INCOME TAXES

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXESWe provide our calculations of ETRs in the following table.

INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
	Years ended December 31,
	2020			2019			2018
Sempra Energy Consolidated:
Income tax expense (benefit) from continuing operations	$	249		$	315		$	(49)
Income from continuing operations before income taxes and equity earnings	$	1,489		$	1,734		$	714
Equity earnings (losses), before income tax(1)	294			30			(236)
Pretax income	$	1,783		$	1,764		$	478
Effective income tax rate	14		%	18		%	(10)		%
SDG&E:
Income tax expense	$	190		$	171		$	173
Income before income taxes	$	1,014		$	945		$	849
Effective income tax rate	19		%	18		%	20		%
SoCalGas:
Income tax expense	$	96		$	120		$	92
Income before income taxes	$	601		$	762		$	493
Effective income tax rate	16		%	16		%	19		%

(1)    We discuss how we recognize equity earnings in Note 6.

For SDG&E and SoCalGas, the CPUC requires flow-through rate-making treatment for the current income tax benefit or expense arising from certain property-related and other temporary differences between the treatment for financial reporting and income tax, which will reverse over time. Under the regulatory accounting treatment required for these flow-through temporary differences, deferred income tax assets and liabilities are not recorded to deferred income tax expense, but rather to a regulatory asset or liability, which impacts the ETR. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the ETR. The following items are subject to flow-through treatment:

▪repairs expenditures related to a certain portion of utility plant fixed assets

▪the equity portion of AFUDC, which is non-taxable

▪a portion of the cost of removal of utility plant assets

▪utility self-developed software expenditures

▪depreciation on a certain portion of utility plant assets

▪state income taxes

The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico has similar flow-through treatment.

We record income tax (expense) benefit from the transactional effects of foreign currency and inflation. Such effects are offset by net gains (losses) from foreign currency derivatives that are hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.

We present in the table below reconciliations of net U.S. statutory federal income tax rates to our ETRs.

RECONCILIATION OF FEDERAL INCOME TAX RATES TO EFFECTIVE INCOME TAX RATES
	Years ended December 31,
	2020		2019		2018
Sempra Energy Consolidated:
U.S. federal statutory income tax rate	21	%	21	%	21	%
Utility depreciation	3		3		12
Non-U.S. earnings taxed at rates different from the U.S. statutory income tax rate(1)	2		3		10
State income taxes, net of federal income tax benefit	1		2		(8)
Impairment losses	1		—		(32)
Effects of the TCJA	—		—		9
Unrecognized income tax benefits	—		—		4
Noncontrolling interests in tax equity arrangements	—		—		3
Resolution of prior years’ income tax items	—		—		(1)
Excess deferred income taxes outside of ratemaking	—		(4)		—
Compensation-related items	(1)		—		3
Valuation allowances	(1)		—		—
Allowance for equity funds used during construction	(1)		(1)		(4)
Amortization of excess deferred income taxes	(1)		(1)		(4)
Tax credits	(1)		(2)		(10)
Foreign exchange and inflation effects(2)	(3)		4		6
Utility self-developed software expenditures	(3)		(2)		(7)
Utility repairs expenditures	(4)		(3)		(13)
Other, net	1		(2)		1
Effective income tax rate	14	%	18	%	(10)	%
SDG&E:
U.S. federal statutory income tax rate	21	%	21	%	21	%
State income taxes, net of federal income tax benefit	5		6		5
Depreciation	3		3		3
Excess deferred income taxes outside of ratemaking	—		(3)		—
Amortization of excess deferred income taxes	(1)		(1)		(1)
Allowance for equity funds used during construction	(2)		(1)		(2)
Repairs expenditures	(3)		(3)		(3)
Self-developed software expenditures	(4)		(3)		(2)
Other, net	—		(1)		(1)
Effective income tax rate	19	%	18	%	20	%
SoCalGas:
U.S. federal statutory income tax rate	21	%	21	%	21	%
Depreciation	5		4		7
State income taxes, net of federal income tax benefit	2		4		2
Nondeductible expenditures	2		—		—
Unrecognized income tax benefits	—		—		4
Compensation-related items	—		—		1
Resolution of prior years’ income tax items	—		—		(1)
Excess deferred income taxes outside of ratemaking	—		(5)		—
Allowance for equity funds used during construction	(1)		(1)		(2)
Amortization of excess deferred income taxes	(1)		(1)		(2)
Self-developed software expenditures	(4)		(2)		(3)
Repairs expenditures	(7)		(4)		(7)
Other, net	(1)		—		(1)
Effective income tax rate	16	%	16	%	19	%

(1)    Related to operations in Mexico.

