EX-13.1 17 sempraexhibit131annualrepo.htm EXHIBIT 13.1 Exhibit


SEMPRA ENERGY FINANCIAL REPORT
TABLE OF CONTENTS
 
 
Page
 
 
19
 
24
 
39
49
53
55
68
71
76
78
79
80
 
82
82
83
84
Consolidated Financial Statements
 
90
97
104
110
227
 
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

1



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 2014 through 2016
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 also in conjunction with “Risk Factors” contained in our 2016 Annual Report on Form 10-K.
This report includes information for the following separate registrants:
Sempra Energy and its consolidated entities
San Diego Gas & Electric Company (SDG&E) and its consolidated variable interest entity (VIE)
Southern California Gas Company (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 Utilities” and “Sempra Infrastructure,” and to their respective principal segments, are not intended to refer to any legal entity with the same or similar name.
Throughout this report, we refer to the following as Consolidated Financial Statements and Notes to Consolidated Financial Statements when discussed together or collectively:
the Consolidated Financial Statements and related Notes of Sempra Energy and its subsidiaries and VIEs;
the Consolidated Financial Statements and related Notes of SDG&E and its VIE; and
the Financial Statements and related Notes of SoCalGas.
 
 
 
 
 
OUR BUSINESS
Sempra Energy is a Fortune 500 energy-services holding company whose operating units invest in, develop and operate energy infrastructure, and provide gas and electricity services to their customers in North and South America. Our operating units, Sempra Utilities and Sempra Infrastructure, and their separate, reportable segments are illustrated below.
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Prior to December 31, 2016, our reportable segments were grouped under the following operating units:
California Utilities (which included the SDG&E and SoCalGas segments)
Sempra International (which included the Sempra South American Utilities and Sempra Mexico segments)
Sempra U.S. Gas & Power (which included the Sempra Renewables and Sempra Natural Gas segments)
The grouping of our segments within our operating units as of December 31, 2016 reflects a realignment of management oversight of our operations. As part of this realignment, we changed the name of our “Sempra Natural Gas” segment to “Sempra LNG & Midstream.” This name change and the realignment of our segments within our new operating units had no impact on our historical financial position, results of operations, cash flows or segment results previously reported.
We provide the following for our reportable segments in the discussions below:
Business overview
Capital project updates
SDG&E
Business Overview
SAN DIEGO GAS & ELECTRIC COMPANY (SDG&E)

Business summary
Market
Service territory

A regulated public utility; infrastructure supports electric generation, transmission and distribution, and natural gas distribution

Provides electricity to a population of 3.6 million (1.4 million meters)
Provides natural gas to a population of 3.3 million (0.9 million meters)
 

Serves the county of San Diego, California (electric and natural gas) and an adjacent portion of southern Orange County (electric only) covering 4,100 square miles
SDG&E delivers electricity to customers 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, which include Palomar Energy Center, Miramar Energy Center, Desert Star Energy Center and Cuyamaca Peak Energy Plant. SDG&E also delivers natural gas in San Diego County and transports electricity and natural gas for others.
SDG&E is regulated by federal, state and local governmental agencies, including:
The California Public Utilities Commission (CPUC), which regulates SDG&E’s rates and operations in California.
The Federal Energy Regulatory Commission (FERC), which regulates SDG&E’s electric transmission operations and interstate transportation of natural gas and various related matters.
The Nuclear Regulatory Commission (NRC), which regulates the San Onofre Nuclear Generating Station (SONGS).
Municipalities and other local authorities, which may influence decisions affecting the location of utility assets, including natural gas pipelines and electric lines.
SDG&E’s financial statements include a 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 in “Variable Interest Entities,” SDG&E has a long-term power purchase agreement (PPA) with Otay Mesa VIE.
Sempra Energy indirectly owns all of the outstanding capital stock of SDG&E.

3



Capital Project Updates
We summarize below information regarding certain major capital projects at SDG&E.
CAPITAL PROJECTS – SDG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
Project description
Estimated cost
(in millions)
 
Status
Cleveland National Forest (CNF) Transmission
    Projects
 
 
 
 
 
 
§

2012 application for various transmission line replacement projects in and around CNF, in order to promote fire safety.
 
$
680

 
§

May 2016 CPUC final decision granted a permit to construct, at an estimated total cost of $680 million: $470 million for the various transmission-level facilities and $210 million for associated distribution-level facilities, including distribution circuits and additional undergrounding required by the final environmental impact statement.
 
 
 
 
 
§



§


July 2016, the CNF Foundation and the Protect Our Communities Foundation filed a joint application for rehearing of the final decision.

Estimated completion: in phases through 2020
Sycamore-Peñasquitos Transmission Project
 
 
 
 
 
 
§

2014 application for a 230-kilovolt (kV) transmission project to provide 16.7-mile connection between Sycamore Canyon and Peñasquitos substations, in order to ensure grid reliability and access to renewable energy.
 
$
260

 
§




§


October 2016 CPUC final decision granted a Certificate of Public Convenience and Necessity (CPCN) to construct project at an estimated cost not to exceed $260 million.

Estimated completion: 2018
South Orange County Reliability Enhancement
 
 
 
 
 
 
§

2012 application to replace/upgrade existing 230-kV transmission lines to enhance the capacity and reliability of electric service to the south Orange County area.
 
$
381

 
§



§


December 2016 CPUC final decision granted a CPCN to construct SDG&E’s proposed project at an estimated cost not to exceed $381 million.

In January 2017, the City of San Juan Capistrano and local opposition group, Frontlines, filed applications for rehearing of the final decision.
Electric Vehicle Charging
 
 
 
 
 
 
§

2014 application to build and own a total of 5,500 electric vehicle charging units at estimated cost of $103 million, of which $59 million is capital investment.
 
$
45

 
§



§


January 2016 CPUC final decision denies proposal but authorizes a 3-year, $45 million program providing up to 3,500 charging units.

Estimated completion: 2020
§

January 2017 application, pursuant to Senate Bill (SB) 350, to perform various activities and make investments in support of electric vehicle charging at an estimated cost of $349 million, of which $298 million is capital investment.
 
$
298

 
§
Application pending
Energy Storage Projects
 
 
 
 
 
 
§

2016 expedited application to own and operate two energy storage projects totaling 37.5 megawatts (MW) to enhance electric reliability in the San Diego service territory.
Not
disclosed
§

§


August 2016 CPUC approval.

Estimated completion: first quarter of 2017

We discuss additional matters related to SDG&E in “California Utilities – Joint Matters” and in “Factors Influencing Future Performance.”

4



SOCALGAS
Business Overview
 
SOUTHERN CALIFORNIA GAS COMPANY

 
 
 Business summary
Market
Service territory
 

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 21.7 million (5.9 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
SoCalGas is the nation’s largest natural gas distribution utility, based on customer meters. It owns and operates a natural gas distribution, transmission and storage system that supplies natural gas throughout its service territory.
SoCalGas’ natural gas storage facilities have a combined working gas capacity of 137 billion cubic feet (Bcf) and have over 200 injection, withdrawal and observation wells that provide natural gas storage services for core, noncore and non-end-use customers. SoCalGas’ and SDG&E’s core customers are allocated a portion of SoCalGas’ storage capacity. SoCalGas offers the remaining storage capacity for sale to others, including SDG&E for its non-core customer requirements, through an open bid process.
SoCalGas is regulated by federal, state and local governmental agencies, including
The CPUC, which regulates SoCalGas’ rates and operations in California.
The California Department of Conservation’s Division of Oil, Gas, and Geothermal Resources (DOGGR), which regulates the operations of SoCalGas’ natural gas storage facilities.
Municipalities and other local authorities, which may influence decisions affecting the location of utility assets, including natural gas pipelines and electric lines.
Sempra Energy indirectly owns all of the common stock of SoCalGas, which also has publicly held preferred stock with liquidation preferences totaling $22 million, representing less than one percent of the ordinary voting power of SoCalGas shares.
In addition to general recurring improvements to its transmission and storage systems, over the next several years, SoCalGas expects to make significant capital expenditures for pipeline safety projects pursuant to the Pipeline Safety Enhancement Plan (PSEP). We discuss these capital projects in “California Utilities – Joint Matters,” below, and additional matters related to SoCalGas in “Factors Influencing Future Performance.” We also discuss matters concerning the Aliso Canyon natural gas storage facility in Note 15 of the Notes to Consolidated Financial Statements.
CALIFORNIA UTILITIES – JOINT MATTERS
We refer to SDG&E and SoCalGas collectively as the California Utilities, which do not include the utilities in our other segments.
CPUC General Rate Case (GRC)
The CPUC uses a general rate case proceeding to set sufficient rates to allow the California Utilities to recover their reasonable cost of operations and maintenance and to provide the opportunity to realize their authorized rates of return on their investment.
In June 2016, the CPUC approved a final decision (2016 GRC FD) in the California Utilities’ 2016 GRC, which is effective retroactive to January 1, 2016 and established their authorized 2016 revenue requirements and the ratemaking mechanisms by which those requirements would change on an annual basis over the subsequent three-year (2016-2018) period. The adopted revenue requirements associated with the seven-month period through July 2016 are being recovered in rates over a 17-month period, beginning August 2016.
The 2016 GRC FD also resulted in certain accounting and financial impacts associated with bonus depreciation, flow-through income tax repairs deductions related to prior years, and the treatment of differences between income tax incurred and income tax forecasted in the GRC for 2016 through 2018.
We discuss the 2016 GRC and the 2016 GRC FD in Note 14 of the Notes to Consolidated Financial Statements.
Incentive Mechanisms
The CPUC applies performance-based measures and incentive mechanisms to all California investor-owned utilities (IOUs), under which the California Utilities have earnings potential above authorized base margins if they achieve or exceed specific performance

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and operating goals. Generally, for performance-based awards, if performance is above or below specific benchmarks, the utility is eligible for financial awards or subject to financial penalties.
SDG&E has incentive mechanisms associated with:
operational incentives (electric reliability)
energy efficiency
SoCalGas has incentive mechanisms associated with:
energy efficiency
natural gas procurement
unbundled natural gas storage and system operator hub services
Incentive awards are included in revenues when we receive required CPUC approval of the award, the timing of which may not be consistent from year to year. We would record penalties for results below the specified benchmarks against revenues when we believe it is probable that the CPUC would assess a penalty.
Energy Efficiency. The CPUC has established incentive mechanisms that are based on the effectiveness of energy efficiency programs.
ENERGY EFFICIENCY AWARDS RECORDED IN REVENUES
 
 
 
 
(Dollars in millions)
 
 
 
 
 
SDG&E
 
SoCalGas
Award period (program years)
2016
 
2015
 
2014
 
2016
 
2015
 
2014
For second half of 2014 and first half of 2015
$
4

 
$

 
$

 
$
4

 
$

 
$

For second half of 2013 and first half of 2014

 
7

 

 

 
4

 

For full year 2012 and first half of 2013

 

 
8

 

 

 
6

In September 2015, the CPUC issued a decision granting two rehearing requests filed by the Office of Ratepayer Advocates (ORA) and The Utility Reform Network (TURN) regarding the utility incentive awards for SDG&E and SoCalGas, as well as Southern California Edison Company (Edison) and Pacific Gas and Electric Company (PG&E), for program years 2006 through 2008, which totaled $16 million for SDG&E and $17 million for SoCalGas. In December 2016, SoCalGas and SDG&E submitted to the CPUC settlement agreements reached with ORA and TURN wherein the parties agreed that SDG&E and SoCalGas would offset up to a total of approximately $4 million each against future incentive awards over the next three years beginning in 2017. If the total incentive awards ultimately authorized for 2017 through 2019 are less than approximately $4 million for either utility, the applicable utility is released from paying any remaining unapplied amount. The CPUC issued a proposed decision in January 2017 approving the settlement agreements.
Natural Gas Procurement. The California Utilities procure natural gas on behalf of their core natural gas customers. The CPUC has established incentive mechanisms to allow the California Utilities the opportunity to share in the savings and/or costs from buying natural gas for their core customers at prices below or above monthly market-based benchmarks. SoCalGas procures natural gas for SDG&E’s core natural gas customers’ requirements. SoCalGas’ gas cost incentive mechanism (GCIM) is applied on the combined portfolio basis.
GCIM AWARDS RECORDED IN REVENUES
 
 
 
 
 
(Dollars in millions)
 
SoCalGas
Award period (program years)
2016
 
2015
 
2014
April 2014 - March 2015
$

 
$
7

 
$

April 2013 - March 2014

 
14

 

April 2012 - March 2013

 

 
6

In January 2017, the CPUC approved a $5 million GCIM award for SoCalGas for the award period from April 2015 through March 2016.
Operational Incentives. The CPUC may establish operational incentives and associated performance benchmarks as part of a general rate case or cost of service proceeding. In the 2016 GRC FD, the CPUC did not establish any operational incentives for SoCalGas, but established an electric reliability incentive for SDG&E. Outcomes could vary from a maximum annual penalty of $8 million to a maximum annual award of $8 million.
Capital Project Updates

6



We summarize below information regarding certain joint capital projects of the California Utilities.
JOINT CAPITAL PROJECTS – CALIFORNIA UTILITIES
 
 
 
 
 
 
 
Project description
Estimated cost (in millions)
 
Status
Pipeline Safety & Reliability Project
§

September 2015 application seeking authority to recover the full cost of the project, involving construction of an approximately 47-mile, 36-inch natural gas transmission pipeline in San Diego County.
 
