico (65). 
 
□  
In the fourth quarter of 2013, IEnova began construction on the Energía Sierra Juárez wind project (65).
 
§  
Updates for projects at Sempra Renewables:
 
□  
In March 2013, we started construction on Copper Mountain Solar 3 (CMS 3), which will have 250 MW of generating capacity when completed (66).
 
□  
In the third quarter of 2013, Sempra Renewables sold 50-percent equity interests in Copper Mountain Solar 2 and Mesquite Solar 1 to ConEdison Development (144).
 
□  
In September 2013, Sempra Renewables acquired the rights to develop the 75-MW Broken Bow 2 Wind project in Custer County, Nebraska (66).
 
§  
Updates for Sempra Natural Gas’ Cameron liquefaction project:
 
□  
In May 2013, Sempra Natural Gas signed a joint venture agreement (subject to a final investment decision, finalization of permit authorizations, securing financing commitments and other conditions) with affiliates of GDF SUEZ S.A., Mitsubishi Corporation (through a related company jointly established with Nippon Yusen Kabushiki Kaisha (NYK)), and Mitsui & Co., Ltd. each to acquire 16.6 percent equity in the existing facilities and the Cameron liquefaction project. We will have a 50.2-percent interest in the joint venture (67).
 
□  
In May 2013, Sempra Natural Gas signed 20-year liquefaction and regasification tolling capacity agreements (subject to a final investment decision, finalization of permit authorizations, securing financing commitments and other conditions) with GDF SUEZ S.A. and affiliates of Mitsubishi Corporation and Mitsui & Co., Ltd. to subscribe the full nameplate capacity of the facility (68).
 
□  
In June and November 2013, Sempra Natural Gas signed agreements totaling 1.45 Bcf per day of firm natural gas transportation service to Cameron LNG on the Cameron Interstate Pipeline (subject to effectiveness of the liquefaction and regasification tolling capacity agreements) with GDF SUEZ S.A. and affiliates of Mitsubishi Corporation and Mitsui & Co., Ltd. The terms of these agreements are concurrent with the liquefaction and regasification tolling capacity agreements (68).
 


 

RESULTS OF OPERATIONS
 

We discuss the following in Results of Operations:
 
§  
Overall results of our operations and factors affecting those results
 
§  
Our segment results
 
§  
Significant changes in revenues, costs and earnings between periods
 
 
OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY AND FACTORS AFFECTING THE RESULTS
 
The graphs below show our overall operations from 2009 to 2013.
 

OVERALL OPERATIONS OF SEMPRA ENERGY FROM 2009 TO 2013
(Dollars and shares in millions, except per share amounts)

[a008.gif]


[a004.gif]



In 2013, our earnings increased by $142 million (17%) to $1.0 billion and our diluted earnings per share increased by $0.53 per share (15%) to $4.01 per share. The net increases in our earnings and diluted earnings per share were primarily impacted by the following increases (decreases), by segment:
 
SDG&E
 
§  
$61 million higher earnings from CPUC base operations and electric transmission, including Sunrise Powerlink
 
§  
$52 million ($0.21 per share) favorable impact on 2013 earnings from the retroactive impact for 2012 of the 2012 GRC, for which a final decision by the CPUC was issued in the second quarter of 2013
 
§  
$(119) million ($0.48 per share) charge for loss from plant closure associated with SDG&E’s investment in the SONGS nuclear facility
 
§  
$(54) million from an income tax benefit recorded in 2012 related to a change in the income tax treatment of certain repairs expenditures, the lower rate of return authorized in our CPUC cost of capital proceeding and higher interest expense
 
SoCalGas
 
§  
$51 million higher operating margin and newly recovered costs as a result of the 2012 GRC
 
§  
$25 million ($0.10 per share) favorable impact on 2013 earnings from the retroactive impact for 2012 of the 2012 GRC
 
Sempra Mexico
 
§  
$(26) million decrease in Sempra Mexico’s earnings for earnings attributable to noncontrolling interests at IEnova following its March 2013 offerings of 18.9 percent of its common stock
 
Sempra Renewables
 
§  
$24 million ($0.10 per share) gains from the sale of 50-percent equity interests in MS 1 and CMS 2 in 2013
 
§  
$(50) million lower deferred income tax benefits, including $5 million decrease from U.S. Treasury grant sequestration in 2013, as a result of solar and wind generating assets placed in service in 2012
 
Sempra Natural Gas
 
§  
$239 million ($0.97 per share) in noncash impairment charges in 2012 to write down our investment in Rockies Express, partially offset by a $25 million income tax make-whole payment received in 2012 from Kinder Morgan ($0.10 per share)
 
§  
$44 million ($0.18 per share) gain on the sale of one 625-MW block of Sempra Natural Gas’ 1,250-MW Mesquite Power natural gas-fired power plant in the first quarter of 2013
 
§  
$41 million higher earnings from LNG operations, primarily due to lower of cost or market adjustments in 2012 associated with the timing of cargoes, the impact of higher natural gas prices on marketing operations and lower costs resulting from commercial arrangements entered into with affiliates
 
Parent and Other
 
§  
$(63) million ($0.25 per share) income tax expense in the first quarter of 2013 resulting from a corporate reorganization in connection with the IEnova stock offerings
 
§  
$(54) million ($0.22 per share) income tax benefit in 2012 primarily associated with our decision to hold life insurance contracts kept in support of certain benefit plans to term
 
Diluted earnings per share for 2013 compared to 2012 were also impacted by an increase in the number of shares outstanding (decrease of $0.05 per share).
 

Our earnings in 2012 decreased by $472 million (35%) to $859 million compared to 2011. Diluted earnings per share for 2012 decreased by $2.03 per share to $3.48 per share.  The decreases were primarily due to:
 
§  
a $277 million ($1.15 per share) gain resulting from the remeasurement of our equity method investments at our South American Utilities segment related to its acquisition of additional interests in Chilquinta Energía and Luz del Sur in April 2011;
 
§  
$239 million ($0.97 per share) in noncash impairment charges in 2012 to write down our investment in Rockies Express, partially offset by a $25 million income tax make-whole payment received from Kinder Morgan ($0.10 per share); and
 
§  
lower earnings at Sempra Natural Gas and Sempra Mexico in 2012 compared to 2011 primarily due to the end of the DWR contract in September 2011; offset by
 
§  
improved results at the California Utilities, Sempra Renewables and Parent and Other.
 
Diluted earnings per share for 2012 compared to 2011 were also impacted by an increase in the number of shares outstanding (decrease of $0.08 per share).
 
The following table shows our earnings (losses) by segment, which we discuss below in “Segment Results.”
 

SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT 2011-2013
(Dollars in millions)
 
 
Years ended December 31, 
 
 
2013 
2012 
2011 
California Utilities:
 
 
 
 
 
 
 
 
 
 
 
 
    SDG&E(1)
 404 
 41 
%
 484 
 56 
%
 431 
 32 
%
    SoCalGas(2)
 
 364 
 37 
 
 
 289 
 34 
 
 
 287 
 22 
 
Sempra International:
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra South American Utilities
 
 153 
 15 
 
 
 164 
 19 
 
 
 425 
 32 
 
    Sempra Mexico
 
 122 
 12 
 
 
 157 
 18 
 
 
 192 
 14 
 
Sempra U.S. Gas & Power:
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra Renewables
 
 62 
 6 
 
 
 61 
 7 
 
 
 7 
 1 
 
    Sempra Natural Gas
 
 64 
 6 
 
 
 (241)
 (28)
 
 
 115 
 9 
 
Parent and other(3)
 
 (168)
 (17)
 
 
 (55)
 (6)
 
 
 (126)
 (10)
 
Earnings
 1,001 
 100 
%
 859 
 100 
%
 1,331 
 100 
%
(1)
After preferred dividends and 2013 call premium on preferred stock.
(2)
After preferred dividends.
(3)
Includes after-tax interest expense ($144 million in 2013, $150 million in 2012 and $138 million in 2011), intercompany eliminations recorded in consolidation and certain corporate costs.
 

 

 
SEGMENT RESULTS
 
The following section is a discussion of earnings (losses) by Sempra Energy segment, as presented in the table above. Variance amounts are the after-tax earnings impact (based on applicable statutory tax rates), unless otherwise noted.
 

 
EARNINGS BY SEGMENT – CALIFORNIA UTILITIES
(Dollars in millions)

[a010.gif]


 
SDG&E
 
Our SDG&E segment recorded earnings of:
 
§  
$404 million in 2013 ($411 million before preferred dividends and call premium)
 
§  
$484 million in 2012 ($489 million before preferred dividends)
 
§  
$431 million in 2011 ($436 million before preferred dividends)
 
The decrease of $80 million (17%) in 2013 was primarily due to:
 
§  
$119 million charge for loss from plant closure associated with SDG&E’s investment in SONGS;
 
§  
$22 million income tax benefit recorded in the third quarter of 2012 for full-year 2011 from the change in the income tax treatment of certain repairs expenditures, as we discuss below in “Income Taxes;”
 
§  
$20 million lower CPUC-authorized rate of return established in the CPUC cost of capital proceeding effective as of January 1, 2013;
 
§  
$12 million higher interest expense;
 
§  
$11 million loss of revenue from SONGS due to the early closure of the plant; and
 
§  
$6 million for the recovery from the U.S. Department of Energy (DOE) in 2012 of incremental costs incurred in prior years for the long-term storage of spent nuclear fuel; offset by
 
§  
$52 million favorable impact on 2013 earnings from the retroactive application for 2012 of the final decision in the 2012 GRC;
 
§  
$38 million higher CPUC base operating margin as a result of the final 2012 GRC decision, net of operating costs; and
 
§  
$23 million higher electric transmission margin (including Sunrise Powerlink).
 
