SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2014

Notes to Consolidated Financial Statements [Abstract]

NOTE 8. SHARE-BASED COMPENSATION

SEMPRA ENERGY EQUITY COMPENSATION PLANS

Sempra Energy has share-based compensation plans intended to align employee and shareholder objectives related to the long-term growth of Sempra Energy. The plans permit a wide variety of share-based awards, including:

non-qualified stock options
incentive stock options
restricted stock
restricted stock units
stock appreciation rights
performance awards
stock payments

dividend equivalents

Eligible California Utilities employees participate in Sempra Energy’s share-based compensation plans as a component of their compensation package.

In May 2013, shareholders approved the Sempra Energy 2013 Long-Term Incentive Plan. Upon approval, the remaining authorized shares from the Sempra Energy 2008 Long Term Incentive Plan and the 2008 Long Term Incentive Plan for EnergySouth, Inc. Employees and Other Eligible Individuals were applied to the number of shares authorized in the 2013 Plan.

At December 31, 2014, Sempra Energy had the following types of equity awards outstanding:

Non-Qualified Stock Options: Options have an exercise price equal to the market price of the common stock at the date of grant, are service-based, become exercisable over a four-year period, and expire 10 years from the date of grant. Vesting and/or the ability to exercise may be accelerated upon a change in control, in accordance with severance pay agreements, in accordance with the terms of the grant, or upon eligibility for retirement. Options are subject to forfeiture or earlier expiration when an employee terminates employment.
Performance-Based Restricted Stock Units: These restricted stock unit awards generally vest in Sempra Energy common stock at the end of four-year performance periods based on Sempra Energy’s total return to shareholders relative to that of market indices or based on earnings per common share (EPS) growth. For awards granted in 2013 or earlier, if Sempra Energy’s total return to shareholders exceeds target levels, up to an additional 50 percent of the number of granted restricted stock units may be issued. For awards granted in 2014, up to an additional 100 percent of the granted restricted stock units may be issued if total return to shareholders or EPS growth exceeds target levels. If Sempra Energy’s total return to shareholders or EPS growth is below the target levels, shares are subject to partial vesting on a pro rata basis. Vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable long-term incentive plan, or in accordance with severance pay agreements. Dividend equivalents on shares subject to restricted stock units are reinvested to purchase additional shares that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.
Service-Based Restricted Stock Units: Restricted stock units may also be service-based; these generally vest at the end of four years of service. Vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable long-term incentive plan, in accordance with severance pay agreements, or at the discretion of the Compensation Committee of Sempra Energy’s Board of Directors. Dividend equivalents on shares subject to restricted stock units are reinvested to purchase additional shares that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.
Other Restricted Stock Units: Restricted stock units were granted in 2014 in connection with the creation of the Cameron LNG Holdings joint venture. These awards vest to the extent that the Compensation Committee of Sempra Energy’s Board of Directors determines that the objectives of the joint venture are continuing to be achieved. These awards vest on the anniversary of the grant date over a period of either two or three years. Vesting may be subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable long-term incentive plan, or in accordance with severance pay agreements. Dividend equivalents on shares subject to restricted stock units are reinvested to purchase additional shares that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.

Restricted Stock: Restricted stock awards are solely service-based and are generally exercisable at the end of four years of service. Vesting is subject to earlier forfeiture upon termination of employment and accelerated vesting upon a change in control under the applicable long-term incentive plan, in accordance with severance pay agreements or upon eligibility for retirement. Holders of restricted stock have full voting rights. They also have full dividend rights; however, dividends paid on restricted stock held by officers are reinvested to purchase additional shares that become subject to the same vesting conditions as the restricted stock to which the dividends relate.

In April 2013, the IEnova board of directors approved the IEnova 2013 Long-Term Incentive Plan. The purpose of this plan is to align the interests of employees and directors of IEnova with its shareholders. All awards issued from this plan and any related dividend equivalents will settle in cash based on the fair market value of the awards, based on IEnova’s common stock value, upon vesting. In 2014 and 2013, IEnova issued 468,339 and 1,014,899 restricted stock units from this plan, respectively, 962,122 of which remain outstanding at December 31, 2014.

SHARE-BASED AWARDS AND COMPENSATION EXPENSE

We measure and recognize compensation expense for all share-based payment awards made to our employees and directors based on estimated fair values on the date of grant. We recognize compensation costs net of an estimated forfeiture rate (based on historical experience) and recognize the compensation costs for non-qualified stock options and restricted stock and stock units on a straight-line basis over the requisite service period of the award, which is generally four years. However, in the year that an employee becomes eligible for retirement, the remaining expense related to the employee’s awards is recognized immediately. Substantially all awards outstanding are classified as equity instruments; therefore, we recognize additional paid in capital as we recognize the compensation expense associated with the awards.

At December 31, 2014, 6,562,347 shares were authorized and available for future grants of share-based awards. Our practice is to satisfy share-based awards by issuing new shares rather than by open-market purchases.

Total share-based compensation expense for all of Sempra Energy’s share-based awards was comprised as follows:

SHARE-BASED COMPENSATION EXPENSE ― SEMPRA ENERGY CONSOLIDATED
(Dollars in millions, except per share amounts)
	Years ended December 31,
	2014		2013		2012
Share-based compensation expense, before income taxes	$	46	$	38	$	40
Income tax benefit		(18)		(15)		(16)
Share-based compensation expense, net of income taxes	$	28	$	23	$	24

Net share-based compensation expense, per common share
Basic	$	0.11	$	0.09	$	0.10
Diluted	$	0.11	$	0.09	$	0.10

Sempra Energy Consolidated’s capitalized compensation cost was $5 million in 2014 and $4 million in each of 2013 and 2012.