$
633

 
§

March 2016 amended application provided detailed analysis and testimony supporting proposed project, and revised estimated cost of $633 million. Revised request also presents additional information on costs and benefits of project alternatives, safety evaluation and compliance analysis, and statutory and procedural requirements.
§

Would implement pipeline safety requirements and modernize system; improve system reliability and resiliency by minimizing dependence on a single pipeline; and enhance operational flexibility to manage stress conditions by increasing system capacity.
 
 
 
§

Procedural schedule set for two phases to address (1) long-term need and planning assumptions, and (2) costs, alternatives and environmental impacts. Phase 1 evidentiary hearings scheduled for second quarter of 2017, draft environmental impact report (EIR) by August 2018, and Phase 2 to follow the draft EIR.
Southern Gas System Reliability Project
    (North-South Pipeline)
§

2013 application sought authority to recover the full cost of the project intended to enhance reliability on the southern portions of the California Utilities’ integrated natural gas transmission system (Southern System).
 
$
21

 
§

July 2016 CPUC final decision denied the California Utilities’ request for a permit to construct, resulting in SoCalGas recording a pretax impairment charge of $21 million ($13 million after-tax) in 2016 for the development costs invested in the project.
 
 
 
 
§

Expect to seek recovery of all or a portion of these costs in a future general rate case filing.
We discuss additional matters related to the California Utilities in “Factors Influencing Future Performance.”
SEMPRA SOUTH AMERICAN UTILITIES
Business Overview
 
SEMPRA SOUTH AMERICAN UTILITIES

 
 
Business summary
Market
Service territory
 

Develops, owns and operates, or holds interests in electric transmission, distribution and generation infrastructure

Provides electricity to a population of approximately 2 million (approximately 0.7 million meters) in Chile and approximately 4.9 million consumers (approximately 1.1 million meters) in Peru

Region of Valparaíso in central Chile
 
Southern zone of metropolitan Lima, Peru

Chilquinta Energía S.A. (Chilquinta Energía), a wholly owned subsidiary of Sempra South American Utilities, is an electric distribution utility serving customers primarily in central Chile.
In November 2015, Chilquinta Energía’s joint venture, Eletrans S.A., completed construction of a 220-kV transmission line in Chile. The project earns a return in U.S. dollars, indexed to the Consumer Price Index (CPI) for 20 years and a regulated return thereafter.
Sempra South American Utilities owns 83.6 percent of Luz del Sur S.A.A. (Luz del Sur), an electric distribution utility that serves consumers in Peru, and delivers approximately one-third of all power used in the country. The remaining shares of Luz del Sur trade on the Lima Stock Exchange (Bolsa de Valores de Lima) under the symbol LUSURC1.
In 2016, Luz del Sur completed construction of four substations and their related transmission lines in Lima. The capitalized cost of the project earns a regulated return for 30 years.
Luz del Sur owns Santa Teresa, a 100-MW hydroelectric power plant in Peru that began commercial operations in September 2015 and supplies electricity to non-regulated customers. Luz del Sur also sells excess electricity generated from the Santa Teresa plant into the spot market.

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Sempra South American Utilities also owns interests in Tecnored S.A. (Tecnored) in Chile and Tecsur S.A. (Tecsur) in Peru, two energy-services companies that provide electric construction and infrastructure services to Chilquinta Energía and Luz del Sur, as well as third parties. Tecnored also sells electricity to non-regulated customers.
Revenues generated by our South American utilities, 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.
Capital Project Updates
We summarize below information regarding major projects in process at Sempra South American Utilities. Chilquinta Energía’s projects will be financed by the joint venture partners during construction, and other financing may be pursued upon project completion. Luz del Sur intends to finance its projects through its existing debt program in Peru’s capital markets.
MAJOR PROJECTS UNDER CONSTRUCTION AT DECEMBER 31, 2016 – SEMPRA SOUTH AMERICAN UTILITIES
 
 
 
 
 
 
 
Project description
Our share of
estimated cost
(in millions)
 
Status
Chilquinta Energía - Eletrans S.A.
 
 
 
 
 
§
Second of two, 220-kV transmission lines awarded in May 2012.
 
$
42

 
§
Estimated completion: second half of 2017
§
50-mile transmission line extending from Ciruelos to Pichirropulli.
 
 
 
 
 
§
Once in operation, will earn a return in U.S. dollars, indexed to the CPI, for 20 years and a regulated return thereafter.
 
 
 
 
 
§
50-percent equity interest in joint venture.
 
 
 
 
 
Chilquinta Energía - Eletrans II S.A.
 
 
 
 
 
§
Two 220-kV transmission lines awarded in June 2013.
 
$
40

 
§
Estimated completion: 2018
§
Transmission lines to extend approximately 60 miles in total.
 
 
 
 
 
§
Once in operation, will earn a return in U.S. dollars, indexed to the CPI, for 20 years and a regulated return thereafter.
 
 
 
 
 
§
50-percent equity interest in joint venture.
 
 
 
 
 
 
Luz Del Sur - Lima Substations and Transmission
    Lines (second investment)
§
Amended transmission investment plan includes development and operation of five substations and related transmission lines.
 
$
130

 
§
Estimated completion: 2017 through 2020 as portions are completed
§
Once in operation, the capitalized cost of the projects will earn a regulated return for 30 years.
 
 
 
 
 
We discuss additional matters related to Sempra South American Utilities in “Factors Influencing Future Performance.”

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SEMPRA MEXICO
Business Overview
 
SEMPRA MEXICO

 
 
Business summary
Market
Geographic area
 

Develops, owns and operates, or holds interests in:
natural gas transmission pipelines
liquid petroleum gas (LPG) and ethane systems
a natural gas distribution utility
electric generation facilities, including wind, solar and a natural gas-fired power plant
a terminal for the import of liquefied natural gas (LNG) 
a terminal for the storage of LPG
marketing operations for the purchase of LNG and the purchase and sale of natural gas


Natural gas
Wholesale electricity
Liquefied natural gas
Liquid petroleum gas

Mexico

Our Sempra Mexico segment includes the operating companies of our subsidiary, Infraestructura Energética Nova, S.A.B. de C.V. (IEnova), as well as certain holding companies and risk management activity. IEnova is a separate legal entity, and its common stock is traded on the Mexican Stock Exchange (La Bolsa Mexicana de Valores, S.A.B. de C.V., or BMV) under the symbol IENOVA. In October 2016, IEnova completed a private follow-on offering in the U.S. and outside of Mexico and a concurrent public offering in Mexico of its common stock. Upon completion of the equity offerings, Sempra Energy beneficially owns 66.4 percent of IEnova. Prior to the offerings, Sempra Energy beneficially owned 81.1 percent of IEnova. We discuss the offerings and IEnova further in Note 1 of the Notes to Consolidated Financial Statements.
Gas Business
Pipelines. Sempra Mexico develops, owns and operates natural gas transmission pipelines, and LPG and ethane systems in Mexico. These assets 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);
Centro Nacional de Control de Gas (CENAGAS);
InterGen; and
other similar counterparties.
In 2016, we had contracted capacity for these assets of 11,257 million cubic feet (MMcf) per day of natural gas and ethane, and 114,000 barrels per day of LPG.
On September 26, 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in Gasoductos de Chihuahua S. de R.L. de C.V. (GdC), increasing IEnova’s ownership interest in GdC to 100 percent. GdC became a consolidated subsidiary of IEnova on this date. IEnova will continue holding an indirect 25-percent ownership interest in the Los Ramones Norte pipeline through GdC’s 50-percent interest in Ductos y Energéticos del Norte, S. de R.L. de C.V. (DEN). As of the acquisition date, IEnova accounts for its 50-percent interest in DEN as an equity method investment. We expect the GdC acquisition to have strategic benefits, including opportunities for expansion into other infrastructure projects and a larger platform and presence in Mexico to participate in energy sector reform. We discuss the acquisition further in Note 3 of the Notes to Consolidated Financial Statements.
At December 31, 2016, IEnova has $1.5 billion in goodwill related to its acquisition of GdC. Goodwill is subject to impairment testing annually, as we discuss in “Critical Accounting Policies and Estimates, and Key Noncash Performance Indicators” below and in Note 1 of the Notes to Consolidated Financial Statements.
LNG. Sempra Mexico’s Energía Costa Azul LNG import terminal in Baja California, Mexico is capable of processing 1 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.

9



In connection with Sempra LNG & Midstream’s LNG purchase agreement with Tangguh PSC Contractors (Tangguh PSC), Sempra Mexico purchases from Sempra LNG & Midstream the LNG delivered to Energía Costa Azul by Tangguh PSC. Sempra Mexico uses the natural gas produced from this LNG and from purchases in the market to supply a contract for the sale 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 LNG & Midstream’s natural gas marketing operations.
Natural Gas Distribution. Sempra Mexico’s natural gas distribution utility, Ecogas México, S. de R.L. de C.V. (Ecogas), operates in three separate areas in Mexico, and had approximately 119,000 meters (serving more than 400,000 consumers) and sales volume of approximately 80 MMcf per day in 2016. Ecogas is subject to regulation by the Energy Regulatory Commission (Comisión Reguladora de Energía, or CRE) and by the labor and environmental agencies of city, state and federal governments in Mexico.
Power Business
Natural Gas-Fired Generation. Sempra Mexico’s Termoeléctrica de Mexicali (TdM), a 625-MW natural gas-fired power plant, is located in Mexicali, Baja California, Mexico. It has an Energy Management Agreement (EMA) with Sempra LNG & Midstream for energy marketing, scheduling and other related services to support its sales of generated power into the California electricity market. Under the EMA, TdM pays fees to Sempra LNG & Midstream for these revenue-generating services. TdM also purchases fuel from Sempra LNG & Midstream. Sempra Mexico records revenue for the sale of power generated by TdM, and records cost of sales for the purchases of natural gas and energy management services provided by Sempra LNG & Midstream.
In February 2016, management approved a plan to market and sell TdM. As a result, we stopped depreciating the plant and classified the plant as held for sale. In connection with the sales process, in September 2016, Sempra Mexico obtained market information indicating that the fair value of TdM may be less than its carrying value. After performing an analysis of the information, Sempra Mexico reduced the carrying value of TdM by recognizing an impairment charge against earnings of $90 million. We discuss TdM further in Notes 3 and 10 of the Notes to Consolidated Financial Statements.
Wind Power Generation. We provide information on the Energía Sierra Juárez wind power generation project and IEnova’s acquisition of the Ventika, S.A.P.I. de C.V. and Ventika II, S.A.P.I. de C.V. (collectively, Ventika) wind power generation facilities in the table below and in Note 3 of the Notes to Consolidated Financial Statements.
The following map shows the location of Sempra Mexico’s principal assets and investments:

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corienova2017.gif

11



The table below summarizes certain projects that were completed, either by IEnova or through its joint venture partnerships, or acquired during the last three years.
PROJECTS COMPLETED OR ACQUIRED IN 2016, 2015 AND 2014 – SEMPRA MEXICO
 
 
 
 
 
Project description
 
 
 
Ethane Pipeline
 
 
 
§
140-mile pipeline to transport ethane from Tabasco, Mexico to Veracruz, Mexico.
 
§
Completed in phases during 2015.
§
Capacity fully contracted under 21-year contract with PEMEX denominated in U.S. dollars.
 
 
 
§
Wholly owned by IEnova through GdC acquisition.
 
 
 
Los Ramones Pipeline - First Phase
 
 
 
§
72-mile pipeline extending from Tamaulipas to Nuevo Leon.
 
§
Pipeline began operations at the end of 2014.
§
Two compression stations.
 