The increase in earnings of $53 million (12%) in 2012 compared to 2011 was primarily due to:
 
§  
$52 million reduction in 2012 income tax expense primarily due to a change in the income tax treatment of certain repairs expenditures, as we discuss below in “Income Taxes;”
 
§  
$33 million higher earnings related to Sunrise Powerlink;
 
§  
$13 million higher earnings for Desert Star in 2012, which was acquired in October 2011;
 
§  
$11 million higher electric transmission margin (excluding Sunrise Powerlink);
 
§  
$8 million increase in AFUDC related to equity (excluding Sunrise Powerlink);
 
§  
$7 million lower expense associated with the settlement of 2007 wildfire claims; and
 
§  
$6 million for the recovery from the DOE in 2012 of incremental costs incurred in prior years for the long-term storage of spent nuclear fuel; offset by
 
§  
$28 million higher depreciation and operation and maintenance expenses related to CPUC-regulated operations (excluding insurance premiums for wildfire coverage, litigation and Desert Star) with no corresponding increase in the CPUC-authorized margin in 2012 due to the delay in the 2012 GRC decision;
 
§  
$18 million unfavorable earnings impact due to higher revenues in 2011 associated with incremental wildfire insurance premiums (revenues in 2011 were for an 18-month period compared to a 12-month period in 2012);
 
§  
$18 million higher interest expense;
 
§  
$6 million lower regulatory incentive awards; and
 
§  
$5 million higher litigation expense.
 
 
SoCalGas
 
Our SoCalGas segment recorded earnings of:
 
§  
$364 million in 2013 ($365 million before preferred dividends)
 
§  
$289 million in 2012 ($290 million before preferred dividends)
 
§  
$287 million in 2011 ($288 million before preferred dividends)
 
The increase of $75 million (26%) in 2013 was primarily due to:
 
§  
$36 million higher CPUC base operating margin as a result of the final 2012 GRC decision and lower non-refundable operating costs;
 
§  
$25 million favorable impact on 2013 earnings from the retroactive application for 2012 of the final decision in the 2012 GRC;
 
§  
$20 million higher favorable resolution of prior years’ income tax issues in 2013; and
 
§  
$15 million due to costs associated with the Transmission Integrity Management Program (TIMP) being expensed in 2012 now being fully recovered (balanced) in revenues pursuant to the 2012 GRC; offset by
 
§  
$14 million lower CPUC-authorized rate of return established in the CPUC cost of capital proceeding effective as of January 1, 2013.
 
The increase of $2 million (1%) in 2012 compared to 2011 was primarily due to:
 
§  
$37 million from a lower effective tax rate, primarily due to a change in the income tax treatment of certain repairs expenditures, as we discuss below in “Income Taxes;” and
 
§  
$6 million from an increase in AFUDC related to equity; offset by
 
§  
$37 million increase in non-refundable operating expenses, primarily due to depreciation and expenses related to the TIMP, with no corresponding increase in CPUC-authorized margin in 2012 due to the delay in the 2012 GRC decision; and
 
§  
$2 million higher bad debt accruals.
 


EARNINGS BY SEGMENT – SEMPRA INTERNATIONAL
(Dollars in millions)

[a011.gif]


 
Sempra South American Utilities
 
Our Sempra South American Utilities segment recorded earnings of:
 
§  
$153 million in 2013
 
§  
$164 million in 2012
 
§  
$425 million in 2011
 
The decrease in earnings of $11 million (7%) in 2013 was primarily due to:
 
§  
$11 million equity losses related to our investments in two Argentine natural gas utility holding companies, including $7 million noncash impairment charge in the first quarter of 2013 and $4 million loss from the sale of the investments in the second quarter of 2013; and
 
§  
$4 million equity losses from our joint venture in Chile in 2013 resulting from a forward exchange contract to manage foreign currency exchange rate risk; offset by
 
§  
$4 million lower income tax expense from an unfavorable resolution of prior years’ tax matters in 2012.
 
The decrease in earnings of $261 million in 2012 compared to 2011 was primarily due to:
 
§  
a $277 million gain related to the remeasurement of the Chilquinta Energía and Luz del Sur equity method investments in April 2011; and
 
§  
$12 million earnings in 2011 from foreign currency rate effect mainly for a previously held U.S. dollar monetary position in Chile; offset by
 
§  
$21 million higher earnings in 2012 due to the acquisition of additional interests in Chilquinta Energía and Luz del Sur in April 2011; and
 
§  
$7 million higher earnings from operations in 2012 primarily attributable to an increase in customer base and higher consumption.
 

 
Sempra Mexico
 
Sempra Mexico recorded earnings of:
 
§  
$122 million in 2013
 
§  
$157 million in 2012
 
§  
$192 million in 2011
 
The decrease of $35 million (22%) in 2013 was primarily due to:
 
§  
$26 million decrease in Sempra Mexico’s earnings for earnings attributable to noncontrolling interests at IEnova following its stock offerings in March 2013;
 
§  
$13 million increase in deferred income tax liability due to Mexico income tax law enacted in the fourth quarter of 2013 and effective January 1, 2014, as we discuss below in “Income Taxes;”
 
§  
$10 million lower earnings mainly due to administrative expenses related to the new IEnova public company structure, scheduled plant maintenance at our Mexicali power plant in 2013, and the net impact of changes in affiliate agreements;
 
§  
$7 million negative translation effect primarily on Peso-denominated tax receivables; and
 
§  
$6 million higher interest expense, including interest associated with the IEnova debt offering in February 2013; offset by
 
§  
$19 million AFUDC related to equity associated with construction of the natural gas pipeline in Sonora; and
 
§  
$7 million lower income tax expense, including the favorable impact of Mexican currency inflation and translation adjustments in 2013 compared to 2012.
 
 
 The decrease in earnings of $35 million (18%) in 2012 compared to 2011 was primarily due to:
 
§  
$43 million lower earnings at our Mexicali power plant in 2012 compared to 2011 primarily due to the expiration of the DWR contract in September 2011, which resulted in a change in the intercompany agreement with Sempra Natural Gas effective January 1, 2012. This decrease was partially offset by an increase in earnings from a prior year outage at the plant; and
 
§  
$8 million income tax expense in 2012 compared to $12 million income tax benefit in 2011, primarily related to Mexican currency translation and inflation adjustments and to changes in tax valuation allowances, net of the effects of a Mexican peso income tax hedge; offset by
 
§  
$22 million in improved operations primarily due to increased earnings from Sempra Mexico’s joint venture with PEMEX and from Sempra Mexico’s LNG operations; and
 
§  
$4 million positive translation effect on Peso-denominated receivables.
 


EARNINGS (LOSSES) BY SEGMENT – SEMPRA U.S. GAS & POWER
(Dollars in millions)

[a012.gif]

 

 
 
Sempra Renewables
 
Sempra Renewables recorded earnings of:
 
§  
$62 million in 2013
 
§  
$61 million in 2012
 
§  
$7 million in 2011
 
The increase in earnings of $1 million (2%) in 2013 was primarily due to:
 
§  
$24 million gains from the sale of 50-percent equity interests in Mesquite Solar 1 and Copper Mountain Solar 2;
 
§  
$16 million higher earnings attributable to our wind assets; and
 
§  
$13 million higher earnings from our solar assets, including $6 million from interest rate hedges; offset by
 
§  
$50 million lower deferred income tax benefits, including $5 million decrease from U.S. Treasury grant sequestration in 2013, as a result of solar and wind generating assets placed in service in 2012.
 
The increase in earnings of $54 million in 2012 compared to 2011 was primarily due to:
 
§  
$35 million higher deferred income tax benefits as a result of increased investments in solar and wind generating assets in 2012;
 
§  
$7 million higher production tax credits from our wind assets;
 
§  
$6 million higher earnings attributable to our solar assets; and
 
§  
$3 million higher interest income.
 
 
Sempra Natural Gas
 
Sempra Natural Gas recorded earnings (losses) of:
 
§  
$64 million in 2013
 
§  
$(241) million in 2012
 
§  
$115 million in 2011
 
The change in 2013 was primarily due to:
 
§  
$239 million write-down of our investment in Rockies Express in 2012;
 
§  
$44 million gain in 2013 on the sale of a 625-MW block of the Mesquite Power plant, net of related expenses;
 
§  
$41 million higher earnings from LNG operations, primarily due to lower of cost or market adjustments in 2012 associated with the timing of cargoes, the impact of higher natural gas prices on marketing operations and lower costs resulting from commercial arrangements entered into with affiliates;
 
§  
$11 million lower interest expense and operating costs at the Mesquite Power plant due to the sale of one block of the plant in the first quarter of 2013; and
 
§  
$10 million improved results at our marketing and storage operations primarily driven by sales of natural gas in 2013; offset by
 
§  
a $25 million payment received from Kinder Morgan in 2012 due to tax impacts related to the sale of their interest in Rockies Express; and
 
§  
$12 million lower earnings at Sempra Rockies Marketing due to expiring capacity release contracts.
 
 The change in 2012 compared to 2011 was primarily due to:
 
§  
$239 million write-down of our investment in Rockies Express in 2012;
 
§  
$121 million lower earnings from natural gas power plant operations in 2012 compared to 2011 primarily from lower natural gas and power prices, including the impact from the end of the DWR contract as of September 30, 2011; and
 
§  
$44 million lower earnings from LNG primarily due to lower natural gas prices, timing of cargo marketing operations, and costs in 2012 related to the development of the Cameron liquefaction project; offset by
 
§  
a $25 million payment received from Kinder Morgan due to tax impacts related to the sale of their interest in Rockies Express; and
 
§  
$23 million operating losses in 2011 from the El Dorado power plant sold to SDG&E as of October 1, 2011.
 
 
Parent and Other
 
Losses for Parent and Other were
 
§  
$168 million in 2013
 
§  
$55 million in 2012
 
§  
$126 million in 2011
 
The increase in losses of $113 million in 2013 was primarily due to:
 
§  
$63 million income tax expense resulting from a corporate reorganization in connection with the IEnova stock offerings;
 
§  
$54 million income tax benefit in 2012 primarily associated with our decision to hold life insurance contracts kept in support of certain benefit plans to term, as we discuss below in “Income Taxes;” and
 
§  
$42 million higher net interest expense primarily due to lower intercompany interest income from a debt restructuring at Sempra Natural Gas and increased borrowings from Sempra Renewables; offset by
 
§  
$42 million higher income tax benefits, excluding income tax items discussed above, primarily due to higher favorable resolution of prior years’ income tax issues and the timing of a change in tax law. We discuss this new law, the American Taxpayer Relief Act of 2012, in “Income Taxes” below.
 
The decrease in losses of $71 million (56%) in 2012 compared to 2011 was primarily due to:
 
§  
$54 million income tax benefit primarily associated with the decision to hold life insurance contracts to term, as we discuss below in “Income Taxes;”
 
§  
$20 million higher investment gains on dedicated assets in support of our executive retirement and deferred compensation plans, net of the increase in deferred compensation liability associated with the investments;
 
§  
$15 million equity losses in 2011 from the RBS Sempra Commodities joint venture, including a $10 million write-down of the investment; and
 
§  
higher earnings from foreign currency exchange effects mainly related to a Chilean holding company, and hedging transactions; offset by
 
§  
$27 million lower income tax benefits, excluding the $54 million income tax benefit discussed above.
 