We classify the tax benefits resulting from tax deductions in excess of the tax benefit related to compensation cost recognized for stock option exercises as financing cash flows.

Sempra Energy subsidiaries record an expense for the plans to the extent that subsidiary employees participate in the plans and/or the subsidiaries are allocated a portion of the Sempra Energy plans’ corporate staff costs. Expenses and capitalized compensation costs recorded by SDG&E and SoCalGas were as follows:

SHARE-BASED COMPENSATION EXPENSE ― SDG&E AND SOCALGAS
(Dollars in millions)
	Years ended December 31,
	2014		2013		2012
SDG&E:
Compensation expense	$	8	$	8	$	8
Capitalized compensation cost		3		3		3
SoCalGas:
Compensation expense	$	8	$	8	$	7
Capitalized compensation cost		2		1		1

SEMPRA ENERGY NON-QUALIFIED STOCK OPTIONS

We use a Black-Scholes option-pricing model (Black-Scholes model) to estimate the fair value of each non-qualified stock option grant. The use of a valuation model requires us to make certain assumptions about selected model inputs. Expected volatility is calculated based on the historical volatility of Sempra Energy’s stock price. We base the average expected life for options on the contractual term of the option and expected employee exercise and post-termination behavior.

The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant. No new options were granted in 2014, 2013 or 2012.

The following table shows a summary of non-qualified stock options at December 31, 2014 and activity for the year then ended:

NON-QUALIFIED STOCK OPTIONS

					Weighted-
			Weighted-		average
	Shares		average		remaining		Aggregate
	under		exercise		contractual term		intrinsic value
	option		price		(in years)		(in millions)
Outstanding at December 31, 2013		1,459,145	$	53.18
Exercised		(699,783)	$	52.48
Forfeited/canceled		(1,950)	$	45.36
Outstanding at December 31, 2014		757,412	$	53.84		3.2	$	44

Vested or expected to vest, at December 31, 2014		757,412	$	53.84		3.2	$	44
Exercisable at December 31, 2014		757,412	$	53.84		3.2	$	44

The aggregate intrinsic value at December 31, 2014 is the total of the difference between Sempra Energy’s closing stock price and the exercise price for all in-the-money options. The aggregate intrinsic value for non-qualified stock options exercised in the last three years was

$33 million in 2014
$41 million in 2013

$45 million in 2012

The total fair value of shares vested in the last three years was

$1 million in 2014
$2 million in 2013

$4 million in 2012

We received cash from option exercises during 2014 totaling $37 million. There were no realized tax benefits for the share-based payment award deductions in 2014 over and above the $18 million income tax benefit shown above.

SEMPRA ENERGY RESTRICTED STOCK AWARDS AND UNITS

We use a Monte-Carlo simulation model to estimate the fair value of the restricted stock awards and units. Our determination of fair value is affected by the volatility of the stock price and the dividend yields for Sempra Energy and its peer group companies. The valuation also is affected by the risk-free rates of return, and a number of other variables. Below are key assumptions for 2014, 2013 and 2012 for Sempra Energy:

		2014		2013		2012
Risk-free rate of return		1.2	%	0.6	%	0.6	%
Annual dividend yield(1)		N/A		3.3		3.4
Stock price volatility		16		19		27
(1)	Annual dividend yield was not used in valuations performed in 2014.

Restricted Stock Awards

We provide below a summary of Sempra Energy’s restricted stock awards at December 31, 2014 and the activity during the year.

RESTRICTED STOCK AWARDS

			Weighted-
			average
			grant-date
	Shares		fair value
Nonvested at December 31, 2013		17,469	$	62.43
Vested		(8,231)	$	60.87
Nonvested at December 31, 2014		9,238	$	63.81
Vested or expected to vest, at December 31, 2014		9,238	$	63.81

Total compensation cost related to nonvested restricted stock awards not yet recognized as of December 31, 2014 is negligible. The weighted-average per-share fair value for restricted stock awards granted was $75.82 in 2013 and $57.81 in 2012.

The total fair value of shares vested in the last three years was $1 million in each of 2014, 2013 and 2012.

Restricted Stock Units

We provide below a summary of Sempra Energy’s restricted stock units as of December 31, 2014 and the activity during the year.

RESTRICTED STOCK UNITS

		Performance-based			Service-based
		restricted stock units			restricted stock units(2)
			Weighted-			Weighted-
			average			average
			grant-date			grant-date
		Units	fair value		Units	fair value
Nonvested at December 31, 2013		3,164,561	$	47.55	215,598	$	63.30
Granted		444,241	$	88.01	111,653	$	91.54
Vested		(720,600)	$	44.38	(21,268)	$	66.84
Forfeited		(13,260)	$	57.83	(2,746)	$	67.79
Nonvested at December 31, 2014(1)		2,874,942	$	54.55	303,237	$	73.41
Vested or expected to vest, at December 31, 2014		2,816,676	$	54.22	290,822	$	73.31
(1)	Each unit represents the right to receive one share of our common stock if applicable performance conditions are satisfied. For all performance-based restricted stock units, up to an additional 50 percent (100 percent for awards granted in 2014) of the shares represented by the units may be issued if Sempra Energy exceeds target performance conditions.
(2)	Includes restricted stock units issued in 2014 in connection with the creation of the Cameron LNG Holdings joint venture.

The total fair value of shares vested in 2014 was $33 million.

The $35 million of total compensation cost related to nonvested restricted stock units not yet recognized as of December 31, 2014 is expected to be recognized over a weighted-average period of 2.4 years. The weighted-average per-share fair values for performance-based restricted stock units granted were $57.55 in 2013 and $49.23 in 2012.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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