§
Compression stations completed in December 2015.
§
Capacity fully contracted by CENAGAS under 25-year contract denominated in Mexican pesos, indexed to the U.S. dollar (adjusted annually for inflation and fluctuation of exchange rate).
 
 
 
§
Wholly owned by IEnova through GdC acquisition.
 
 
 
Los Ramones Norte Pipeline
 
 
 
§
280-mile pipeline, which connects first phase of Los Ramones, from Nuevo Leon to San Luis Potosi.
 
§
Pipeline began operations in February 2016.
§
Two compression stations.
 
§
Compression stations completed in June 2016.
§
Capacity fully contracted by CENAGAS under 25-year contract denominated in Mexican pesos, indexed to the U.S. dollar (adjusted annually for inflation and fluctuation of exchange rate).
 
 
 
§
IEnova holds indirect 25-percent ownership through DEN joint venture.
 
 
 
Energía Sierra Juárez Wind
 
 
 
§
Wind power generation project in Baja California.
 
§
First phase began operations in June 2015.
§
SDG&E has a 20-year contract for up to 155 MW of renewable power supplied from first phase of project.
 
 
 
§
First phase of project jointly owned with InterGen N.V.
 
 
 
Ventika Wind
 
 
 
§
Fully operational 252-MW wind farm located in Nuevo Leon, Mexico.
 
§
Acquired by IEnova in December 2016.
§
Acquired for cash of $310 million plus the assumption of $610 million of existing debt.
 
 
 
§
All capacity contracted under 20-year, U.S. dollar-denominated contracts with five private off-takers.
 
 
 


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Capital Project Updates
We summarize major projects in process at Sempra Mexico below. The ability to successfully complete major construction projects is subject to a number of risks and uncertainties. For a discussion of these risks and uncertainties, see “Risk Factors” in our 2016 Annual Report on Form 10-K.
MAJOR PROJECTS UNDER CONSTRUCTION AT DECEMBER 31, 2016  SEMPRA MEXICO
 
 
 
 
 
 
 
Project description
Our share of
estimated cost
(in millions)
 
Status
Sonora Pipeline
 
 
 
 
 
§
Sempra Mexico awarded two contracts in October 2012 by the CFE to build and operate a 500-mile pipeline network.
 
$
1,000

 
§
First segment completed in stages from fourth quarter of 2014 through August 2015.
§
Comprised of two segments that will interconnect to the U.S. interstate pipeline system.
 
 
 
§
Estimated completion: first half of 2017
§
Pipeline to transport natural gas from the U.S.-Mexico border south of Tucson, Arizona through the Mexican state of Sonora to the northern part of the Mexican state of Sinaloa along the Gulf of California.
 
 
 
 
 
§
Capacity is fully contracted by the CFE under two 25-year contracts denominated in U.S. dollars.
 
 
 
 
 
Ojinaga Pipeline
 
 
 
 
 
§
December 2014 agreement with CFE for development, construction and operation of the approximately 137-mile pipeline.
 
$
300

 
§
Estimated completion: first half of 2017
§
Natural gas transportation services agreement for a 25-year term, denominated in U.S. dollars, for 100 percent of the transport capacity, equal to 1.4 Bcf per day.
 
 
 
 
 
San Isidro Pipeline
 
 
 
 
 
§
July 2015 agreement with CFE for development, construction and operation of the approximately 14-mile pipeline.
 
$
110

 
§
Estimated completion: first half of 2017
§
Natural gas transportation services agreement for a 25-year term, denominated in U.S. dollars, for 100 percent of the transport capacity, equal to 1.1 Bcf per day.
 
 
 
 
 
Sur de Texas - Tuxpan Marine Pipeline
 
 
 
 
 
§
In June 2016, Infraestructura Marina del Golfo, a joint venture between IEnova and a subsidiary of TransCanada Corporation, was awarded the right to build, own and operate the natural gas pipeline by the CFE.
 
$
840

 
§
Estimated completion: second half of 2018
§
Sempra Mexico has a 40-percent interest in the joint venture and TransCanada Corporation owns the remaining 60-percent interest.
 
 
 
 
 
§
Natural gas transportation services agreement for a 25-year term, denominated in U.S. dollars.
 
 
 
 
 
La Rumorosa and Tepezalá II Solar Complexes
 
 
 
 
 
§
In September 2016, IEnova was awarded two solar energy projects in an auction conducted by Mexico’s National Center of Electricity Control (Centro Nacional de Control de Energía).
 
$
150

 
§
Estimated completion: first half of 2019
§
La Rumorosa Solar complex is a 41-MW photovoltaic project located in Baja California, Mexico.
 
 
 
 
 
§
Tepezalá II Solar complex is a 100-MW photovoltaic project located in Aguascalientes, Mexico.
 
 
 
 
 
§
Contracted by the CFE under a 15-year renewable energy and capacity agreement and a 20-year clean energy certificate agreement.
 
 
 
 
 

We discuss additional matters related to Sempra Mexico in “Factors Influencing Future Performance.”

13



SEMPRA RENEWABLES
Business Overview
 
SEMPRA RENEWABLES

 
 
Business summary
Market
Geographic area
 

Develops, owns, operates, or holds interests in renewable energy generation projects

Wholesale electricity


U.S.A.

Sempra Renewables develops, invests in and operates renewable energy generation projects that have long-term contracts with electric load serving entities, which provide electric service to end-users and wholesale customers.
The majority of Sempra Renewables’ wind farm assets earn production tax credits (PTC) based on the number of megawatt hours of electricity they generate. A PTC is a federal subsidy that pays wind-energy producers a flat rate for generating clean energy. Because PTCs last for ten years after project completion, any wind turbine that is under construction before the end of 2019 will earn a full decade of PTCs at phased-out rates beginning with construction starting in 2017 through 2019. For each of the years ended December 31, 2016, 2015 and 2014, PTCs represented a large portion of our wind farm earnings, often exceeding earnings from operations.
Certain of Sempra Renewables’ wind and solar power projects are held by limited liability companies whose members are Sempra Renewables and financial institutions. The financial institutions are noncontrolling tax equity investors to which earnings, tax attributes and cash flows are allocated in accordance with the respective limited liability company agreements. We discuss these tax equity arrangements in “Variable Interest Entities” and in “Noncontrolling Interests” in Note 1 of the Notes to Consolidated Financial Statements.
The following table provides information about the Sempra Renewables wind and solar energy generation facilities that were operational as of December 31, 2016. The generating capacity of these facilities is fully contracted under long-term PPAs for the periods indicated in the table.

14



SEMPRA RENEWABLES OPERATING FACILITIES
Capacity in Megawatts at December 31, 2016
Name
Generating capacity
 
PPA term in years
 
First in
service(1)
 
Location
Wholly owned facility:
 
 
 
 
 
 
 
Copper Mountain Solar 1
58

 
20

 
2008
 
Boulder City, Nevada
Total
58

 
 
 
 
 
 
Tax equity-owned facilities(2):
 
 
 
 
 
 
 
Black Oak Getty Wind
78

 
20

 
2016
 
Stearns County, Minnesota
Copper Mountain Solar 4
94

 
20

 
2016
 
Boulder City, Nevada
Mesquite Solar 2
100

 
20

 
2016
 
Maricopa County, Arizona
Mesquite Solar 3
150

 
25

 
2016
 
Maricopa County, Arizona
Total
422

 
 
 
 
 
 
Jointly owned facilities(3):
 
 
 
 
 
 
 
Auwahi Wind
11

 
20

 
2012
 
Maui, Hawaii
Broken Bow 2 Wind
38

 
25

 
2014
 
Custer County, Nebraska
Cedar Creek 2 Wind
125

 
25

 
2011
 
New Raymer, Colorado
Flat Ridge 2 Wind
235

 
20 and 25

 
2012
 
Wichita, Kansas
Fowler Ridge 2 Wind
100

 
20

 
2009
 
Benton County, Indiana
Mehoopany Wind
71

 
20

 
2012
 
Wyoming County, Pennsylvania
Total wind
580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
California solar partnership
55

 
25

 
2013
 
Tulare and Kings Counties, California
Copper Mountain Solar 2
75

 
25

 
2012
 
Boulder City, Nevada
Copper Mountain Solar 3
125

 
20

 
2014
 
Boulder City, Nevada
Mesquite Solar 1
75

 
20

 
2011
 
Maricopa County, Arizona
Total solar
330

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total MW in operation
1,390

 
 

 
 
 
 
(1)
If placed in service in phases, indicates the year the first phase went into service.
(2)
Represents facilities that we own through tax equity arrangements. We consolidate these entities and report noncontrolling interests.
(3)
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.

The following map shows the location and full nameplate generating capacity of Sempra Renewables’ projects in operation as of December 31, 2016:
correnewablesassets2017a01.gif

15



SEMPRA LNG & MIDSTREAM
Business Overview
 
SEMPRA LNG & MIDSTREAM

 
 
 Business summary
Market
Geographic area
 

Develops, owns and operates, or holds interests in LNG and natural gas midstream assets and operations:
a terminal in the U.S. for the import and export of LNG and sale of natural gas
natural gas pipelines and storage facilities
marketing operations


Liquefied natural gas 
Natural gas

U.S.A.

Sempra LNG & Midstream develops and invests in LNG-related infrastructure and has a 50.2-percent equity interest in the Cameron LNG regasification terminal and the Cameron LNG liquefaction project under construction in Louisiana, a project developed and permitted by Sempra LNG & Midstream. Sempra LNG & Midstream develops, owns and operates, or holds interests in, natural gas underground storage and related pipeline facilities in Alabama, Louisiana and Mississippi. It also 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.
LNG
In August 2014, Sempra Energy and three project partners provided their respective final investment decision with regard to the Cameron LNG Holdings, LLC (Cameron LNG JV) joint venture for the development, construction and operation of a three-train natural gas liquefaction export facility at the existing Cameron LNG, LLC regasification terminal. Beginning from the October 1, 2014 joint venture effective date, Cameron LNG, LLC was no longer wholly owned, and Sempra LNG & Midstream began accounting for its investment in the joint venture under the equity method. We discuss the 2014 formation of the Cameron LNG JV, including the contribution of our share of equity to the joint venture through the contribution of the Cameron LNG, LLC regasification terminal in Hackberry, Louisiana, in Note 3 of the Notes to Consolidated Financial Statements.
The existing regasification terminal is capable of processing 1.5 Bcf of natural gas per day, and it currently 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 capacity reservation and usage fees to use the facilities to receive, store and regasify the customer’s LNG.
There is an agreement in place that will result in the termination of the current terminal services agreement at the point during construction of the new liquefaction facilities when piping tie-ins to the existing regasification terminal become necessary, which we expect to occur when progress on the construction of the three-train liquefaction project, described below, makes regasification no longer possible under the terms of the services agreement.
Sempra LNG & Midstream 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. The LNG purchase agreement allows Tangguh PSC to divert deliveries to other global markets in exchange for cash differential payments to Sempra LNG & Midstream. Sempra LNG & Midstream also may enter into short-term supply agreements to purchase LNG to be received, stored and regasified at the terminal for sale to other parties.
Storage
Sempra LNG & Midstream has 42 Bcf of operational working natural gas storage capacity and a project under development as follows:
Bay Gas Storage Company, Ltd. is a facility located 40 miles north of Mobile, Alabama, that provides underground storage (20 Bcf of operational working natural gas storage capacity) and delivery of natural gas. Sempra LNG & Midstream owns 91 percent of the project. It is the easternmost salt dome storage facility on the Gulf Coast, with direct service to the Florida market and markets across the Southeast, Mid-Atlantic and Northeast regions.
Mississippi Hub, LLC (Mississippi Hub) is an underground salt dome with 22 Bcf of operational working natural gas storage capacity located 45 miles southeast of Jackson, Mississippi. It has access to natural gas from shale basins of East Texas and Louisiana, traditional Gulf Coast supplies and LNG, with multiple interconnections to serve the Southeast and Northeast regions.