 
CHANGES IN REVENUES, COSTS AND EARNINGS
 
This section contains a discussion of the differences between periods in the specific line items of the Consolidated Statements of Operations for Sempra Energy, SDG&E and SoCalGas.
 
 
Utilities Revenues
 
Our utilities revenues include
 
Natural gas revenues at:
 
§  
SDG&E
 
§  
SoCalGas
 
§  
Sempra Mexico’s Ecogas
 
§  
Sempra Natural Gas’ Mobile Gas and Willmut Gas
 
Electric revenues at:
 
§  
SDG&E
 
§  
Sempra South American Utilities’ Chilquinta Energía and Luz del Sur
 
Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Consolidated Statements of Operations.
 
 
The California Utilities
 
The current regulatory framework for SoCalGas and SDG&E permits the cost of natural gas purchased for core customers (primarily residential and small commercial and industrial customers) to be passed through to customers in rates substantially as incurred. However, SoCalGas’ Gas Cost Incentive Mechanism provides SoCalGas the opportunity to share in the savings and/or costs from buying natural gas for its core customers at prices below or above monthly market-based benchmarks. This mechanism permits full recovery of costs incurred when average purchase costs are within a price range around the benchmark price. Any higher costs incurred or savings realized outside this range are shared between the core customers and SoCalGas. We provide further discussion in Notes 1 and 14 of the Notes to Consolidated Financial Statements.
 
The regulatory framework also permits SDG&E to recover the actual cost incurred to generate or procure electricity based on annual estimates of the cost of electricity supplied to customers. The differences in cost between estimates and actual are recovered in the next year through rates.
 

The table below summarizes Utilities Revenues and Cost of Sales for Sempra Energy, net of intercompany activity.
 

UTILITIES REVENUES AND COST OF SALES 2011-2013
(Dollars in millions)
 
 
Years ended December 31, 
 
 
2013 
2012 
2011 
Electric revenues:
 
 
 
 
 
 
SDG&E
 3,537 
 3,226 
 2,830 
Sempra South American Utilities
 
 1,383 
 
 1,349 
 
 1,009 
Eliminations and adjustments
 
 (9)
 
 (7)
 
 (6)
 
Total
 
 4,911 
 
 4,568 
 
 3,833 
Natural gas revenues:
 
 
 
 
 
 
SoCalGas
 
 3,736 
 
 3,282 
 
 3,816 
SDG&E
 
 529 
 
 468 
 
 543 
Sempra Mexico
 
 97 
 
 75 
 
 91 
Sempra Natural Gas
 
 109 
 
 96 
 
 93 
Eliminations and adjustments
 
 (73)
 
 (48)
 
 (54)
 
Total
 
 4,398 
 
 3,873 
 
 4,489 
  Total utilities revenues
 9,309 
 8,441 
 8,322 
Cost of electric fuel and purchased power:
 
 
 
 
 
 
SDG&E
 1,019 
 892 
 715 
Sempra South American Utilities
 
 913 
 
 868 
 
 682 
 
Total
 1,932 
 1,760 
 1,397 
Cost of natural gas:
 
 
 
 
 
 
SoCalGas
 1,362 
 1,074 
 1,568 
SDG&E
 
 204 
 
 151 
 
 226 
Sempra Mexico
 
 63 
 
 45 
 
 63 
Sempra Natural Gas
 
 35 
 
 25 
 
 27 
Eliminations and adjustments
 
 (18)
 
 (5)
 
 (18)
 
Total
 1,646 
 1,290 
 1,866 

 
Sempra Energy Consolidated
 
Electric Revenues
 
Our electric revenues increased by $343 million (8%) to $4.9 billion in 2013 primarily due to:
 
§  
$311 million increase at SDG&E, including:
 
□  
$140 million higher authorized revenues from electric transmission,
 
□  
$127 million increase in cost of electric fuel and purchased power,
 
□  
$94 million higher authorized revenue from implementation of the 2012 GRC decision and 2013 attrition. Due to the delay in the issuance of the 2012 GRC decision by the CPUC, 2012 authorized revenue was essentially unchanged from the 2011 authorized revenue, and
 
□  
$61 million increase due to the retroactive application in 2013 of the 2012 GRC decision for the period from January 2012 through December 2012, offset by
 
□  
$40 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses,
 
□  
$33 million loss of revenue from SONGS due to the early closure of the plant, and
 
□  
$30 million lower CPUC-authorized rate of return established in the CPUC cost of capital proceeding effective as of January 1, 2013; and
 
§  
$34 million increase at our South American utilities primarily due to higher volumes, net of foreign currency exchange rate effects.
 
In 2012 compared to 2011, our electric revenues increased by $735 million (19%) to $4.6 billion primarily due to:
 
§  
$396 million increase at SDG&E, which we discuss below; and
 
§  
$340 million increase at our South American utilities, primarily from the consolidation of Chilquinta Energía and Luz del Sur acquired in April 2011. In addition, electric revenues increased due to higher commodity prices and volume at Luz del Sur, offset by lower commodity prices at Chilquinta Energía.
 
Our utilities’ cost of electric fuel and purchased power increased by $172 million (10%) to $1.9 billion in 2013 primarily due to:
 
§  
$127 million increase in SDG&E’s cost of electric fuel and purchased power primarily due to the incremental cost and purchases of renewable energy, and increased cost of other purchased power primarily due to higher power prices, slightly offset by lower demand driven by an overall cooler summer in 2013 compared to 2012; and
 
§  
$45 million increase at our South American utilities driven primarily by higher volumes and higher costs of purchased power, net of foreign currency exchange rate effects.
 
Our utilities’ cost of electric fuel and purchased power increased by $363 million (26%) to $1.8 billion in 2012 compared to 2011 primarily due to:
 
§  
$186 million increase at Chilquinta Energía and Luz del Sur associated with the higher revenues; and
 
§  
$177 million increase at SDG&E, which we discuss below.
 
Natural Gas Revenues
 
In 2013, Sempra Energy’s natural gas revenues increased by $525 million (14%) to $4.4 billion, and the cost of natural gas increased by $356 million (28%) to $1.6 billion. The increase in natural gas revenues included
 
§  
an increase in cost of natural gas sold at both SoCalGas and SDG&E, as we discuss below;
 
§  
increases of $64 million and $20 million at SoCalGas and SDG&E, respectively, primarily due to higher authorized revenues from implementation of the 2012 GRC decision and 2013 attrition. Due to the delay in the issuance of the 2012 GRC decision by the CPUC, 2012 authorized revenue was essentially unchanged from the 2011 authorized revenue;
 
§  
higher recovery of costs at SoCalGas associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses; and
 
§  
$30 million increase due to the retroactive application in 2013 of the 2012 GRC decision for the period from January 2012 through December 2012.
 
In 2012 compared to 2011, Sempra Energy’s natural gas revenues decreased by $616 million (14%) to $3.9 billion, and the cost of natural gas decreased by $576 million (31%) to $1.3 billion. The decrease in natural gas revenues included
 
§  
$494 million and $75 million decreases in cost of natural gas sold at SoCalGas and SDG&E, respectively, from lower natural gas prices and volumes sold; and
 
§  
$64 million lower recovery of the California Utilities’ costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses.
 
We discuss the changes in revenues and cost of natural gas individually for SDG&E and SoCalGas below.
 
 
SDG&E: Electric Revenues and Cost of Electric Fuel and Purchased Power
 
The table below shows electric revenues for SDG&E. Because the cost of electricity is substantially recovered in rates, changes in the cost are reflected in the changes in revenues. In addition to the change in cost, electric revenues recorded during a period are impacted by customer billing cycles causing a difference between customer billings and recorded or authorized costs.  These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts. We discuss balancing accounts and their effects further in Note 1 of the Notes to Consolidated Financial Statements.
 


SDG&E
ELECTRIC DISTRIBUTION AND TRANSMISSION 2011-2013
(Volumes in millions of kilowatt-hours, dollars in millions)
 
 
Years ended December 31,
 
 
2013 
2012 
2011 
Customer class
Volumes 
Revenue 
Volumes 
Revenue 
Volumes 
Revenue 
Residential
 7,392 
 1,283 
 7,587 
 1,242 
 7,374 
 1,215 
Commercial
 6,722 
 
 1,080 
 6,902 
 
 1,017 
 6,736 
 
 1,000 
Industrial
 1,962 
 
 257 
 2,042 
 
 249 
 2,037 
 
 247 
Direct access(1)
 3,593 
 
 151 
 3,399 
 
 148 
 3,265 
 
 148 
Street and highway lighting
 87 
 
 12 
 95 
 
 13 
 100 
 
 14 
 
 
 19,756 
 
 2,783 
 20,025 
 
 2,669 
 19,512 
 
 2,624 
CAISO shared transmission revenue - net(2)
 
 
 268 
 
 
 64 
 
 
 11 
Other revenues
 
 
 172 
 
 
 134 
 
 
 106 
Balancing accounts
 
 
 314 
 
 
 359 
 
 
 89 
    Total(3)
 
 3,537 
 
 3,226 
 
 2,830 
(1)
The Direct Access (DA) program, which offered all customers the option to purchase their electric commodity services from a third-party Energy Service Provider (ESP) instead of continuing to receive these services from SDG&E, was implemented in 1998 and suspended in 2001. In 2009, Senate Bill 695 required the CPUC to develop a process and rules for a limited re-opening of DA to be phased in over a period of time. In 2010, the CPUC adopted the process and rules for the limited re-opening of DA for non-residential customers under a 4-year phase-in schedule. The 2013 tranche of non-residential customers switching to DA resulted in higher volumes in 2013. The increase in revenues from the higher volumes was offset by lower tariffs in 2013 compared to 2012.
(2)
California Independent System Operator (CAISO) shared transmission revenue increased in both 2013 and 2012 compared to the prior year due to the Sunrise Powerlink transmission line being placed in service in June 2012.
(3)
Includes sales to affiliates of $9 million in 2013, $7 million in 2012 and $6 million in 2011.