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LA Storage is a salt cavern development project in Cameron Parish, Louisiana. Sempra LNG & Midstream owns 77 percent of the project and ProLiance Transportation LLC owns the remaining 23 percent. The project’s location provides access to several LNG facilities in the area and could be positioned to support LNG export from various liquefaction terminals, when operational, if anticipated cash flows support further investment.
Transportation
In the second quarter of 2016, Sempra LNG & Midstream sold its 25-percent interest in Rockies Express Pipeline LLC (Rockies Express) and permanently released pipeline capacity that it held with Rockies Express and others. We discuss Rockies Express further in Notes 3 and 15 of the Notes to Consolidated Financial Statements.
Generation
Sempra LNG & Midstream sells electricity under short-term and long-term contracts and into the spot market and other competitive markets. Sempra LNG & Midstream purchases natural gas to fuel Sempra Mexico’s TdM power plant, described above, and prior to April 2015, to fuel its Mesquite Power natural gas-fired power plant. Sempra LNG & Midstream sold the first 625-MW block of the Mesquite Power plant in February 2013 and the remaining 625-MW block, together with a related power sales contract, in April 2015.
Sempra LNG & Midstream has an EMA with Sempra Mexico to provide energy marketing, scheduling and other related services to Sempra Mexico’s TdM power plant to support its sales of generated power into the California electricity market. We discuss the EMA in “Sempra Mexico – Business Overview – Power Business – Natural Gas-Fired Generation” above.
Distribution
As we discuss in Note 3 of the Notes to Consolidated Financial Statements, in September 2016, Sempra LNG & Midstream sold 100 percent of the outstanding equity of EnergySouth Inc. (EnergySouth), the parent company of Mobile Gas Service Corporation (Mobile Gas) and Willmut Gas Company (Willmut Gas). Mobile Gas and Willmut Gas are regulated natural gas distribution utilities in southwest Alabama and in Mississippi, respectively.
Capital Project Updates
We summarize the Cameron LNG JV three-train liquefaction project below. Sempra LNG & Midstream’s ability to successfully complete major infrastructure projects is subject to a number of risks and uncertainties, which we discuss below and in “Risk Factors” in our 2016 Annual Report on Form 10-K.
MAJOR PROJECT UNDER CONSTRUCTION AT DECEMBER 31, 2016  SEMPRA LNG & MIDSTREAM
 
 
 
 
Project description
Status
Cameron LNG JV Three-Train Liquefaction Project
 
 
§
Construction began in the second half of 2014.
§
Cameron LNG JV has received authorizations from the U.S. Department of Energy (DOE) to export up to 14.95 Mtpa of LNG to FTA and Non-FTA countries.
§
Sempra Energy contributed Cameron LNG, LLC’s existing facilities to Cameron LNG JV.
§
Latest indication by the EPC contractor for in-service dates: mid-2018 for train one, late 2018 for train two, and mid-2019 for train three.
§
Capacity of 13.9 million tonnes per annum (Mtpa) of LNG with an expected export capability of 12 Mtpa of LNG, or approximately 1.7 Bcf per day.
 
 
§
Anticipated incremental investment of approximately $7 billion.
 
 
§
Authorized to export LNG to both Free Trade Agreement (FTA) and non-FTA countries.
 
 
§
20-year liquefaction and regasification tolling capacity agreements for full nameplate capacity.
 
 
Cameron LNG JV Three-Train Liquefaction Project
Construction on the current three-train liquefaction project began in the second half of 2014 under an engineering, procurement and construction (EPC) contract with a joint venture between CB&I Shaw Constructors, Inc., a wholly owned subsidiary of Chicago Bridge & Iron Company N.V., and Chiyoda International Corporation, a wholly owned subsidiary of Chiyoda Corporation.
Incremental investment. The anticipated incremental investment by Cameron LNG JV in the three-train liquefaction project is estimated to be approximately $7 billion, including the cost of the lump-sum, turnkey EPC contract, development engineering costs

17



and permitting costs, but excluding capitalized interest and other financing costs. The majority of the incremental investment will be project-financed and the balance provided by the project partners. We expect that our remaining equity requirements to complete the project will be met by a combination of our share of cash generated from each liquefaction train as it comes on line and additional cash contributions. If construction, financing or other project costs are higher than we currently expect, we may have to contribute additional cash exceeding our current expectations.
Total estimated cost. The total cost of the facility, including the cost of our original facility contributed to the joint venture plus interest during construction, financing costs and required reserves, is estimated to be approximately $10 billion.
Construction delay. In late October 2016, Cameron LNG JV received indication from the EPC contractor that the in-service date for each train may be delayed. Any such construction delays would defer a portion of the 2018 and 2019 earnings anticipated from this project.
Transportation agreements. Sempra LNG & Midstream has agreements totaling 1.45 Bcf per day of firm natural gas transportation service to the Cameron LNG JV facilities on the Cameron Interstate Pipeline with ENGIE 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.
Financing agreements and guarantees. Sempra Energy and the project partners executed project financing documents and completion guarantees, which became effective on October 1, 2014 and will terminate upon financial completion of the project. Sempra Energy and the project partners executed project financing documents for senior secured debt in an initial aggregate principal amount up to $7.4 billion for the purpose of financing the cost of development and construction of the Cameron LNG JV liquefaction project. Sempra Energy has entered into guarantees under which it has severally guaranteed 50.2 percent of Cameron LNG JV’s obligations under the project financing and financing-related agreements, for a maximum amount of $3.9 billion. The project financing and completion guarantees became effective on October 1, 2014, and will terminate upon financial completion of the project, which will occur upon satisfaction of certain conditions, including all three trains achieving commercial operation and meeting certain operational performance tests. We expect the project to achieve financial completion and the completion guarantees to be terminated approximately nine months after all three trains achieve commercial operation.
We discuss matters related to Cameron LNG JV further in Notes 3 and 4 of the Notes to Consolidated Financial Statements.
We discuss additional matters related to Sempra LNG & Midstream, including Cameron LNG JV, in “Factors Influencing Future Performance.”
 
 
 
 
 
EXECUTIVE SUMMARY
BUSINESS STRATEGY
Our objective is to increase shareholder value by developing, investing in and operating long-term-contracted energy infrastructure assets and operating our regulated utilities in a safe and reliable manner.
The key components of our strategy include the following disciplined growth platforms:
U.S. and South American utilities
U.S. and Mexican energy infrastructure
Operating within these areas, we are focused on generating stable, predictable earnings and cash flows by investing in assets that are primarily regulated or contracted on a long-term basis. We have a robust capital program and take a disciplined approach to deploying this capital to areas that fit our strategy and are designed to create shareholder value. By doing so, our goal is to deliver long-term growth above the utility average, but with a commensurate risk profile.
KEY EVENTS AND ISSUES IN 2016
Below are key events and issues that affected our business in 2016; some of these may continue to affect our future results.
In March 2016, Sempra LNG & Midstream recorded an impairment charge related to its investment in Rockies Express ($27 million earnings impact).
In May 2016, Sempra LNG & Midstream recorded a charge related to permanently released pipeline capacity with Rockies Express and others ($123 million earnings impact).
In June 2016, the CPUC approved a final decision (2016 GRC FD) in the California Utilities’ 2016 GRC, effective retroactive to January 1, 2016.

18



In September 2016, Sempra Mexico reduced the carrying value of TdM by recognizing an impairment charge ($90 million earnings impact).
In September 2016, Sempra LNG & Midstream recorded a gain on the sale of EnergySouth, the parent company of Mobile Gas and Willmut Gas ($78 million earnings impact).
In September 2016, Sempra Mexico’s subsidiary, IEnova, purchased the remaining 50-percent interest in GdC for $1.144 billion, and recorded a noncash gain associated with the remeasurement of its 50-percent equity interest in GdC immediately prior to the transaction ($350 million earnings impact).
In October 2016, IEnova completed a private follow-on offering of its common stock in the U.S. and outside of Mexico and a concurrent public common stock offering in Mexico, generating net proceeds of approximately $1.57 billion. Sempra Energy also purchased stock in the Mexican offering. Upon completion of the equity offerings, our beneficial ownership of IEnova decreased from 81.1 percent to 66.4 percent.
In December 2016, Sempra Mexico acquired the 252-MW Ventika wind power generation facilities in Nuevo Leon, Mexico for cash of $310 million, plus the assumption of $610 million of existing debt.
As of December 31, 2016, SoCalGas has recorded an estimated $780 million for certain costs and $606 million for expected recovery of costs from insurance related to the Aliso Canyon natural gas storage facility gas leak, which we discuss further in Note 15 of the Notes to Consolidated Financial Statements.
 
 
 
 
 
RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
Overall results of our operations
Our segment results
Adjusted earnings and adjusted earnings per share
Significant changes in revenues, costs and earnings between periods
OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY
In 2016, our earnings increased by $21 million (2%) to $1.4 billion and our diluted earnings per share increased by $0.09 per share (2%) to $5.46 per share. In 2015 compared to 2014, our earnings increased by $188 million (16%) to $1.3 billion and our diluted earnings per share increased by $0.74 per share (16%) to $5.37 per share. Our earnings and diluted earnings per share were impacted by variances discussed in “Segment Results” below and by the items included in the table “Sempra Energy Adjusted Earnings and Adjusted Earnings Per Share,” also below.

19



SEGMENT RESULTS
The following section presents earnings (losses) by Sempra Energy segment, as well as Parent and other, and the related discussion of the changes in segment earnings (losses). Variance amounts presented are the after-tax earnings impact (based on applicable statutory tax rates), unless otherwise noted, and before noncontrolling interests, where applicable.
SEMPRA ENERGY EARNINGS (LOSSES) BY SEGMENT
(Dollars in millions)
 
Years ended December 31,
 
2016
 
2015
 
2014
Sempra Utilities:
 

 
 

 
 

SDG&E
$
570

 
$
587

 
$
507

SoCalGas(1)
349

 
419

 
332

Sempra South American Utilities
156

 
175

 
172

Sempra Infrastructure:
 

 
 

 
 

Sempra Mexico
463

 
213

 
192

Sempra Renewables
55

 
63

 
81

Sempra LNG & Midstream
(107
)
 
44

 
50

Parent and other(2)
(116
)
 
(152
)
 
(173
)
Earnings
$
1,370

 
$
1,349

 
$
1,161

(1)
After preferred dividends.
(2)
Includes after-tax interest expense ($169 million in 2016, $157 million in 2015 and $144 million in 2014), intercompany eliminations recorded in consolidation and certain corporate costs.
SEMPRA UTILITIES
SDG&E
The decrease in earnings of $17 million (3%) in 2016 was primarily due to:
$31 million of charges associated with prior years’ income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the 2016 GRC FD ($22 million related to 2015 estimated benefits and $9 million related to the true-up of 2012-2014 estimated benefits used in the 2016 GRC FD to actuals), as we discuss in Notes 6 and 14 of the Notes to Consolidated Financial Statements;
$15 million reduction to the loss from plant closure in 2015 primarily based on the CPUC approval of a compliance filing related to SDG&E’s authorized recovery of its investment in SONGS pursuant to an amended settlement agreement approved by the CPUC in 2014;
$9 million lower favorable impact in 2016 related to the resolution of prior years’ income tax items; and
$7 million lower earnings from electric transmission primarily due to lower formulaic revenues associated with lower borrowing costs; offset by
$23 million higher CPUC base operating margin authorized for 2016, including lower generation major maintenance costs, and lower non-refundable operating costs;
$9 million increase in allowance for funds used during construction (AFUDC) related to equity;
$7 million related to excess tax benefits associated with the adoption of a new accounting standard related to share-based compensation; and
$7 million lower net interest expense.
The increase in earnings of $80 million (16%) in 2015 compared to 2014 was primarily due to:
$15 million reduction to the loss from plant closure in 2015 compared to a $21 million charge in 2014 to adjust the total loss from plant closure;
$26 million higher earnings from electric transmission operations primarily due to higher rate base;
$14 million higher CPUC base operating margin authorized for 2015, and lower non-refundable operating costs;
$7 million lower generation major maintenance costs; and 
$7 million higher favorable resolution of prior years’ income tax items; offset by
$7 million higher earnings in 2014 associated with SDG&E’s annual FERC formulaic rate adjustment.
SoCalGas
The decrease in earnings of $70 million (17%) in 2016 was primarily due to:

20



$49 million of charges associated with prior years’ income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the 2016 GRC FD ($43 million related to 2015 estimated benefits and $6 million related to the true-up of 2012-2014 estimated benefits used in the 2016 GRC FD to actuals);
$16 million charge associated with tracking the 2016 income tax benefit from certain flow-through items in relation to forecasted amounts in the 2016 GRC FD, as we discuss in Notes 6 and 14 of the Notes to Consolidated Financial Statements;
$16 million lower favorable impact in 2016 related to the resolution of prior years’ income tax items;
$13 million impairment of assets related to the Southern Gas System Reliability project;
$13 million lower regulatory awards;
$11 million of earnings in 2015 from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base; and
$8 million higher net interest expense primarily due to debt issuances in the second quarter of 2015; offset by
$27 million higher CPUC base operating margin authorized for 2016, and lower non-refundable operating costs; and
$23 million higher earnings associated with the PSEP and advanced metering assets.
The increase in earnings of $87 million (26%) in 2015 compared to 2014 was primarily due to:
$34 million higher earnings primarily due to a lower effective tax rate, including $11 million earnings impact from higher favorable resolution of prior years’ income tax items in 2015; 
$31 million higher CPUC base operating margin authorized for 2015, and lower non-refundable operating costs;
$11 million of earnings from a retroactive increase, approved by the CPUC in 2015, in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base;
$10 million from an increase in AFUDC related to equity; and
$8 million higher regulatory awards; offset by
$8 million higher interest expense.
Sempra South American Utilities
Because our operations in South America use their local currency as their functional currency, revenues and expenses are translated into U.S. dollars at average exchange rates for the period for consolidation in Sempra Energy Consolidated’s results of operations. The year-to-year variances discussed below are as adjusted for the difference in foreign currency translation rates between years. We discuss these and other foreign currency effects below in “Impact of Foreign Currency and Inflation Rates on Results of Operations.”
The decrease in earnings of $19 million (11%) in 2016 was primarily due to:
$15 million higher income tax expense, including $17 million related to Peruvian tax reform, as we discuss below in “Changes in Revenues, Costs and Earnings – Income Taxes;”
$9 million lower earnings from foreign currency translation effects;
$7 million business interruption insurance proceeds in 2015 for the Santa Teresa hydroelectric power plant, which was expected to begin commercial operation in September 2014, but did not commence operation until September 2015 due to construction delays; and
$3 million primarily due to lower capitalized interest due to completion of construction of the Santa Teresa hydroelectric power plant in 2015; offset by
$10 million higher earnings from operations mainly due to the start of operations of the Santa Teresa hydroelectric power plant in September 2015.
The increase in earnings of $3 million (2%) in 2015 compared to 2014 was primarily due to:
$21 million higher earnings from operations, mainly in Peru, due to an increase in volumes and rates, which rates include foreign currency adjustments;
$7 million business interruption insurance proceeds for the Santa Teresa hydroelectric power plant;
$4 million higher earnings from early termination fees from commercial power contracts;
$4 million decrease in earnings attributable to noncontrolling interests in 2015; and
$3 million lower net interest expense, mainly in Chile, related to inflationary effect on local bonds; offset by
$20 million lower earnings from foreign currency translation effects;
$9 million higher income tax expense, including $18 million income tax benefit in 2014 related to Peruvian tax reform, offset by $6 million income tax expense in 2014 related to Chilean tax reform, as we discuss below in “Changes in Revenues, Costs and Earnings – Income Taxes;” and
$8 million lower earnings associated with the relocation of electrical infrastructure.

21



SEMPRA INFRASTRUCTURE
Sempra Mexico
The increase in earnings of $250 million in 2016 was primarily due to:
$432 million noncash gain associated with the remeasurement of our 50-percent equity interest in GdC, as we discuss in Note 3 of the Notes to Consolidated Financial Statements;
$20 million incremental earnings from the increase in our ownership interest in GdC from 50 percent to 100 percent on September 26, 2016; and
$8 million increase in earnings from our distribution company mainly associated with new distribution rates; offset by
$111 million impairment of TdM assets held for sale;
$80 million increase in earnings attributable to noncontrolling interests at IEnova, as we discuss below in “Changes in Revenues, Costs and Earnings – Earnings Attributable to Noncontrolling Interests;”
$36 million favorable impact in 2016 compared to $49 million favorable impact in 2015 due primarily to transactional effects from foreign currency and inflation, including amounts in equity earnings from our joint ventures; and
$8 million deferred income tax expense on our investment in the TdM natural gas-fired power plant as a result of management’s decision to hold the asset for sale.
The increase in earnings of $21 million (11%) in 2015 compared to 2014 was primarily due to:
$37 million higher pipeline earnings, primarily due to the start of operations of certain pipelines in the fourth quarter of 2014; and 
$31 million favorable variance due to effects from foreign currency and inflation, including amounts in earnings from our joint ventures; offset by
$5 million losses in 2015 from operations at our TdM power plant compared to $13 million earnings for the same period in 2014, primarily due to lower capacity revenues and lower volumes;
$14 million gain in 2014 from the sale of a 50-percent equity interest in the first phase of the Energía Sierra Juárez project;
$10 million unfavorable impact from income taxes ($5 million expense in 2015 compared to $5 million benefit in 2014); and
$6 million increase in earnings attributable to noncontrolling interests at IEnova.
Sempra Renewables
The decrease in earnings of $8 million (13%) in 2016 was primarily due to:
$12 million lower solar investment tax credits from projects placed in service in 2015; and
$5 million gain in 2015 from the sale of the Rosamond Solar development project; offset by
$8 million higher earnings from increased production at our wind and solar assets.
The decrease in earnings of $18 million (22%) in 2015 compared to 2014 was primarily due to:
$24 million gains in 2014 from the sale of 50-percent equity interests in Copper Mountain Solar 3 and Broken Bow 2 Wind; offset by
$5 million gain in 2015 from the sale of the Rosamond Solar development project; and
$4 million higher earnings from increased solar capacity, offset by lower earnings from decreased production at wind projects.
Sempra LNG & Midstream
The decrease of $151 million in 2016 was primarily due to:
$123 million loss on permanent release of pipeline capacity, as we discuss in Note 15 of the Notes to Consolidated Financial Statements;
$36 million gain in 2015 on the sale of the remaining 625-MW block of the Mesquite Power plant, net of related expenses;
$36 million lower equity earnings resulting from the sale of the investment in Rockies Express;
$27 million impairment charge in the first quarter of 2016 related to the investment in Rockies Express; and
$15 million lower results primarily driven by changes in natural gas prices; offset by
$78 million gain on the sale of EnergySouth, net of related expenses, as we discuss in Note 3 of the Notes to Consolidated Financial Statements.
The decrease in earnings of $6 million (12%) in 2015 compared to 2014 was primarily due to:
$29 million lower results primarily driven by the effect of lower natural gas prices; 
$25 million tax benefit in 2014 due to the release of Louisiana state valuation allowance against a deferred tax asset associated with Cameron LNG developments; and

22



$10 million development expense associated with the potential expansion of our LNG business; offset by
$36 million gain in 2015 on the sale of the remaining 625-MW block of the Mesquite Power plant and a related power sale contract, net of related expenses;
$11 million higher equity earnings from Rockies Express due to additional capacity placed in service in 2015; and
$9 million lower net losses from the Mesquite Power plant due to the sale of the remaining block in April 2015.
Parent and Other
The decrease in losses of $36 million (24%) in 2016 was primarily due to:
$32 million higher income tax benefits, including;
$40 million lower U.S. tax expense in 2016 as a result of a change in planned repatriation, as we discuss below in “Changes in Revenues, Costs and Earnings – Income Taxes,” and
$17 million related to excess tax benefits associated with the adoption of a new accounting standard related to share-based compensation, offset by
$14 million income tax benefits in 2015 associated with the favorable resolution of prior years’ income tax items, and
$7 million income tax benefits in 2015 from a decrease in state valuation allowances; and
$10 million higher investment gains in 2016 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; offset by
$10 million higher net interest expense.
The decrease in losses of $21 million (12%) in 2015 compared to 2014 was primarily due to:
$39 million higher income tax benefits, including;
$18 million lower U.S. income tax expense in 2015 as a result of lower planned repatriation of current year earnings from certain non-U.S. subsidiaries,
$14 million of income tax benefits in 2015 associated with the resolution of prior years’ income tax items, and
$5 million higher income tax benefits from a decrease in state valuation allowances; offset by
$11 million lower investment gains in 2015 on dedicated assets in support of our executive retirement and deferred compensation plans, net of the decrease in deferred compensation liability associated with the investments.
ADJUSTED EARNINGS AND ADJUSTED EARNINGS PER SHARE
We prepare the consolidated financial statements in conformity with U.S. GAAP. However, management may use earnings and earnings per share adjusted to exclude certain items (adjusted earnings and adjusted earnings per share) internally for financial planning, for analysis of performance and for reporting of results to the Board of Directors. We may also use adjusted earnings and adjusted earnings per share when communicating our financial results and earnings outlook to analysts and investors. Adjusted earnings and adjusted earnings per share are non-GAAP financial measures. Because of the significance and/or nature of the excluded items, management believes that these non-GAAP financial measures provide a meaningful comparison of the performance of Sempra Energy’s and the California Utilities’ business operations to prior and future periods.
Non-GAAP financial measures are supplementary information that should be considered in addition to, but not as a substitute for, the information prepared in accordance with U.S. GAAP. The table below reconciles adjusted earnings and adjusted earnings per share to Sempra Energy Earnings and Diluted Earnings Per Common Share, which we consider to be the most directly comparable financial measures calculated in accordance with U.S. GAAP, for the years ended December 31, 2016, 2015 and 2014.

23



SEMPRA ENERGY ADJUSTED EARNINGS AND ADJUSTED EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
 
Pretax amount
 
Income tax expense (benefit)(1)
 
Non-controlling interests
 
Earnings
 
Diluted
EPS
 
Year ended December 31, 2016
Sempra Energy GAAP Earnings
 
 
 
 
 
 
$
1,370

 
$
5.46

Excluded items:
 
 
 
 
 
 
 
 
 
Remeasurement gain in connection with GdC
$
(617
)
 
$
185

 
$
82

 
(350
)
 
(1.39
)
Gain on sale of EnergySouth
(130
)
 
52

 

 
(78
)
 
(0.31
)
Permanent release of pipeline capacity
206

 
(83
)
 

 
123

 
0.49

SDG&E tax repairs adjustments related to 2016 GRC FD
52

 
(21
)
 

 
31

 
0.12

SoCalGas tax repairs adjustments related to 2016 GRC FD
83

 
(34
)
 

 
49

 
0.19

Impairment of investment in Rockies Express
44

 
(17
)
 

 
27

 
0.11

Impairment of TdM assets held for sale
131

 
(20
)
 
(21
)
 
90

 
0.36

Deferred income tax expense associated with TdM

 
8

 
(3
)
 
5

 
0.02

Sempra Energy Adjusted Earnings
 
 
 
 
 
 
$
1,267

 
$
5.05

Weighted-average number of shares outstanding, diluted (thousands)
 
 
 
 
 
 
 
 
251,155

 
Year ended December 31, 2015
Sempra Energy GAAP Earnings
 
 
 
 
 
 
$
1,349

 
$
5.37

Excluded items:
 
 
 
 
 
 
 
 
 
Gain on sale of Mesquite Power block 2
$
(61
)
 
$
25

 
$

 
(36
)
 
(0.14
)
SONGS plant closure adjustment
(26
)
 
11

 

 
(15
)
 
(0.06
)
Sempra Energy Adjusted Earnings
 
 
 
 
 
 
$
1,298

 
$
5.17

Weighted-average number of shares outstanding, diluted (thousands)
 
 
 
 
 
 
 
 
250,923

 
 Year ended December 31, 2014
Sempra Energy GAAP Earnings
 
 
 
 
 
 
$
1,161

 
$
4.63

Excluded item:
 
 
 
 
 
 
 
 
 
SONGS plant closure loss(2)
$
6

 
$
15

 
$

 
21

 
0.08

Sempra Energy Adjusted Earnings
 
 
 
 
 
 
$
1,182

 
$
4.71

Weighted-average number of shares outstanding, diluted (thousands)
 
 
 
 
 
 
 
 
250,655

(1)
Income taxes were calculated based on applicable statutory tax rates, except for adjustments that are solely income tax. Income taxes on the impairment of TdM were calculated based on the applicable statutory tax rate, including translation from historic to current exchange rates.
(2) After including a $17 million charge to reduce certain tax regulatory assets attributed to SONGS, the adjustment to loss from plant closure is a $21 million charge to earnings.