 
SDG&E’s electric revenues increased by $311 million (10%) to $3.5 billion in 2013 primarily due to:
 
§  
$140 million higher authorized revenues from electric transmission including:
 
□  
$80 million from placing the Sunrise Powerlink transmission line in service in June 2012, and
 
□  
$60 million from increased investment in other transmission assets;
 
§  
$127 million increase in cost of electric fuel and purchased power primarily due to the incremental cost and purchases of renewable energy, and increased cost of other purchased power primarily due to higher power prices, slightly offset by lower demand driven by an overall cooler summer in 2013 compared to 2012;
 
§  
$94 million higher authorized revenue from implementation of the 2012 GRC decision and 2013 attrition. Due to the delay in the issuance of the 2012 GRC decision by the CPUC, SDG&E’s 2012 authorized revenue was essentially unchanged from the 2011 authorized revenue; and
 
§  
$61 million increase due to the retroactive application in 2013 of the 2012 GRC decision for the period from January 2012 through December 2012; offset by
 
§  
$40 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses;
 
§  
$33 million loss of revenue from SONGS due to the early closure of the plant; and
 
§  
$30 million lower CPUC-authorized rate of return established in the CPUC cost of capital proceeding effective as of January 1, 2013.
 
In 2012 compared to 2011, electric revenues increased by $396 million (14%) to $3.2 billion at SDG&E, primarily due to:
 
§  
$177 million increase in cost of electric fuel and purchased power in 2012 including:
 
□  
$100 million due to the incremental cost of renewable energy and other purchased power, and
 
□  
$77 million due to the cost of power purchased to replace power scheduled to be generated and delivered to SDG&E from SONGS;
 
§  
$130 million higher authorized revenues from electric transmission including:
 
□  
$83 million from placing the Sunrise Powerlink transmission line in service in June 2012, and
 
□  
$47 million from increased investment in other transmission assets;
 
§  
$45 million higher authorized revenues from electric generation, primarily due to the acquisition of the Desert Star generation facility in October 2011;
 
§  
$42 million higher recoverable expenses that are fully offset in operation and maintenance expenses; and
 
§  
$21 million from advanced meter program costs; offset by
 
§  
$22 million lower revenues associated with incremental wildfire insurance premiums; and
 
§  
$10 million lower regulatory awards.
 
We do not include in the Consolidated Statements of Operations the commodity costs (and the revenues to recover those costs) associated with long-term contracts that are allocated to SDG&E by the California DWR. However, we do include the associated volumes and distribution revenues in the table above. We provide further discussion of these contracts in Notes 1 and 14 of the Notes to Consolidated Financial Statements.
 
 
SDG&E and SoCalGas: Natural Gas Revenues and Cost of Natural Gas
 
The following tables show natural gas revenues for SDG&E and SoCalGas. Because the cost of natural gas is recovered in rates, changes in the cost are reflected in the changes in revenues. In addition to the change in market prices, natural gas revenues recorded during a period are impacted by the difference between customer billings and recorded or CPUC-authorized costs.  These differences are required to be balanced over time, resulting in over- and undercollected regulatory balancing accounts. We discuss balancing accounts and their effects further in Note 1 of the Notes to Consolidated Financial Statements.
 

SDG&E
NATURAL GAS SALES AND TRANSPORTATION 2011-2013
(Volumes in billion cubic feet, dollars in millions)
 
 
 
 
 
 
 
 
 
Natural Gas Sales 
Transportation 
Total 
Customer class
Volumes 
Revenue 
Volumes 
Revenue 
Volumes 
Revenue 
2013:
 
 
 
 
 
 
 
 
 
    Residential
 31 
 323 
 ― 
 1 
 31 
 324 
    Commercial and industrial
 15 
 
 98 
 9 
 
 13 
 24 
 
 111 
    Electric generation plants
 ― 
 
 ― 
 25 
 
 15 
 25 
 
 15 
 
 46 
 421 
 34 
 29 
 80 
 
 450 
    Other revenues
 
 
 
 
 
 
 
 
 42 
    Balancing accounts
 
 
 
 
 
 
 
 
 37 
        Total(1)
 
 
 
 
 
 
 
 529 
2012:
 
 
 
 
 
 
 
 
 
    Residential
 30 
 266 
 ― 
 1 
 30 
 267 
    Commercial and industrial
 15 
 
 76 
 8 
 
 11 
 23 
 
 87 
    Electric generation plants
 ― 
 
 ― 
 37 
 
 15 
 37 
 
 15 
 
 45 
 342 
 45 
 27 
 90 
 
 369 
    Other revenues
 
 
 
 
 
 
 
 
 40 
    Balancing accounts
 
 
 
 
 
 
 
 
 59 
        Total(1)
 
 
 
 
 
 
 
 468 
2011:
 
 
 
 
 
 
 
 
 
    Residential
 32 
 341 
 ― 
 1 
 32 
 342 
    Commercial and industrial
 15 
 
 103 
 8 
 
 10 
 23 
 
 113 
    Electric generation plants
 ― 
 
 ― 
 25 
 
 8 
 25 
 
 8 
 
 47 
 444 
 33 
 19 
 80 
 
 463 
    Other revenues
 
 
 
 
 
 
 
 
 36 
    Balancing accounts
 
 
 
 
 
 
 
 
 44 
        Total(1)
 
 
 
 
 
 
 
 543 
(1)    Includes sales to affiliates of $3 million in 2013, $2 million in 2012 and $1 million in 2011.


In 2013, SDG&E’s natural gas revenues increased by $61 million (13%) to $529 million, and the cost of natural gas increased by $53 million (35%) to $204 million. The increase in revenues was primarily due to:
 
§  
higher cost of natural gas sold, as we discuss below;
 
§  
$20 million higher authorized revenue from implementation of the 2012 GRC decision and 2013 attrition. Due to the delay in the issuance of the 2012 GRC decision by the CPUC, SDG&E’s 2012 authorized revenue was essentially unchanged from the 2011 authorized revenue; and
 
§  
$5 million increase from the retroactive application in 2013 of the 2012 GRC decision for the period from January 2012 through December 2012; offset by
 
§  
$5 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses.
 
In 2012 compared to 2011, SDG&E’s natural gas revenues decreased by $75 million (14%) to $468 million, and the cost of natural gas decreased by $75 million (33%) to $151 million. The decrease in revenues was primarily due to:
 
§  
the decrease in cost of natural gas sold from lower natural gas prices and volumes sold, as we discuss below; and
 
§  
$13 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses; offset by
 
§  
$10 million increase associated with the advanced meter program.
 
SDG&E’s average cost of natural gas was $4.49 per thousand cubic feet (Mcf) for 2013, $3.62 per Mcf for 2012 and $4.83 per Mcf for 2011. In 2013, the 24-percent increase of $0.87 per Mcf resulted in higher revenues and cost of $40 million compared to 2012.
 
In 2012, the 25-percent decrease of $1.21 per Mcf resulted in lower revenues and cost of $54 million compared to 2011. The decrease in the cost of natural gas sold was also attributable to lower volumes, which resulted in lower revenues and cost of $9 million.
 


SOCALGAS
NATURAL GAS SALES AND TRANSPORTATION 2011-2013
(Volumes in billion cubic feet, dollars in millions)
 
 
 
 
 
 
 
 
 
Natural Gas Sales 
Transportation 
Total 
Customer class
Volumes 
Revenue 
Volumes 
Revenue 
Volumes 
Revenue 
2013:
 
 
 
 
 
 
 
 
 
    Residential
 234 
 2,204 
 2 
 8 
 236 
 2,212 
    Commercial and industrial
 100 
 
 691 
 293 
 
 242 
 393 
 
 933 
    Electric generation plants
 ― 
 
 ― 
 200 
 
 44 
 200 
 
 44 
    Wholesale
 ― 
 
 ― 
 170 
 
 27 
 170 
 
 27 
 
 334 
 2,895 
 665 
 321 
 999 
 
 3,216 
    Other revenues
 
 
 
 
 
 
 
 
 101 
    Balancing accounts
 
 
 
 
 
 
 
 
 419 
        Total(1)
 
 
 
 
 
 
 
 3,736 
2012:
 
 
 
 
 
 
 
 
 
    Residential
 234 
 1,963 
 2 
 8 
 236 
 1,971 
    Commercial and industrial
 101 
 
 608 
 283 
 
 240 
 384 
 
 848 
    Electric generation plants
 ― 
 
 ― 
 231 
 
 39 
 231 
 
 39 
    Wholesale
 ― 
 
 ― 
 175 
 
 24 
 175 
 
 24 
 
 335 
 2,571 
 691 
 311 
 1,026 
 
 2,882 
    Other revenues
 
 
 
 
 
 
 
 
 91 
    Balancing accounts
 
 
 
 
 
 
 
 
 309 
        Total(1)
 
 
 
 
 
 
 
 3,282 
2011:
 
 
 
 
 
 
 
 
 
    Residential
 253 
 2,358 
 1 
 4 
 254 
 2,362 
    Commercial and industrial
 103 
 
 759 
 272 
 
 219 
 375 
 
 978 
    Electric generation plants
 ― 
 
 ― 
 166 
 
 42 
 166 
 
 42 
    Wholesale
 ― 
 
 ― 
 148 
 
 19 
 148 
 
 19 
 
 356 
 3,117 
 587 
 284 
 943 
 
 3,401 
    Other revenues
 
 
 
 
 
 
 
 
 99 
    Balancing accounts
 
 
 
 
 
 
 
 
 316 
        Total(1)
 
 
 
 
 
 
 
 3,816 
(1)    Includes sales to affiliates of $70 million in 2013, $46 million in 2012 and $53 million in 2011.

 
In 2013, SoCalGas’ natural gas revenues increased by $454 million (14%) to $3.7 billion, and the cost of natural gas increased by $288 million (27%) to $1.4 billion. The revenue increase included
 
§  
an increase in cost of natural gas sold from higher natural gas prices (as we discuss below);
 
§  
$76 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses;
 
§  
$64 million increase primarily due to higher authorized revenue from implementation of the 2012 GRC decision and 2013 attrition. Due to the delay in the issuance of the 2012 GRC decision by the CPUC, SoCalGas’ 2012 authorized revenue was essentially unchanged from the 2011 authorized revenue; and
 
§  
$25 million increase due to the retroactive application in 2013 of the 2012 GRC decision for the period from January 2012 through December 2012.
 
In 2012 compared to 2011, SoCalGas’ natural gas revenues decreased by $534 million (14%) to $3.3 billion, and the cost of natural gas sold decreased by $494 million (32%) to $1.1 billion. The decrease in revenues was primarily due to:
 
§  
the decrease in cost of natural gas sold from lower natural gas prices and volumes sold (as we discuss below); and
 
§  
$51 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses.
 