24



The tables below reconcile adjusted earnings to SDG&E’s and SoCalGas’ Earnings, which we consider to be the most directly comparable financial measure calculated in accordance with U.S. GAAP, for the years ended December 31, 2016, 2015 and 2014. SoCalGas had no reconciling adjustments for the years ended December 31, 2015 or 2014.
SDG&E ADJUSTED EARNINGS
(Dollars in millions)
 
Pretax amount
 
Income tax (benefit) expense(1)
 
Earnings
 
Year ended December 31, 2016
SDG&E GAAP Earnings
 
 
 
 
$
570

Excluded item:
 
 
 
 
 
SDG&E tax repairs adjustments related to 2016 GRC FD
$
52

 
$
(21
)
 
31

SDG&E Adjusted Earnings
 
 
 
 
$
601

 
Year ended December 31, 2015
SDG&E GAAP Earnings
 
 
 
 
$
587

Excluded item:
 
 
 
 
 
SONGS plant closure adjustment
$
(26
)
 
$
11

 
(15
)
SDG&E Adjusted Earnings
 
 
 
 
$
572

 
 Year ended December 31, 2014
SDG&E GAAP Earnings
 
 
 
 
$
507

Excluded item:
 
 
 
 
 
SONGS plant closure loss(2)
$
6

 
$
15

 
21

SDG&E Adjusted Earnings
 
 
 
 
$
528

(1)
Income taxes were calculated based on applicable statutory tax rates, except for adjustments that are solely income tax.
(2) After including a $17 million charge to reduce certain tax regulatory assets attributed to SONGS, the adjustment to loss from plant closure is a $21 million charge to earnings.
SOCALGAS ADJUSTED EARNINGS
(Dollars in millions)
 
Pretax amount
 
Income tax benefit(1)
 
Earnings
 
Year ended December 31, 2016
SoCalGas GAAP Earnings
 
 
 
 
$
349

Excluded item:
 
 
 
 
 
SoCalGas tax repairs adjustments related to 2016 GRC FD
$
83

 
$
(34
)
 
49

SoCalGas Adjusted Earnings
 
 
 
 
$
398

(1)
Income taxes were calculated based on applicable statutory tax rates.

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
Electric revenues at:
SDG&E 
Sempra South American Utilities’ Chilquinta Energía and Luz del Sur
Natural gas revenues at:
SDG&E 
SoCalGas
Sempra Mexico’s Ecogas
Sempra LNG & Midstream’s Mobile Gas and Willmut Gas (prior to September 12, 2016)

25



Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Consolidated Statements of Operations.
SoCalGas and SDG&E currently operate under a regulatory framework that:
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 subsequent periods through rates.
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’ GCIM 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 “Our Business” above.
also permits the California Utilities to recover certain expenses for programs authorized by the CPUC, or “refundable programs.”
Because changes in SDG&E’s and SoCalGas’ cost of electricity and/or natural gas is substantially recovered in rates, changes in these costs are reflected in the changes in revenues, and therefore do not impact earnings. In addition to the change in cost or market prices, electric or natural gas 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 14 of the Notes to Consolidated Financial Statements.
The table below summarizes revenues and cost of sales for our utilities, net of intercompany activity:
UTILITIES REVENUES AND COST OF SALES
(Dollars in millions)
 
Years ended December 31,
 
2016
 
2015
 
2014
Electric revenues:
 
 
 
 
 
SDG&E
$
3,754

 
$
3,719

 
$
3,785

Sempra South American Utilities
1,463

 
1,447

 
1,434

Eliminations and adjustments
(6
)
 
(8
)
 
(10
)
Total
5,211

 
5,158

 
5,209

Natural gas revenues:
 

 
 

 
 

SoCalGas
3,471

 
3,489

 
3,855

SDG&E
499

 
500

 
544

Sempra Mexico
88

 
81

 
109

Sempra LNG & Midstream
68

 
103

 
113

Eliminations and adjustments
(76
)
 
(77
)
 
(72
)
Total
4,050

 
4,096

 
4,549

Total utilities revenues
$
9,261

 
$
9,254

 
$
9,758

Cost of electric fuel and purchased power:
 

 
 

 
 

SDG&E
$
1,187

 
$
1,151

 
$
1,309

Sempra South American Utilities
1,001

 
985

 
972

Total
$
2,188

 
$
2,136

 
$
2,281

Cost of natural gas:
 

 
 

 
 

SoCalGas
$
891

 
$
921

 
$
1,449

SDG&E
127

 
153

 
208

Sempra Mexico
52

 
49

 
74

Sempra LNG & Midstream
17

 
31

 
44

Eliminations and adjustments
(20
)
 
(20
)
 
(17
)
Total
$
1,067

 
$
1,134

 
$
1,758


26



The table below summarizes electric and natural gas volumes sold for our utilities:
UTILITIES VOLUMES
(Electric volumes in millions of kilowatt-hours, natural gas volumes in billion cubic feet)
 
 
Years ended December 31,
 
 
2016
 
2015
 
2014
Electric volumes:
 
 
 
 
 
 
SDG&E:
 
 
 
 
 
 
Residential(1)
 
6,685

 
7,143

 
7,338

Commercial(1)
 
6,700

 
6,877

 
6,974

Industrial
 
2,189

 
2,161

 
2,067

Direct access
 
3,515

 
3,652

 
3,648

Street and highway lighting
 
75

 
83

 
88

Total(4)
 
19,164

 
19,916

 
20,115

Sempra South American Utilities:
 
 
 
 
 
 
Luz del Sur(2)
 
7,387

 
7,549

 
7,287

Chilquinta Energía
 
2,900

 
2,887

 
2,944

Total
 
10,287

 
10,436

 
10,231

Natural gas volumes(3):
 
 

 
 

 
 

SDG&E:
 
 
 
 
 
 
Natural gas sales
 
40

 
38

 
39

Transportation
 
31

 
35

 
34

Total(4)
 
71

 
73

 
73

SoCalGas:
 
 
 
 
 
 
Natural gas sales
 
294

 
291

 
287

Transportation
 
610

 
634

 
657

Total(4)
 
904

 
925

 
944

Sempra Mexico – Ecogas
 
29

 
25

 
24

(1)
Rooftop solar installations, weather and energy efficiency initiatives are impacting residential and commercial volumes sold by SDG&E. As of December 31, 2016, the residential and commercial rooftop solar capacity in SDG&E’s territory totals 694 MW, an increase in capacity of 198 MW in 2016.
(2)
The decrease in electric volumes in 2016 is primarily due to the migration of regulated and non-regulated customers to tolling customers, who pay only a tolling fee and do not contribute to customer load.
(3)
In September 2016, Sempra LNG & Midstream completed the sale of EnergySouth, the parent company of Mobile Gas and Willmut Gas. Volume information for Mobile Gas and Willmut Gas has been excluded for all years presented due to immateriality.
(4)
Includes intercompany sales.

Electric Revenues and Cost of Electric Fuel and Purchased Power
Our electric revenues increased by $53 million (1%), remaining at $5.2 billion in 2016 primarily due to:
$35 million increase at SDG&E, including: 
$37 million higher authorized revenue in the 2016 GRC FD,
$36 million higher cost of electric fuel and purchased power, which we discuss below,
$31 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses, and
$5 million to adjust estimated 2015 income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the CPUC 2016 GRC FD to actual deductions taken on the 2015 tax return. This amount reflects the increase in income tax expense, offset by
$52 million of charges associated with prior years’ income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the 2016 GRC FD ($37 million related to 2015 estimated benefits and $15 million related to the true-up of 2012-2014 estimated benefits used in the 2016 GRC FD to actuals); and
$16 million increase at Sempra South American Utilities, including:
$117 million due to higher rates at Luz del Sur and Chilquinta Energía primarily due to $81 million of increased costs passed through to customers, offset by
$69 million due to foreign currency exchange rate effects,
$24 million lower volumes at Luz del Sur, net of the effects of higher revenues from the Santa Teresa hydroelectric power plant, which began commercial operations in September 2015, and
$9 million business interruption insurance proceeds in 2015.

27



In 2015 compared to 2014, our electric revenues decreased by $51 million (1%) to $5.2 billion primarily due to:
$66 million decrease at SDG&E, including: 
$158 million lower cost of electric fuel and purchased power, which we discuss below, and
$57 million lower recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses, offset by
$88 million higher revenues from CPUC-authorized 2015 attrition and, starting in 2015, authorized revenues for the recovery of the SONGS regulatory assets pursuant to an amended settlement agreement approved by the CPUC in 2014, which we discuss below in “Depreciation and Amortization” and in Note 13 of the Notes to Consolidated Financial Statements, and
$52 million higher authorized revenues from electric transmission; offset by
$13 million increase at Sempra South American Utilities, including:
higher rates and volumes at Luz del Sur, offset by foreign currency effects, and
$9 million business interruption insurance proceeds in 2015, offset by
foreign currency effects at Chilquinta Energía, offset by higher rates and volumes, and
lower revenues and volumes associated with the transfer of certain non-regulated customers from Chilquinta Energía to Tecnored, an energy-services subsidiary of Sempra South American Utilities. Our energy-service companies are part of our energy-related businesses, which revenues are discussed below in “Energy-Related Businesses: Revenues and Cost of Sales.”
Our utilities’ cost of electric fuel and purchased power increased by $52 million (2%) to $2.2 billion in 2016 due to:
$36 million increase at SDG&E, including:
an increase from the incremental purchase of renewable energy at higher prices, offset by
a decrease in cost of purchased power due to declining natural gas prices, and
a decrease in consumption due to increased rooftop solar installations, weather impacts and energy efficiency initiatives; and
$16 million increase at Sempra South American Utilities driven primarily by
$81 million of increased costs passed through to customers, offset by
$48 million due to foreign currency exchange rate effects, and
$28 million lower volumes at Luz del Sur, net of the effects of increased costs at the Santa Teresa hydroelectric power plant.
Our utilities’ cost of electric fuel and purchased power decreased by $145 million (6%) to $2.1 billion in 2015 compared to 2014 primarily due to:
$158 million decrease at SDG&E, including:
a decrease in cost of purchased power due to declining natural gas prices, and
a decrease in consumption due to energy efficiency initiatives, including an increase in rooftop solar installations, offset by
an increase from the incremental purchase of renewable energy at higher prices; offset by
$13 million increase at Sempra South American Utilities driven primarily by higher rates and volumes at both Luz del Sur and Chilquinta Energía, offset by foreign currency exchange rate effects.
Natural Gas Revenues and Cost of Natural Gas
The table below summarizes average cost of natural gas sold by the California Utilities and included in Cost of Natural Gas. The average cost of natural gas sold at each utility in the table below is impacted by market prices, as well as transportation, tariff and other charges.
CALIFORNIA UTILITIES AVERAGE COST OF NATURAL GAS
(Dollars per thousand cubic feet)
 
Years ended December 31,
 
2016
 
2015
 
2014
SoCalGas
$
3.05

 
$
3.18

 
$
5.06

SDG&E
3.20

 
4.05

 
5.44


In 2016, our natural gas revenues decreased by $46 million (1%), remaining at $4.1 billion, and the cost of natural gas decreased by $67 million (6%), remaining at $1.1 billion. The decrease in natural gas revenues included
$35 million decrease at Sempra LNG & Midstream primarily due to the sale of Mobile Gas and Willmut Gas in September 2016;
$18 million decrease at SoCalGas, which included

28



$83 million of charges associated with prior years’ income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the 2016 GRC FD ($72 million related to estimated 2015 benefits and $11 million related to the true-up of 2012-2014 estimated benefits used in the 2016 GRC FD to actuals),
$30 million decrease in cost of natural gas sold, due to $38 million from lower average prices offset by $8 million from higher volume,
$27 million charge associated with tracking the 2016 income tax benefit from certain flow-through items in relation to forecasted amounts in the 2016 GRC FD,
$21 million lower regulatory awards, and
$19 million increase in 2015 from a CPUC-approved retroactive increase in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base, offset by
$56 million higher revenues primarily associated with the PSEP and advanced metering assets,
$52 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses,
$49 million higher authorized revenue in the 2016 GRC FD, and
$19 million to adjust estimated 2015 income tax benefits generated from income tax repairs deductions that were reallocated to ratepayers pursuant to the CPUC 2016 GRC FD to actual deductions taken on the 2015 tax return. This amount reflects the increase in income tax expense; and
$1 million decrease at SDG&E, which included
$26 million decrease in cost of natural gas sold, due to $34 million from lower average prices offset by $8 million from higher volume, offset by
$9 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses, and
$8 million higher revenues primarily associated with the PSEP.
In 2015 compared to 2014, our natural gas revenues decreased by $453 million (10%) to $4.1 billion, and the cost of natural gas decreased by $624 million (35%) to $1.1 billion. The decrease in natural gas revenues included
$366 million decrease at SoCalGas, which included
$528 million decrease in cost of natural gas sold, due to $543 million from lower average prices offset by $15 million from higher sales volumes driven mainly by cooler weather in 2015, offset by
$57 million higher revenues from CPUC-authorized 2015 attrition,
$45 million higher recovery of costs associated with CPUC-authorized refundable programs, which revenues are fully offset in operation and maintenance expenses,
$19 million increase from a retroactive increase, approved by the CPUC in 2015, in authorized GRC revenue requirement for years 2012 through 2014 due to increased rate base, and
$13 million higher regulatory awards;
$44 million decrease at SDG&E, which included
$55 million decrease in cost of natural gas sold, primarily due to $52 million from lower average prices, offset by
$8 million higher revenues from CPUC-authorized 2015 attrition; and
$28 million lower revenues at Sempra Mexico primarily due to foreign currency effects and lower natural gas prices at Ecogas.

29



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
(Dollars in millions)
 
Years ended December 31,
 
2016
 
2015
 
2014
REVENUES
 
 
 
 
 
Sempra South American Utilities
$
93

 
$
97

 
$
100

Sempra Mexico
637

 
588

 
709

Sempra Renewables
34

 
36

 
35

Sempra LNG & Midstream
440

 
550

 
866

Intersegment revenues, eliminations and adjustments(1)
(282
)
 
(294
)
 
(433
)
Total revenues
$
922

 
$
977

 
$
1,277

COST OF SALES(2)
 

 
 

 
 

Cost of natural gas, electric fuel and purchased power:
 
 
 
 
 
Sempra South American Utilities
$
13

 
$
22

 
$
11

Sempra Mexico
200

 
221

 
350

Sempra LNG & Midstream
337

 
375

 
617

Eliminations and adjustments(1)
(273
)
 
(283
)
 
(426
)
Total
$
277

 
$
335

 
$
552

Other cost of sales:
 
 
 
 
 
Sempra South American Utilities
$
69

 
$
64

 
$
68

Sempra Mexico
10

 
15

 
14

Sempra LNG & Midstream
251

 
79

 
89

Eliminations and adjustments(1)
(8
)
 
(10
)
 
(8
)
Total
$
322


$
148

 
$
163

(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 decreased by $55 million (6%) to $922 million in 2016. The decrease included
$110 million decrease at Sempra LNG & Midstream, which included
$63 million primarily driven by changes in natural gas prices and lower volumes,
$34 million lower power revenues due to the sale of the second block of Mesquite Power in April 2015, and
$13 million from lower natural gas sales to Sempra Mexico; offset by
$49 million higher revenues at Sempra Mexico primarily due to:
$82 million due to the acquisition of the remaining 50-percent interest in GdC in September 2016, offset by
$30 million lower power volumes at the TdM power plant; and
$12 million primarily from lower intercompany eliminations associated with sales between Sempra LNG & Midstream and Sempra Mexico.
In 2015 compared to 2014, revenues from our energy-related businesses decreased by $300 million (23%) to $977 million. The decrease included
$316 million decrease at Sempra LNG & Midstream mainly from lower natural gas prices and volumes and lower power revenues due to the sale of the remaining block of Mesquite Power and a related power sale contract in April 2015, as well as from the deconsolidation of Cameron LNG, LLC as of October 1, 2014;
$121 million lower revenues at Sempra Mexico primarily due to lower natural gas prices and volumes in its gas business and lower power prices and volumes and capacity revenues in its power business, offset by higher transportation revenues from a section of the Sonora natural gas pipeline that commenced operations in the fourth quarter of 2014; and
$3 million decrease at Sempra South American Utilities primarily due to foreign currency effects, offset by higher revenues associated with the transfer of certain non-regulated customers from Chilquinta Energía. Those revenues were included in “Electric Revenues” in prior years; offset by
$139 million primarily from lower intercompany eliminations associated with sales between Sempra LNG & Midstream and Sempra Mexico.
The cost of natural gas, electric fuel and purchased power for our energy-related businesses decreased by $58 million (17%) to $277 million in 2016 primarily due to:

30



$38 million decrease at Sempra LNG & Midstream primarily due to lower natural gas costs and lower electric fuel costs due to the sale of the remaining block of Mesquite Power in April 2015; and
$21 million decrease at Sempra Mexico primarily due to lower natural gas volumes and costs; offset by
$10 million primarily from lower intercompany eliminations of costs associated with sales between Sempra LNG & Midstream and Sempra Mexico.
The cost of natural gas, electric fuel and purchased power for our energy-related businesses decreased by $217 million (39%) to $335 million in 2015 compared to 2014 primarily due to:
$242 million decrease at Sempra LNG & Midstream primarily due to lower natural gas costs and volumes and lower electric fuel costs due to the sale of the remaining block of Mesquite Power in April 2015; and
$129 million decrease at Sempra Mexico primarily due to lower natural gas costs and volumes; offset by
$143 million primarily from lower intercompany eliminations of costs associated with sales between Sempra LNG & Midstream and Sempra Mexico.
Other cost of sales increased by $174 million to $322 million in 2016 primarily due to the $206 million charge related to Sempra LNG & Midstream’s permanent release of pipeline capacity in the second quarter of 2016, offset by $33 million of capacity costs in 2015 on the Rockies Express pipeline.
Operation and Maintenance
In the table below, we provide a breakdown of our operation and maintenance expenses by segment.
OPERATION AND MAINTENANCE
(Dollars in millions)
 
Years ended December 31,
 
2016
 
2015
 
2014
Sempra Utilities:
 
 
 
 
 
SDG&E
$
1,048

 
$
1,017

 
$
1,076

SoCalGas
1,385

 
1,361

 
1,321

Sempra South American Utilities
172

 
160

 
173

Sempra Infrastructure:
 
 
 
 
 
Sempra Mexico
150

 
126

 
121

Sempra Renewables
54

 
50

 
50

Sempra LNG & Midstream
156

 
177

 
181

Parent and other(1)
5

 
(5
)
 
13

Total operation and maintenance
$
2,970

 
$
2,886

 
$
2,935

(1)
Includes intercompany eliminations recorded in consolidation.

Our operation and maintenance expenses increased by $84 million (3%) to $3.0 billion in 2016 primarily due to:
$31 million increase at SDG&E, which included
$40 million higher expenses associated with CPUC-authorized refundable programs, for which all costs incurred are fully recovered in revenue (refundable program expenses), and
$10 million at Otay Mesa VIE primarily due to major maintenance at the Otay Mesa Energy Center (OMEC) plant in the second quarter of 2016, offset by
$14 million lower litigation expense, and
$8 million lower non-refundable operating costs, including labor, contract services and administrative and support costs;
$24 million increase at SoCalGas, which included
$52 million higher expenses associated with CPUC-authorized refundable programs, for which all costs incurred are fully recovered in revenue (refundable program expenses), offset by
$33 million lower non-refundable operating costs, including labor, contract services and administrative and support costs; and
$24 million increase at Sempra Mexico primarily from $17 million higher operating costs due to the acquisition of the remaining 50-percent interest in GdC in September 2016; offset by
$21 million decrease at Sempra LNG & Midstream, $9 million of which is attributable to the sale of EnergySouth in September 2016.

31



Our operation and maintenance expenses decreased by $49 million (2%), remaining at $2.9 billion in 2015 compared to 2014 primarily due to:
$59 million decrease at SDG&E, which included
$53 million lower expenses associated with CPUC-authorized refundable programs, for which all costs incurred are fully recovered in revenue (refundable program expenses), and
$8 million lower non-refundable operating costs, including $11 million lower major maintenance costs at its electric generating facilities, as well as labor, contract services and administrative and support costs; and
$18 million decrease at Parent and Other primarily due to lower employee benefit and deferred compensation costs; offset by
$40 million increase at SoCalGas primarily due to $45 million higher expenses associated with CPUC-authorized refundable programs for which all costs incurred are fully recovered in revenue (refundable program expenses).
Depreciation and Amortization
Our depreciation and amortization expense was
$1,312 million in 2016
$1,250 million in 2015
$1,156 million in 2014
The increase of $62 million (5%) in 2016 was primarily due to:
$42 million increase at SDG&E from depreciation on higher utility plant base, higher depreciation at Otay Mesa VIE and higher amortization; and
$15 million higher depreciation at SoCalGas from higher utility plant base.
The increase of $94 million (8%) in 2015 compared to 2014 was primarily due to:
$74 million higher depreciation and amortization at SDG&E mainly from $42 million from the start of amortization of SONGS regulatory assets and from higher utility plant base. As we discuss in Note 13 of the Notes to Consolidated Financial Statements, based on an amended settlement agreement approved by the CPUC in 2014, SDG&E is authorized to recover in rates its remaining investment in SONGS, including base plant and construction work in progress; and
$30 million higher depreciation at SoCalGas from higher utility plant base; offset by
$12 million lower depreciation expense at Sempra LNG & Midstream primarily due to the deconsolidation of Cameron LNG, LLC as of October 1, 2014.
Impairment Losses
In 2016, Sempra Mexico reduced the carrying value of TdM by recognizing a noncash impairment charge of $131 million. We discuss deferred income tax impacts related to TdM and this impairment in Note 3 of the Notes to Consolidated Financial Statements. Also in 2016, SoCalGas recorded a $21 million impairment of assets related to the Southern Gas System Reliability project.
Plant Closure Adjustment (Loss)
In 2015, SDG&E recorded a $26 million pretax reduction to the loss from SONGS plant closure. In 2014, SDG&E recorded a $6 million pretax charge to adjust the total loss from plant closure. We discuss SONGS further in Notes 13 and 15 of the Notes to Consolidated Financial Statements.
Gain on Sale of Assets
Gain on sale of assets includes, in 2016, $130 million from the sale of EnergySouth, and in 2015, $61 million from the sale of the remaining 625-MW block of the Mesquite Power plant and a related power sale contract, and $8 million from the sale of the Rosamond Solar development project.
Also included in this line item are gains on the sale of 50-percent equity interests in 2014 as follows:
$27 million for Copper Mountain Solar 3
$19 million for the first phase of the Energía Sierra Juárez Wind project
$14 million for the Broken Bow 2 Wind project

32



Equity Earnings, Before Income Tax
Equity earnings from our equity method investments were
$6 million in 2016 
$104 million in 2015
$81 million in 2014
The decrease of $98 million in equity earnings in 2016 was primarily due to a $44 million impairment charge related to Rockies Express in the first quarter of 2016, and $61 million lower equity earnings as a result of the sale of our 25-percent interest in Rockies Express in May 2016.
The increase of $23 million in equity earnings in 2015 compared to 2014 was primarily due to:
$19 million higher equity earnings from Rockies Express mainly due to east-to-west capacity placed in service in 2015; and
$4 million higher earnings at Sempra Renewables due to higher earnings from increased solar capacity, offset by lower earnings from decreased production at wind projects.
We provide further details about equity method investments in Note 4 of the Notes to Consolidated Financial Statements.
Remeasurement of Equity Method Investment
In the third quarter of 2016, Sempra Mexico recorded a $617 million noncash gain associated with the remeasurement of its 50-percent equity interest in GdC. We discuss the transaction further in Notes 3 and 10 of the Notes to Consolidated Financial Statements.
Other Income, Net
Other income, net, was
$132 million in 2016
$126 million in 2015
$137 million in 2014
Other income, net, includes equity-related AFUDC at the California Utilities and regulated entities at Sempra Mexico and Sempra LNG & Midstream; interest on regulatory balancing accounts; gains and losses from our investments and interest rate swaps; foreign currency transaction gains and losses; electrical infrastructure relocation income in Peru; 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, increased by $6 million (5%) to $132 million in 2016 and included the following activity:
$20 million higher investment gains in 2016 on dedicated assets in support of our executive retirement and deferred compensation plans;
$9 million increase in equity-related AFUDC, including
$9 million increase at SDG&E, and
$4 million increase at SoCalGas, offset by
$6 million decrease at Sempra Mexico; and
$6 million lower foreign currency losses in 2016; offset by
$28 million higher losses on interest rate and foreign exchange instruments in 2016; and
$6 million lower income from the sale of other investments.
In 2015 compared to 2014, other income, net, decreased by $11 million (8%) and included the following activity:
$24 million lower investment gains in 2015 on dedicated assets in support of our executive retirement and deferred compensation plans; and
$14 million lower electrical infrastructure income in Peru; offset by
$11 million lower net losses on interest rate and foreign exchange instruments in 2015;
$9 million higher income from the sale of other investments;
$8 million lower foreign currency losses in 2015; and
$1 million increase in equity-related AFUDC, including
$10 million increase at SoCalGas, offset by
$10 million decrease at Sempra Mexico related to construction of the Sonora natural gas pipeline.
We provide further details of the components of other income, net, in Note 1 of the Notes to Consolidated Financial Statements.