The average cost of natural gas was $4.08 per Mcf for 2013, $3.21 per Mcf for 2012 and $4.41 per Mcf for 2011. In 2013, the 27-percent increase of $0.87 per Mcf resulted in higher revenues and cost of $291 million compared to 2012.
 
In 2012, the 27-percent decrease of $1.20 per Mcf resulted in lower revenues and cost of $402 million compared to 2011. The decrease in the cost of natural gas sold was also attributable to lower demand for natural gas from a warmer winter in 2012.
 
 
Other Utilities: Revenues and Cost of Sales
 
Revenues generated by Chilquinta Energía and Luz del Sur are based on tariffs that are set by government agencies in their respective countries based on an efficient model distribution company defined by those agencies. The basis for the tariffs do not meet the requirement necessary for treatment under applicable U.S. GAAP for regulatory accounting. We discuss revenue recognition further for Chilquinta Energía and Luz del Sur in Note 1 of the Notes to Consolidated Financial Statements.
 
Operations of Mobile Gas, Willmut Gas and Ecogas qualify for regulatory accounting treatment under applicable U.S. GAAP, similar to the California Utilities.
 
The table below summarizes natural gas and electric revenue for our utilities outside of California:
 

OTHER UTILITIES
NATURAL GAS AND ELECTRIC REVENUES 2011-2013
(Dollars in millions)
 
 
Years ended December 31,
 
 
2013 
2012 
2011 
 
 
Volumes 
Revenue 
Volumes 
Revenue 
Volumes 
Revenue 
Natural Gas Sales (billion cubic feet):
 
 
 
 
 
 
 
 
 
Sempra Mexico - Ecogas
 24 
 97 
 23 
 75 
 22 
 91 
Sempra Natural Gas:
 
 
 
 
 
 
 
 
 
    Mobile Gas
 40 
 
 88 
 43 
 
 86 
 40 
 
 93 
    Willmut Gas(1)
 3 
 
 21 
 1 
 
 10 
 ― 
 
 ― 
    Total
 67 
 206 
 67 
 171 
 62 
 184 
 
 
 
 
 
 
 
 
 
 
 
Electric Sales (million kilowatt hours)(2):
 
 
 
 
 
 
 
 
 
Sempra South American Utilities:
 
 
 
 
 
 
 
 
 
    Luz del Sur
 6,984 
 785 
 6,668 
 759 
 4,715 
 487 
    Chilquinta Energía
 2,856 
 
 537 
 2,698 
 
 533 
 1,859 
 
 481 
 
 
 9,840 
 
 1,322 
 9,366 
 
 1,292 
 6,574 
 
 968 
Other service revenues
 
 
 61 
 
 
 57 
 
 
 41 
    Total
 
 1,383 
 
 1,349 
 
 1,009 
(1)
We acquired Willmut Gas in May 2012.
(2)
We accounted for Luz del Sur and Chilquinta Energía under the equity method until April 6, 2011, when they became consolidated entities upon our acquisition of additional ownership interests.


 
Energy-Related Businesses: Revenues and Cost of Sales
 
The table below shows revenues and cost of sales for our energy-related businesses.
 

ENERGY-RELATED BUSINESSES: REVENUES AND COST OF SALES 2011-2013
(Dollars in millions)
 
 
Years ended December 31, 
 
 
2013 
2012 
2011 
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra South American Utilities
 112 
 9 
%
 92 
 8 
%
 71 
 4 
%
    Sempra Mexico
 
 578 
 46 
 
 
 530 
 44 
 
 
 645 
 38 
 
    Sempra Renewables
 
 82 
 7 
 
 
 68 
 6 
 
 
 22 
 1 
 
    Sempra Natural Gas
 
 799 
 64 
 
 
 835 
 69 
 
 
 1,539 
 90 
 
    Intersegment revenues, adjustments
 
 
 
 
 
 
 
 
 
 
 
 
      and eliminations(1)
 
 (323)
 (26)
 
 
 (319)
 (27)
 
 
 (563)
 (33)
 
        Total revenues
 1,248 
 100 
%
 1,206 
 100 
%
 1,714 
 100 
%
COST OF SALES(2)
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra Mexico
 253 
 58 
%
 197 
 41 
%
 276 
 37 
%
    Sempra Renewables
 
 3 
 1 
 
 
 3 
 ― 
 
 
 ― 
 ― 
 
    Sempra Natural Gas
 
 497 
 114 
 
 
 581 
 121 
 
 
 1,034 
 139 
 
    Adjustments and eliminations(1)
 
 (318)
 (73)
 
 
 (300)
 (62)
 
 
 (564)
 (76)
 
        Total cost of natural gas, electric fuel
 
 
 
 
 
 
 
 
 
 
 
 
            and purchased power
 435 
 100 
%
 481 
 100 
%
 746 
 100 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra South American Utilities
 84 
 47 
%
 66 
 41 
%
 45 
 33 
%
    Sempra Mexico
 
 10 
 6 
 
 
 21 
 13 
 
 
 4 
 3 
 
    Sempra Natural Gas
 
 91 
 51 
 
 
 90 
 57 
 
 
 89 
 65 
 
    Adjustments and eliminations(1)
 
 (7)
 (4)
 
 
 (18)
 (11)
 
 
 (1)
 (1)
 
        Total other cost of sales
 178 
 100 
%
 159 
 100 
%
 137 
 100 
%
(1)
Includes eliminations of intercompany activity.
(2)
Excludes depreciation and amortization, which are shown separately on the Consolidated Statements of Operations.

 
Revenues from our energy-related businesses increased by $42 million (3%) to $1.2 billion in 2013. The increase included
 
§  
$48 million increase at Sempra Mexico primarily due to higher natural gas and power prices, partially offset by the net impact of changes in affiliate agreements;
 
§  
$20 million increase at Sempra South American Utilities primarily due to higher electric construction service and energy distribution revenues at Tecnored; and
 
§  
$14 million increase at Sempra Renewables mainly from revenues generated by our solar assets placed in service during 2012; offset by
 
§  
$36 million decrease at Sempra Natural Gas primarily due to lower power production at Mesquite Power, a portion of which was due to the sale of one 625-MW block of the natural gas-fired power plant, and expiring capacity release contracts at Sempra Rockies Marketing, offset by higher physical gas sales at natural gas marketing and storage operations, and the impact of higher natural gas prices on LNG marketing operations.
 
In 2012 compared to 2011, revenues from our energy-related businesses decreased by $508 million (30%) to $1.2 billion. The decrease included
 
§  
$704 million decrease at Sempra Natural Gas due to decreased power sales in 2012 compared to 2011 primarily from the end of the DWR contract in September 2011, lower natural gas revenues from its LNG operations as a result of lower natural gas prices and volumes, and lower revenues due to power sales associated with the EMA with Sempra Mexico, which we discuss above in “Sempra Mexico – Power Business;” and
 
§  
$115 million decrease in 2012 compared to 2011 at Sempra Mexico primarily due to the expiration of the DWR contract, which resulted in a change in the intercompany agreement with Sempra Natural Gas effective January 1, 2012, and from lower natural gas prices at its LNG operations, partially offset by an increase in revenues due to an outage at the Mexicali power plant in 2011; offset by
 
§  
$244 million lower intercompany eliminations primarily associated with sales between Sempra Mexico and Sempra Natural Gas; and
 
§  
$46 million increase at Sempra Renewables mainly from revenues generated by our solar and wind assets.
 
The cost of natural gas, electric fuel and purchased power for our energy-related businesses decreased by $46 million (10%) to $435 million in 2013 primarily due to:
 
§  
an $84 million decrease at Sempra Natural Gas primarily due to lower natural gas costs as a result of lower power production at Mesquite Power, as discussed above, and a decrease at its LNG operations primarily due to lower natural gas sales and lower costs resulting from commercial arrangements entered into with affiliates; offset by
 
§  
a $56 million increase at Sempra Mexico primarily due to higher natural gas prices and costs associated with greenhouse gas allowances.
 
The cost of natural gas, electric fuel and purchased power for our energy-related businesses in 2012 compared to 2011 decreased by $265 million (36%) to $481 million. The decrease was primarily due to:
 
§  
$453 million decrease at Sempra Natural Gas primarily associated with lower natural gas prices and lower power costs associated with the EMA with Sempra Mexico, which we discuss above in “Sempra Mexico – Power Business;” and
 
§  
$79 million decrease at Sempra Mexico primarily due to lower natural gas prices; offset by
 
§  
$264 million lower intercompany eliminations primarily associated with sales between Sempra Mexico and Sempra Natural Gas.
 
Other cost of sales from our energy-related businesses increased by $19 million (12%) to $178 million in 2013 primarily due to costs associated with higher service revenues at Tecnored and Tecsur, including those related to electric construction and generation projects.
 
In 2012 compared to 2011, other cost of sales from our energy-related businesses increased by $22 million (16%) to $159 million primarily due to twelve months of cost of sales in 2012 for Tecnored and Tecsur compared to only nine months in 2011. We started consolidating Tecnored and Tecsur in April 2011.
 
 
Operation and Maintenance
 
In the table below, we provide a breakdown of our operation and maintenance expenses by segment.
 

OPERATION AND MAINTENANCE 2011-2013
(Dollars in millions)
 
 
Years ended December 31, 
 
 
2013 
2012 
2011 
California Utilities:
 
 
 
 
 
 
 
 
 
 
 
 
    SDG&E
 1,157 
 39 
%
 1,154 
 39 
%
 1,072 
 38 
%
    SoCalGas
 
 1,324 
 44 
 
 
 1,304 
 44 
 
 
 1,305 
 46 
 
Sempra International:
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra South American Utilities
 
 170 
 6 
 
 
 177 
 6 
 
 
 132 
 5 
 
    Sempra Mexico
 
 124 
 4 
 
 
 94 
 3 
 
 
 98 
 3 
 
Sempra U.S. Gas & Power:
 
 
 
 
 
 
 
 
 
 
 
 
    Sempra Renewables
 
 46 
 1 
 
 
 34 
 1 
 
 
 17 
 1 
 
    Sempra Natural Gas
 
 167 
 6 
 
 
 168 
 6 
 
 
 169 
 6 
 
Parent and other(1)
 
 7 
 ― 
 
 
 25 
 1 
 
 
 32 
 1 
 
Total operation and maintenance
 2,995 
 100 
%
 2,956 
 100 
%
 2,825 
 100 
%
(1)
Includes intercompany eliminations recorded in consolidation.