33



Interest Expense
Interest expense was
$553 million in 2016
$561 million in 2015
$554 million in 2014
The decrease of $8 million (1%) in 2016 was primarily due to:
$26 million higher capitalized interest primarily due to:
$18 million increase at Sempra Renewables primarily for solar projects, and
$10 million increase at Sempra Mexico primarily for the Ojinaga and San Isidro pipeline projects; offset by
$13 million increase at SoCalGas primarily due to debt issuances in 2015 and 2016; and
$6 million higher lease interest on our downtown headquarters building.
The increase of $7 million (1%) in 2015 compared to 2014 was primarily due to:
$24 million increase in long-term debt interest at Parent and Other primarily due to debt issuances in 2014 and 2015, net of maturities; and
$15 million increase at SoCalGas primarily due to debt issuances in 2014 and 2015; offset by
$33 million increase in capitalized interest at Sempra LNG & Midstream primarily related to its investment in Cameron LNG JV, which has not commenced its planned principal operations.
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
(Dollars in millions)
 
Years ended December 31,
 
2016
 
2015
 
2014
 
Income
tax
expense
 
Effective
income
tax rate
 
Income
tax
expense
 
Effective
income
tax rate
 
Income
tax
expense
 
Effective
income
tax rate
Sempra Energy Consolidated
$
389

 
21
%
 
$
341

 
20
%
 
$
300

 
20
%
SDG&E
280

 
33

 
284

 
32

 
270

 
34

SoCalGas
143

 
29

 
138

 
25

 
139

 
29

Sempra Energy Consolidated
Sempra Energy’s income tax expense increased in 2016 due to higher pretax income and a higher effective income tax rate. The higher effective income tax rate was primarily due to:
$3 million income tax expense in 2016 compared to $56 million income tax benefit in 2015 from the resolution of prior years’ income tax items. The amount in 2016 includes $14 million income tax expense from lower actual repairs deductions at SDG&E and SoCalGas taken on the 2015 tax return compared to amounts estimated in 2015, as discussed in Note 14 of the Notes to Consolidated Financial Statements; and
$17 million income tax expense from the remeasurement of our Peruvian deferred income tax balances as a result of tax reform in Peru as discussed below; offset by
$34 million income tax benefit associated with the adoption of a new accounting standard related to share-based compensation; and
$40 million lower U.S. income tax expense as a result of a change in planned repatriation from certain non-U.S. subsidiaries, as discussed below and in Note 6 of the Notes to Consolidated Financial Statements.
Sempra Energy’s income tax expense increased in 2015 compared to 2014 due to higher pretax income. The effective income tax rate remained the same in 2015. However, the effective income tax rate was affected by:
$21 million higher favorable resolution of prior years’ income tax items including settlement with the California Franchise Tax Board in 2015;
$20 million U.S income tax expense in 2015 on the planned repatriation from certain non-U.S. subsidiaries, compared to $38 million in 2014, as discussed below; and
$17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS, as we discuss in Note 13 of the Notes to Consolidated Financial Statements; offset by

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$25 million tax benefit in 2014 due to the release of Louisiana state valuation allowance against a deferred tax asset associated with Cameron LNG developments.
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. Our pretax income, however, includes 100 percent of these entities. 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.
Based on the current tax law, we anticipate that Sempra Energy’s effective income tax rate will be approximately 28 percent in 2017 compared to 21 percent in 2016. In the years 2018 through 2021, based on current tax law, we anticipate that Sempra Energy’s effective income tax rate will range from 29 percent to 33 percent. The effective income tax rate in 2016 was impacted by significant items that could not be reliably forecasted. However, the income tax effects of items that cannot be reliably forecasted are not factored into these 2017-2021 forecasted effective tax rates. The increase in the forecasted effective income tax rates is primarily due to a forecasted increase in pretax income without a proportional increase in the forecasted flow-through deductions at the California Utilities. Flow-through deductions are subject to review by the CPUC and, at the CPUC’s discretion, the flow-through benefits of these items could be changed, which could have a material adverse impact on Sempra Energy’s and the California Utilities’ earnings, financial condition and cash flow. We discuss the items that are subject to flow-through treatment at the California Utilities in Note 6 of the Notes to Consolidated Financial Statements.
SDG&E
SDG&E’s income tax expense decreased in 2016 due to lower pretax income, offset by a higher effective income tax rate. The higher effective income tax rate was primarily due to:
$11 million lower income tax benefit in 2016 from the resolution of prior years’ income tax items, including $3 million income tax expense in 2016 from lower actual repairs deductions taken on the 2015 tax return compared to amounts estimated in 2015; offset by
$7 million income tax benefit associated with the adoption of a new accounting standard related to share-based compensation.
SDG&E’s income tax expense increased in 2015 compared to 2014 due to higher pretax income, offset by a lower effective income tax rate, primarily from the $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS.
Based on the current tax law, we anticipate that SDG&E’s effective income tax rate will be approximately 37 percent in 2017 compared to 33 percent in 2016. In the years 2018 through 2021, based on current tax law, we anticipate that SDG&E’s effective income tax rate will range from 37 percent to 38 percent. The effective income tax rate in 2016 was impacted by significant items that could not be reliably forecasted. However, the income tax effects of items that cannot be reliably forecasted are not factored into these forecasted 2017-2021 effective tax rates. The increase in the forecasted effective income tax rates is primarily due to a forecasted increase in pretax income without a proportional increase in the forecasted flow-through deductions.
SoCalGas
SoCalGas’ income tax expense increased in 2016 due to a higher effective income tax rate, offset by lower pretax income. The higher effective income tax rate was primarily due to:
$10 million income tax expense in 2016 compared to $18 million income tax benefit in 2015 from the resolution of prior years’ income tax items. The amount in 2016 includes $11 million income tax expense from lower actual repairs deductions taken on the 2015 tax return compared to amounts estimated in 2015; offset by
$4 million income tax benefit associated with the adoption of a new accounting standard related to share-based compensation.
SoCalGas’ income tax expense decreased slightly in 2015 compared to 2014 due to a lower effective income tax rate, offset by higher pretax income. The lower effective income tax rate was primarily due to:
$10 million higher favorable resolution of prior years’ income tax items in 2015;
higher deductions for certain repairs expenditures that are capitalized for financial statement purposes; and
higher deductions for self-developed software expenditures.
Based on the current tax law, we anticipate that SoCalGas’ effective income tax rate will be approximately 33 percent in 2017 compared to 29 percent in 2016. In the years 2018 through 2021, based on current tax law, we anticipate that SoCalGas’ effective income tax rate will range from 31 percent to 33 percent. The effective income tax rate in 2016 was impacted by significant items that could not be reliably forecasted. However, the income tax effects of items that cannot be reliably forecasted are not factored into these 2017-2021 forecasted effective tax rates. The increase in the forecasted effective income tax rates is primarily due to a forecasted increase in pretax income without a proportional increase in the forecasted flow-through deductions.

35



Tax Legislation
United States. Due to bonus depreciation, Sempra Energy, SDG&E and SoCalGas have U.S. federal net operating loss (NOL) carryforwards. Based on current projections, Sempra Energy, SDG&E and SoCalGas do not expect any of their NOL or income tax credits to expire prior to the end of the carryforward period, as allowed under current U.S. federal income tax law. We discuss our NOLs and tax credit carryforwards further in Note 6 of the Notes to Consolidated Financial Statements and potential U.S. federal tax reform in “Factors Influencing Future Performance.”
Peru. On December 10, 2016, the Peruvian president, through a presidential decree, enacted income tax law changes that became effective on January 1, 2017. Among other changes, the new law imposes an increase in the corporate income tax rate from 28 percent in 2016 to 29.5 percent in 2017 and beyond, as well as a decrease in the dividend withholding tax rate from 6.8 percent in 2016 to 5 percent in 2017 and beyond. As a result of the increase to the Peruvian corporate income tax rate to 29.5 percent, we remeasured our Peruvian deferred income tax balances, resulting in $17 million income tax expense recorded in 2016. We do not expect a material impact as a result of the decrease to the dividend withholding tax rate.
Pursuant to tax reform legislation passed in 2014, we recorded an $18 million tax benefit in 2014 for remeasurement of our Peruvian tax balances.
Chile. Pursuant to tax reform legislation passed in 2014, we recorded an additional $6 million of income tax expense in 2014 for remeasurement of our Chilean deferred tax balances.
Repatriation of Foreign Earnings
We no longer plan to repatriate undistributed non-U.S earnings and accordingly, in 2016, we reversed $20 million of U.S. income tax expense accrued on these earnings in 2015. We intend to indefinitely reinvest cumulative undistributed earnings from all of our non-U.S. subsidiaries and non-U.S. corporate joint ventures and use such earnings to support non-U.S operations. Therefore, we do not intend to use these cumulative undistributed earnings as a source of funding for U.S. operations. In 2014, we made distributions of approximately $288 million from our non-U.S. subsidiaries, $100 million of which was from previously taxed income and therefore not subject to additional U.S. federal income tax.
Equity Earnings, Net of Income Tax
Equity earnings of unconsolidated subsidiaries, net of income tax, which are all from Sempra South American Utilities’ and Sempra Mexico’s equity method investments, were
$78 million in 2016
$85 million in 2015
$38 million in 2014
The decrease of $7 million in 2016 was primarily due to IEnova’s acquisition of the remaining 50-percent interest in GdC, increasing IEnova’s ownership in GdC to 100 percent, offset by higher equity earnings at the Eletrans joint venture.
The increase of $47 million in 2015 compared to 2014 was primarily due to:
start of operations in December 2014 of the Los Ramones I pipeline;
higher earnings from the Energía Sierra Juárez wind-powered electric generation facility commencing operations in the second quarter of 2015; and
equity-related AFUDC for the Los Ramones Norte pipeline project.
Earnings Attributable to Noncontrolling Interests
Earnings attributable to noncontrolling interests were $148 million for 2016 compared to $98 million for 2015. The net change of $50 million included
$80 million at Sempra Mexico, primarily due to:
$82 million gain associated with the remeasurement of our 50-percent equity interest in GdC, and
$14 million due to the decrease in our controlling interest from 81.1 percent to 66.4 percent following IEnova’s equity offerings in October 2016, offset by
$21 million impairment of TdM assets held for sale; offset by
$24 million decrease at SDG&E, primarily due to an increase in operating expenses as a result of major maintenance at the OMEC plant in the second quarter of 2016.

36



Earnings attributable to noncontrolling interests were $98 million for 2015 compared to $100 million for 2014. The net change of $2 million included
$7 million decrease in earnings attributable to noncontrolling interests at Sempra South American Utilities, before adjustments for the effects of foreign currency translation; offset by
$6 million increase in earnings attributable to noncontrolling interests of IEnova in 2015.
TRANSACTIONS WITH AFFILIATES
We provide information about our related party transactions in Note 1 of the Notes to Consolidated Financial Statements.
BOOK VALUE PER SHARE
Sempra Energy’s book value per share on the last day of each year was
$51.77 in 2016
$47.56 in 2015
$45.98 in 2014
The increases in 2016 and 2015 were primarily the result of comprehensive income exceeding dividends. In 2016, the increase was also attributable to IEnova’s follow-on equity offerings and a cumulative-effect adjustment to retained earnings for previously unrecognized excess tax benefits from share-based compensation.
IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS
Foreign Currency Translation
Our operations in South America and our natural gas distribution utility in Mexico use their local currency as their functional currency. The assets and liabilities of these foreign operations are translated into U.S. dollars at current exchange rates at the end of the reporting period, and revenues and expenses are translated at average exchange rates for the reporting period. The resulting noncash translation adjustments do not enter into the calculation of earnings or retained earnings, but are reflected in Other Comprehensive Income (Loss) (OCI) and in Accumulated Other Comprehensive Income (Loss) (AOCI). However, any difference in average exchange rates used for the translation of income statement activity from year to year can cause a variance in Sempra Energy’s comparative results of operations. Changes in foreign currency translation rates between years impacted our comparative reported results as follows:
TRANSLATION IMPACT FROM CHANGE IN AVERAGE FOREIGN CURRENCY EXCHANGE RATES
(Dollars in millions)
 
 
 
 
2016
compared to
2015
 
2015
compared to
2014
Lower earnings from foreign currency translation:
 
 
 
 
Sempra South American Utilities
 
$
8

 
$
18

Sempra Mexico – Ecogas
 
2

 
2

Total
 
$
10