Sempra Energy Consolidated
 
While our operation and maintenance expenses remained approximately the same at $3.0 billion in 2013, it included the following activities:
 
§  
$30 million higher expenses at Sempra Mexico mainly due to higher administrative expenses from the new IEnova public company structure and scheduled plant maintenance at the Mexicali power plant in 2013;
 
§  
$20 million increase at SoCalGas, which we discuss below; and
 
§  
$12 million increase at Sempra Renewables primarily due to higher corporate allocations, land lease costs for CMS 3, and operating expenses of CMS 2 and MS 1 prior to the projects’ deconsolidation in the third quarter of 2013; offset by
 
§  
$18 million decrease at Parent and Other mainly due to higher eliminations of intersegment operating costs.
 
In 2012 compared to 2011, our operation and maintenance expenses increased by $131 million (5%) to $3.0 billion. The increase included
 
§  
$82 million increase at SDG&E, which we discuss below;
 
§  
$45 million increase at Sempra South American Utilities primarily from the consolidation of expenses in Chile and Peru for a full year; and
 
§  
$17 million higher costs at Sempra Renewables primarily due to growth in the business.
 
SDG&E
 
SDG&E’s operation and maintenance expenses remained approximately the same at $1.2 billion in 2013, and included the following activities:
 
§  
$36 million higher non-refundable operating costs, including:
 
□  
$10 million recovery from the DOE in 2012 of incremental costs incurred in prior years for the long-term storage of spent nuclear fuel, and
 
□  
$4 million increase in liability insurance premiums for wildfire coverage in 2013;
 
§  
$7 million higher litigation expense; and
 
§  
$5 million higher operation and maintenance expenses at Otay Mesa VIE; offset by
 
§  
$45 million lower refundable program expenses.
 
In 2012 compared to 2011, SDG&E’s operation and maintenance expenses increased by $82 million (8%) to $1.2 billion. The increase was primarily due to:
 
§  
$56 million higher other operation and maintenance costs, including:
 
□  
$14 million associated with the Desert Star generation facility acquired by SDG&E in October 2011 and from increased costs from the operations of other electric generating facilities,
 
□  
$12 million of advanced meter program costs, and
 
□  
$9 million increase in liability insurance premiums for wildfire coverage, offset by
 
□  
$10 million recovery in 2012 of incremental costs incurred in prior years for the long-term storage of spent nuclear fuel; and
 
§  
$29 million higher recoverable expenses primarily due to an increase in electric transmission-related operating expenses.
 
SoCalGas
 
Operation and maintenance expenses at SoCalGas increased by $20 million (2%) to $1.3 billion in 2013 primarily due to:
 
§  
$76 million higher refundable program expenses; offset by
 
§  
$49 million lower non-refundable operating costs; and
 
§  
$7 million insurance recovery in 2013 of previously expensed costs.
 
SoCalGas’ operation and maintenance expenses decreased by $1 million to $1.3 billion in 2012 compared to 2011 primarily due to:
 
§  
$51 million lower recoverable expenses, primarily from reduced funding requirements for employee benefit programs; offset by
 
§  
$49 million higher other operational and maintenance costs, including expenses related to the TIMP, with no corresponding increase in CPUC-authorized margin in 2012 due to the delay in the 2012 GRC decision.
 
 
Depreciation and Amortization
 
Sempra Energy Consolidated
 
Our depreciation and amortization expense was
 
§  
$1,113 million in 2013
 
§  
$1,090 million in 2012
 
§  
$976 million in 2011
 
The increase in 2013 was primarily due to:
 
§  
$36 million higher depreciation and amortization at SoCalGas from higher utility plant base; and
 
§  
$22 million net increase in depreciation and amortization at SDG&E mainly from Sunrise Powerlink going into service in June 2012 and higher amortization of legacy meters, offset by lower depreciation from the retirement of SONGS; offset by
 
§  
lower depreciation and amortization of $18 million at SDG&E and $15 million at SoCalGas due to the retroactive application to the period of January 1 to December 2012 of the extension of the useful lives of depreciable assets as adopted in the 2012 GRC; and
 
§  
$12 million lower depreciation expense at Sempra Natural Gas largely due to the sale of one block of the Mesquite Power plant in February 2013.
 
The increase in 2012 compared to 2011 included
 
§  
$68 million at SDG&E, primarily from higher electric plant depreciation;
 
§  
$31 million at SoCalGas from an increase in net utility plant base;
 
§  
$16 million from the consolidation of entities in Chile and Peru for a full year; and
 
§  
$10 million at Sempra Renewables mainly due to Mesquite Solar 1 going into service starting in December 2011; offset by
 
§  
$10 million decrease at Sempra Natural Gas primarily due to the sale of El Dorado in 2011.
 
 
Loss From Plant Closure
 
SDG&E has a 20-percent ownership interest in SONGS, a nuclear generating facility near San Clemente, California. SONGS’ Units 2 and 3 were shut down in early 2012 due to steam generator issues and, in June 2013, Southern California Edison, the majority owner and operator of SONGS, made the decision to permanently retire these two units. In the second quarter of 2013, SDG&E recorded a pretax charge of $200 million ($119 million after-tax), which represents the portion of SDG&E’s investment in SONGS and associated costs that management estimates may not be recovered in rates based on prior CPUC precedent. We discuss SONGS further in Notes 13 and 15 of the Notes to Consolidated Financial Statements.
 
 
Gain on Sale of Assets
 
In the first quarter of 2013, Sempra Natural Gas completed the sale of one 625-MW block of its Mesquite Power natural gas-fired power plant to the Salt River Project Agricultural Improvement and Power District for $371 million, resulting in a pretax gain on sale of the asset of $74 million ($44 million after-tax). In the third quarter of 2013, Sempra Renewables recorded pretax gains of $36 million and $4 million from the sale of 50-percent equity interests in Mesquite Solar 1 and Copper Mountain Solar 2, respectively. After-tax gains from the sales were $22 million and $2 million, respectively.
 
 
Equity Earnings (Losses), Before Income Tax
 
Equity earnings (losses) from our equity method investments were
 
§  
$31 million in 2013
 
§  
$(319) million in 2012
 
§  
$9 million in 2011
 
Equity losses in 2012 included a write-down of our investment in Rockies Express of $400 million, offset by a $41 million make-whole income tax provision payment received from our previous joint venture partner, Kinder Morgan.
 
Results for 2011 include a $16 million write-down of, and $8 million equity loss from, our investment in the RBS Sempra Commodities joint venture. We and RBS, our partner in the joint venture, sold substantially all of the partnership’s businesses and assets in four separate transactions completed in 2010 and early 2011.
 
We provide further details about equity method investments in Note 4 and the impairments of our Rockies Express and RBS Sempra Commodities investments in Note 10 of the Notes to Consolidated Financial Statements.
 
 
Remeasurement of Equity Method Investments
 
In the second quarter of 2011, we recorded a $277 million non-taxable gain from the remeasurement of our equity method investments in Chilquinta Energía in Chile and Luz del Sur in Peru.  We provide additional discussion related to this gain below in “Income Taxes” and in Note 3 of the Notes to Consolidated Financial Statements.
 
 
Other Income, Net
 
Sempra Energy Consolidated
 
Other income, net, was
 
§  
$140 million in 2013
 
§  
$172 million in 2012
 
§  
$130 million in 2011
 
Other Income, Net, includes equity-related AFUDC at the California Utilities and, starting in 2013, at Sempra Mexico; interest on regulatory balancing accounts; gains and losses from our investments and interest rate swaps; foreign currency gains and losses; and other, sundry amounts. The investment activity is on dedicated assets in support of certain executive benefit plans, as we discuss in Note 7 of the Notes to Consolidated Financial Statements.
 
Other income, net, decreased by $32 million (19%) to $140 million in 2013 primarily due to:
 
§  
$21 million decrease in equity-related AFUDC, including:
 
□  
$32 million decrease at SDG&E primarily due to completion of construction on the Sunrise Powerlink project in June 2012, and
 
□  
$8 million decrease at SoCalGas, offset by
 
□  
$19 million increase at Sempra Mexico related to construction of the Sonora Pipeline; and
 
§  
$9 million foreign currency gains in 2012.
 
In 2012 compared to 2011, other income, net, increased by $42 million (32%) primarily due to:
 
§  
$10 million gains on interest rate and foreign exchange instruments in 2012 compared to $14 million losses in 2011; and
 
§  
$19 million higher gains from investment activity related to our executive retirement and deferred compensation plans in 2012.
 
SDG&E
 
Other income, net, was
 
§  
$40 million in 2013
 
§  
$69 million in 2012
 
§  
$79 million in 2011
 
The decreases in other income, net, in 2013 and 2012 were primarily due to lower AFUDC equity as a result of completion of construction on the Sunrise Powerlink project in June 2012.
 
We provide further details of the components of other income, net, in Note 1 of the Notes to Consolidated Financial Statements.
 

 
Interest Expense
 
The table below shows the interest expense for Sempra Energy Consolidated, SDG&E and SoCalGas.
 

INTEREST EXPENSE 2011-2013
(Dollars in millions)
 
Years ended December 31, 
 
2013 
2012 
2011 
Sempra Energy Consolidated
 559 
 493 
 465 
SDG&E
 
 197 
 
 173 
 
 142 
SoCalGas
 
 69 
 
 68 
 
 69 

Sempra Energy Consolidated
 
Our interest expense increased in 2013 primarily due to:
 
§  
$46 million decrease in capitalized interest mainly due to projects placed in service, including: SDG&E’s Sunrise Powerlink, which was placed in service in June 2012; Sempra Renewables’ solar and wind projects, which went online in the fourth quarter of 2012; and additional capacity at Sempra Natural Gas’ Mississippi Hub facility, which went online in September 2012; and
 
§  
$20 million net increase in interest expense primarily related to long-term debt issuances, including:
 
□  
the IEnova debt offering in February 2013,
 
□  
long-term debt issuances in 2012 and 2013 and remarketing of industrial development bonds in 2012 from floating to fixed rates at SDG&E,
 
□  
long-term debt issuances of $1.6 billion in March and September 2012 and November 2013 at Parent and Other, offset by lower interest expense associated with the maturity of $650 million of notes in February and November 2013, and
 
□  
project financing of selected projects at Sempra Renewables.
 
In 2012 compared to 2011, our interest expense increased by $28 million (6%) primarily due to:
 
§  
$31 million higher interest expense at SDG&E, which we discuss below; and
 
§  
$19 million higher long-term debt interest expense at Parent and Other from debt issuances in 2012; offset by
 
§  
$24 million higher capitalized interest associated with energy projects at Sempra Renewables.
 
SDG&E
 
SDG&E’s interest expense increased $24 million (14%) in 2013 primarily due to lower AFUDC debt as a result of the Sunrise Powerlink project going into service in June 2012, the issuances of long-term debt in 2012 and 2013 and the remarketing of industrial development bonds from floating to fixed rates in 2012.
 
In 2012 compared to 2011, SDG&E’s interest expense increased by $31 million (22%) primarily due to issuances of long-term debt in the second half of 2011 and in March 2012, and the decrease in AFUDC debt in 2012 due to the completion of construction of Sunrise Powerlink.
 

 
Income Taxes
 
The table below shows the income tax expense and effective income tax rates for Sempra Energy, SDG&E and SoCalGas.
 

INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES 2011-2013
(Dollars in millions)
 
Years ended December 31,
 
 
 
2013 
 
2012 
 
2011 
 
 
 
Income Tax
 
Effective Income
 
 
Income Tax
 
Effective Income
 
 
Income Tax
 
Effective Income
 
 
 
 
Expense
 
Tax Rate
 
 
Expense
 
Tax Rate
 
 
Expense
 
Tax Rate
 
Sempra Energy Consolidated
$
 366 
 
 26 
%
$
 59 
 
 6 
%
$
 394 
 
 23 
%
SDG&E
 
 191 
 
 31 
 
 
 190 
 
 27 
 
 
 237 
 
 34 
 
SoCalGas
 
 116 
 
 24 
 
 
 79 
 
 21 
 
 
 143 
 
 33 
 
 
 

 
Sempra Energy Consolidated
 
Sempra Energy’s income tax expense increased in 2013 compared to 2012 due to higher pretax income and a higher effective income tax rate. The higher effective income tax rate was primarily due to:
 
§  
$63 million income tax expense recorded in the first quarter of 2013 resulting from a corporate reorganization in connection with the IEnova stock offerings. We discuss the stock offerings further in Note 1 of the Notes to Consolidated Financial Statements;
 
§  
a $62 million income tax benefit recorded in 2012 for life insurance contracts, of which $54 million is primarily associated with our decision in the second quarter of 2012 to hold life insurance contracts kept in support of certain benefit plans to term. Previously, we took the position that we might cash in or sell these contracts before maturity, which required that we record deferred income taxes on unrealized gains on investments held within the insurance contracts;
 
§  
lower deferred income tax benefits related to renewable energy projects;
 
§  
lower income tax benefit in 2013 relating to certain repairs expenditures that are capitalized for financial statement purposes, including $22 million income tax benefit recorded in 2012 for 2011 resulting from a favorable change made in the third quarter of 2012, as we discuss below;
 
§  
lower favorable impact of exclusions from taxable income of the equity portion of AFUDC; and
 
§  
lower deductions for self-developed software expenditures; offset by
 
§  
a lower unfavorable impact on our effective tax rate in 2013 from the reversal through book depreciation of previously recognized tax benefits for a certain portion of utility fixed assets; and
 
§  
favorable adjustments to prior years’ income tax items in 2013, primarily at SoCalGas.
 
Sempra Energy’s income tax expense decreased in 2012 compared to 2011 due to significantly lower pretax income (due to the write-down of our investment in Rockies Express in 2012) and a lower effective income tax rate. The lower effective income tax rate was primarily due to:
 
§  
a change in the income tax treatment of certain repairs expenditures at SDG&E and SoCalGas that are capitalized for financial statement purposes, which resulted in a $70 million higher income tax benefit compared to 2011, including a $22 million income tax benefit related to the 2011 U.S. federal income tax return filed in the third quarter of 2012. This higher income tax benefit reflects the offsetting impact of lower income tax depreciation and unrecognized income tax benefits. We discuss this change in income tax treatment of certain repairs expenditures for electric transmission and distribution assets and for gas plant assets in Note 6 of the Notes to Consolidated Financial Statements;
 
§  
a $62 million income tax benefit for life insurance contracts, of which $54 million is primarily associated with our decision in the second quarter of 2012 to hold life insurance contracts kept in support of certain benefit plans to term, as we discuss above;
 
§  
higher renewable energy income tax credits and deferred income tax benefits related to renewable energy projects; and
 
§  
higher deductions for self-developed software expenditures; offset by
 
§  
the impact of the $277 million remeasurement gain (non-U.S. earnings) in 2011 related to our acquisition of controlling interests in Chilquinta Energía and Luz del Sur, which was non-taxable;
 
§  
higher reversal through book depreciation in 2012 of previously recognized tax benefits for a certain portion of utility fixed assets; and
 
§  
higher income tax expense due to Mexican currency translation and inflation adjustments.
 
We use the deferral method of accounting for investment tax credits (ITC). For certain solar and wind generating assets being placed into service during 2011 and 2012, we elected to seek cash grants rather than ITC for which the projects also qualify. Accordingly, cash grant accounting was applied. Grant accounting for cash grants is very similar to the deferral method of accounting for ITC, the primary difference being the recording of a cash grant receivable instead of an income tax receivable. We discuss our accounting for ITC and cash grants further in Note 6 of the Notes to Consolidated Financial Statements.
 
The results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is consolidated, and therefore, Sempra Energy Consolidated’s and SDG&E’s effective income tax rates are impacted by the VIE’s stand-alone effective income tax rate, as we discuss in Note 1 of the Notes to Consolidated Financial Statements. For 2013, 2012 and 2011, the impacts on the Sempra Energy Consolidated and SDG&E effective income tax rates shown above were not material.
 
We report as part of our pretax results the income or loss attributable to noncontrolling interests. However, we do not record income taxes for a portion of this income or loss, as some of our entities with noncontrolling interests are currently treated as partnerships for income tax purposes and thus we are only liable for income taxes on the portion of the earnings that are allocated to us. As our entities with noncontrolling interests grow, and as we may continue to invest in such entities, the impact on our effective income tax rate may become more significant.
 
In 2014, we anticipate that Sempra Energy Consolidated’s effective income tax rate will be approximately 28% compared to 26% in 2013. This increase is primarily due to a forecasted increase in pretax book income and because we are not currently anticipating any similar significant one-time events as incurred in 2013. In addition, we are forecasting higher planned repatriation of a portion of future earnings beginning in 2014 from our subsidiaries in Mexico and Peru.
 
In the years 2015 through 2018, we anticipate that Sempra Energy Consolidated’s effective income tax rate will range from 30% to 33% primarily due to forecasted increases in pretax book income, higher reversal through book depreciation of previously recognized tax benefits for a certain portion of utility fixed assets and lower deductions for self-developed software expenditures.
 
SDG&E
 
SDG&E’s income tax expense increased in 2013 due to a higher effective tax rate offset by lower pretax income. The higher rate in 2013 compared to 2012 was primarily due to:
 
§  
$22 million income tax benefit recorded in 2012 for 2011 resulting from a favorable change made in the third quarter of 2012 in the income tax treatment of certain repairs expenditures that are capitalized for book purposes; and
 
§  
lower favorable impact of exclusions from taxable income of the equity portion of AFUDC.
 
SDG&E’s income tax expense decreased in 2012 compared to 2011 primarily due to a lower effective income tax rate. The lower effective income tax rate was primarily due to a change in the income tax treatment of certain repairs expenditures that are capitalized for financial statement purposes, which resulted in a $36 million higher income tax benefit compared to 2011, including the $22 million income tax benefit related to the 2011 U.S. federal income tax return filed in the third quarter of 2012. This higher income tax benefit reflects the offsetting impact of lower income tax depreciation. The change in income tax treatment of certain repairs expenditures for electric transmission and distribution assets was made pursuant to an Internal Revenue Service (IRS) Revenue Procedure providing a safe harbor for deducting certain repairs expenditures from taxable income when incurred for tax years beginning on or after January 1, 2011.
 
In 2014, we anticipate that SDG&E’s effective income tax rate will be approximately 36% compared to 31% in 2013.  This increase is primarily due to a forecasted increase in pretax book income and lower deductions for self-developed software and repairs expenditures.
 
In the years 2015 through 2018, we anticipate that SDG&E’s effective income tax rate will range from 37% to 38% primarily due to forecasted increases in pretax book income and lower deductions for self-developed software expenditures.
 

SoCalGas
 
SoCalGas’ income tax expense increased in 2013 due to higher pretax income and a higher effective tax rate. The higher rate in 2013 compared to 2012 was primarily due to:
 
§  
lower income tax benefit in 2013 relating to certain repairs expenditures for gas assets that are capitalized for financial statement purposes; and
 
§  
lower deductions for self-developed software expenditures; offset by
 
§  
higher favorable adjustments to prior years’ income tax items in 2013.
 
SoCalGas’ income tax expense decreased in 2012 compared to 2011 due to lower pretax income and a lower effective tax rate. The lower rate in 2012 was primarily due to:
 
§  
a change in the income tax treatment of certain repairs expenditures that are capitalized for financial statement purposes, which resulted in a $34 million higher income tax benefit compared to 2011. This higher income tax benefit reflects the offsetting impact of lower income tax depreciation and unrecognized income tax benefits. The change in income tax treatment of certain repairs expenditures for gas plant assets was made pursuant to an IRS Revenue Procedure which allows, under an Internal Revenue Code section, for such expenditures to be deducted from taxable income when incurred; and
 
§  
higher deductions for self-developed software expenditures; offset by
 
§  
higher reversal through book depreciation in 2012 of previously recognized tax benefits for a certain portion of utility fixed assets.
 
In 2014, we anticipate that SoCalGas’ effective income tax rate will be approximately 33% compared to 24% in 2013.  This increase is primarily due to a forecasted increase in pretax book income and because we are not currently anticipating any similar significant one-time events as incurred in 2013. In addition, we are forecasting higher reversal through book depreciation of previously recognized tax benefits for a certain portion of utility fixed assets and lower deductions for self-developed software expenditures.
 
In the years 2015 through 2018, we anticipate that SoCalGas’ effective income tax rate will remain constant at approximately 33%, primarily due to forecasted increases in pretax book income and lower deductions for self-developed software expenditures.
 
Subject to review in each general rate case proceeding, in general, the following items are subject to flow-through treatment at the California Utilities:
 
§  
repairs expenditures related to a certain portion of utility plant fixed assets
 
§  
the equity portion of AFUDC
 
§  
a portion of the cost of removal of utility plant assets
 
§  
self-developed software expenditures
 
§  
depreciation on a certain portion of utility plant fixed assets
 
The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico has similar flow-through treatment.
 
In December 2013, the Mexican Congress passed tax reform legislation with the following impacts on Sempra Energy and our Sempra Mexico segment:
 
§  
Higher Corporate Tax Rate:  Previously, the law provided that the corporate income tax rate would return to the previously enacted rate of 28 percent for 2014 and future years. The newly enacted rate is 30 percent for 2014 and future years. The earnings impact of this rate change is:
 
□  
For 2013, $13 million additional income tax expense related to the revaluation of deferred tax liabilities.
 
□  
For 2014 through 2017, estimated higher income tax expense of approximately $18 million in total over the four years.
 
§  
Tax Consolidation:  The current consolidation rules under the income tax law were replaced with new rules under which tax benefits are recaptured in three years instead of five years. As part of the revocation of the old rules, we are required to make a prepayment of approximately $38 million in 2014 that we expect to recover in 2015. The new rules do not have a material earnings impact at Sempra Energy or our Sempra Mexico segment.
 
§  
10-Percent Dividends Tax:  A new “corporate” tax on dividends is payable by the Mexican entity that distributes the dividend to its foreign shareholder, which will increase Mexico’s income tax rate to an effective 37 percent. Under the law, this tax is reduced or offset in accordance with bilateral tax treaties. The dividends from our Mexican entities to Sempra Energy will be to a country which has a bilateral tax treaty with Mexico that we expect will fully offset the tax. Accordingly, we do not expect this rule to have a material financial impact.
 
In January 2013, the American Taxpayer Relief Act of 2012 (2012 Tax Act) was signed into law. The 2012 Tax Act included retroactive extensions from January 1, 2012 through December 31, 2013 of certain business income tax provisions that had expired at the end of 2011, including the look-through rule. The look-through rule allows, under certain situations, for certain non-operating income (e.g., dividend income, royalty income, interest income, rental income, etc.), of a greater than 50-percent owned non-U.S. subsidiary, to not be taxed under U.S. federal income tax law. The retroactive application of the look-through rule to 2012 resulted in a $6 million income tax benefit. However, as the 2012 Tax Act was not signed into law as of December 31, 2012, the extension of the look-through rule has been treated as a 2013 event, and the related income tax benefit for 2012 was recorded in the first quarter of 2013. The 2012 Tax Act also extended the 50 percent bonus depreciation for qualified property placed in service before January 1, 2014, the impact of which is discussed below.
 
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act) was signed into law. The 2010 Tax Act included the extension of bonus depreciation for U.S. federal income tax purposes for years 2010 through 2012 and an increase in the rate of bonus depreciation from 50 percent to 100 percent. This increased rate only applies to certain investments made after September 8, 2010 through December 31, 2012. Self-constructed property, where the construction period exceeds one year, construction started between December 31, 2007 and January 1, 2013, and the property is placed in service by December 31, 2013, qualified for bonus depreciation in 2013 at either the original or increased rate.
 
Due to the extension of bonus depreciation, Sempra Energy generated a U.S. federal net operating loss (NOL) in 2011, 2012 and 2013. We currently project that the total NOL will not be fully utilized until approximately 2018. Because of the carryforward of NOL and U.S. federal income tax credits discussed below, Sempra Energy expects no U.S. federal income tax payments in years 2014 through 2018. Because bonus depreciation only creates a temporary difference between Sempra Energy’s U.S. federal income tax return and its U.S. GAAP financial statements, it does not impact Sempra Energy’s effective income tax rate. We expect larger U.S. federal income tax payments in the future as these temporary differences reverse.
 
SDG&E and SoCalGas both generated a large U.S. federal NOL in 2011 and in 2012 primarily due to bonus depreciation. In 2012, SoCalGas was able to, on a stand-alone basis, carry back its 2011 NOL to 2009 and partially carry back 2012 NOL to 2010 to offset taxable income in those years. In 2012, SDG&E was able to, on a stand-alone basis, carry back a majority of its 2011 NOL to 2009 and 2010 to offset taxable income in those years. The remaining portion of SDG&E’s 2011 NOL and 2012 NOL is carried forward to offset taxable income from 2013 to 2015, when we expect that the NOL will be fully utilized. Since SDG&E’s 2012 NOL and partial NOL from 2011 will be carried forward, it is therefore recorded as a deferred income tax asset. Because of the carryforward of NOL and U.S. federal income tax credits discussed below, SDG&E expects minimal U.S. federal income tax payments in 2014. SoCalGas’ 2012 remaining NOL after carry back will be carried forward, and is therefore recorded as a deferred income tax asset. We currently project that SoCalGas’ NOL carryforward, on a stand-alone basis, will be fully utilized by 2014. Because bonus depreciation only creates a temporary difference between SDG&E’s and SoCalGas’ U.S. federal income tax returns and U.S. GAAP financial statements, it does not impact SDG&E’s and SoCalGas’ effective income tax rates. We expect larger U.S. federal income tax payments in the future as these temporary differences reverse.
 
Bonus depreciation, in addition to impacting Sempra Energy’s and SDG&E’s U.S. federal income tax payments, will also have a temporary impact on Sempra Energy’s and SDG&E’s ability to utilize their U.S. federal income tax credits, which primarily are investment tax credits and production tax credits generated by Sempra Energy’s and SDG&E’s current and future renewable energy investments. However, based on current projections, Sempra Energy and SDG&E do not expect, based on more-likely-than-not criteria required under U.S. GAAP, any of these income tax credits to expire prior to the end of their 20-year carryforward period, as allowed under current U.S. federal income tax law. We also expect bonus depreciation to increase the deferred income tax liability component of SDG&E’s and SoCalGas’ rate base, which reduces rate base.
 
We had planned to begin repatriating a portion of future earnings beginning in 2013 from certain of our non-U.S. subsidiaries in Mexico and Peru. Due to the income tax expense resulting from a corporate reorganization in connection with the IEnova stock offerings that we discuss in Note 1 of the Notes to Consolidated Financial Statements, we made a distribution in 2013 of approximately $200 million from our non-U.S. subsidiaries. This distribution was from previously taxed income and will not be subject to additional U.S. federal income tax. We now plan to repatriate a portion of future earnings beginning in 2014 from our subsidiaries in Mexico and Peru. Currently, all future repatriated earnings would be subject to U.S. income tax (with a credit for foreign income taxes) and future repatriation from Peru would be subject to local country withholding tax. Because this potential repatriation would only be from future earnings, it does not change our current assertion that we intend to continue to indefinitely reinvest our cumulative undistributed non-U.S. earnings through December 31, 2013. Therefore, we do not intend to use these cumulative undistributed earnings as a source of funding for U.S. operations.
 
Mexican Currency Exchange Rate and Inflation Impact on Income Taxes and Related Economic Hedging Activity
 
Our Mexican subsidiaries have U.S. dollar denominated cash balances, receivables and payables (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 that are denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes.
 
The fluctuations in both the currency exchange rate for the Mexican peso against the U.S. dollar, with regard to Mexican monetary assets and liabilities, and Mexican inflation are subject to Mexican income tax and thus may expose us to fluctuations in our income tax expense. The income tax expense of Sempra Mexico is impacted by these factors. From time to time, we may utilize short-term foreign currency derivatives at our subsidiaries and at the consolidated level as a means to manage these exposures.
 
For Sempra Energy Consolidated, the impacts in 2011-2013 related to the factors described above are as follows:
 

MEXICAN CURRENCY IMPACT ON INCOME TAXES AND RELATED ECONOMIC HEDGING ACTIVITY
(Dollars in millions)
 
 
Years ended December 31, 
 
 
2013 
2012 
2011 
Income tax (expense) benefit on currency exchange
 
 
 
 
 
 
 
rate movement of monetary assets and liabilities
 (6)
 (6)
 11 
Translation of non-U.S. deferred income tax balances
 
 1 
 
 (2)
 
 11 
Income tax expense on inflation
 
 ― 
 
 (2)
 
 (4)
 
Total impact on income taxes
 
 (5)
 
 (10)
 
 18 
After-tax gains (losses) on Mexican peso exchange rate
 
 
 
 
 
 
 
instruments (included in Other Income, Net)
 
 4 
 
 6 
 
 (9)
Net impacts on Sempra Energy Consolidated
 
 
 
 
 
 
 
Statements of Operations
 (1)
 (4)
 9 

 
Equity Earnings, Net of Income Tax
 
Sempra Energy Consolidated
 
Equity earnings of unconsolidated subsidiaries, net of income tax, which are primarily earnings from Sempra South American Utilities’ and Sempra Mexico’s equity method investments, were
 
§  
$24 million in 2013
 
§  
$36 million in 2012
 
§  
$52 million in 2011
 
The decrease in 2013 included
 
§  
$11 million equity losses related to our investments in two Argentine natural gas utility holding companies, including $7 million noncash impairment charge in the first quarter of 2013 and $4 million loss from the sale of the investments in the second quarter of 2013, as we discuss in Note 4 of the Notes to Consolidated Financial Statements; and
 
§  
$4 million of equity losses in 2013 from our Eletrans S.A. and Eletrans II S.A. (collectively, Eletrans) joint ventures in Chile resulting from a forward exchange contract to manage foreign currency exchange rate risk; offset by
 
§  
$3 million higher earnings in 2013 from Sempra Mexico’s joint-venture interest in pipeline assets.
 
The decrease in 2012 compared to 2011 was primarily due to:
 
§  
$24 million earnings in 2011 related to equity method investments in Chile and Peru, for entities that we have consolidated since April 2011; offset by
 
§  
$7 million higher earnings from Sempra Mexico’s joint-venture interest in pipeline assets.
 

Earnings Attributable to Noncontrolling Interests
 
Sempra Energy Consolidated
 
Earnings attributable to noncontrolling interests were $79 million for 2013 compared to $55 million for the same period in 2012. The net change of $24 million included
 
§  
$26 million earnings attributable to noncontrolling interests of IEnova in 2013; offset by
 
§  
$2 million lower earnings attributable to noncontrolling interest at Otay Mesa VIE in 2013.
 
Earnings attributable to noncontrolling interests increased by $13 million in 2012 compared to 2011 primarily due to:
 
§