(2)    Due to fluctuation of the Mexican peso against the U.S. dollar. We record income tax expense (benefit) from the transactional effects of foreign currency and inflation because of appreciation (depreciation) of the Mexican peso. We also recognize gains (losses) in Other Income, Net, on the Consolidated Statements of Operations from foreign currency derivatives that are partially hedging Sempra Mexico parent’s exposure to movements in the Mexican peso from its controlling interest in IEnova.

In January 2019, our board of directors approved a plan to sell our South American businesses and we completed the sales in the second quarter of 2020, as we discuss in Note 5. Prior to this decision, our repatriation estimate excluded post-2017 earnings and other basis differences related to our South American businesses. Because of our decision to sell our South American businesses, we no longer assert indefinite reinvestment of these basis differences. Accordingly, we recorded the following income tax impacts from changes in outside basis differences in our discontinued operations in South America:

▪$89 million income tax benefit in 2019 primarily related to outside basis differences existing as of the January 25, 2019 approval of our plan to sell our South American businesses; and

▪$7 million income tax benefit in 2020 compared to $51 million income tax expense in 2019 related to changes in outside basis differences from earnings and foreign currency effects since January 25, 2019.

We expect to repatriate approximately $1.3 billion of foreign undistributed earnings in the foreseeable future, and have accrued $58 million of U.S. state deferred income tax liability as of December 31, 2020 for repatriations that we expect will begin in 2021 as cash is generated. We repatriated approximately $4.7 billion, $254 million and $338 million to the U.S. in 2020, 2019 and 2018, respectively.

We have not recorded deferred income taxes with respect to remaining basis differences of approximately $1.1 billion between financial statement and income tax investment amounts in our non-U.S. subsidiaries because we consider them to be indefinitely reinvested as of December 31, 2020. The remaining basis differences are calculated pursuant to U.S. federal tax law, which may differ from tax law in California and foreign jurisdictions. It is currently not practicable to determine the hypothetical amount of tax that might be payable if the underlying basis differences were realized.

The remeasurement of deferred income tax balances at SDG&E and SoCalGas in December 2017, as a result of the TCJA, resulted in excess deferred income taxes that previously had been collected from ratepayers at the higher rate. In a January 2019 decision, the CPUC directed certain excess deferred income tax balances generated by activities outside of ratemaking be allocated to shareholders rather than ratepayers. As a result, in 2019, SDG&E and SoCalGas recorded income tax benefits of $31 million and $38 million, respectively, from the release of a portion of the regulatory liability established in connection with 2017 tax reform for excess deferred income tax balances.

The table below presents the geographic components of pretax income.

PRETAX INCOME – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Years ended December 31,
	2020		2019		2018
By geographic components:
U.S.	$	1,461	$	1,191	$	(102)
Non-U.S.	322		573		580
Total(1)	$	1,783	$	1,764	$	478

(1)    See the Income Tax Expense (Benefit) and Effective Income Tax Rates table above for the calculation of pretax income.

U.S. pretax income was lower in 2018 compared to 2020 and 2019 due to the 2018 impairment of certain assets at Sempra LNG and Sempra Renewables (discussed in Notes 5 and 12), offset by the 2018 gain on the sale of assets at Sempra Renewables (discussed in Note 5).

The components of income tax expense are as follows.

INCOME TAX EXPENSE (BENEFIT)
(Dollars in millions)
	Years ended December 31,
	2020		2019		2018
Sempra Energy Consolidated:
Current:
U.S. federal	$	—	$	—	$	(1)
U.S. state	(22)		(14)		67
Non-U.S.	112		140		127
Total	90		126		193
Deferred:
U.S. federal	157		87		(121)
U.S. state	36		21		(183)
Non-U.S.	(34)		84		66
Total	159		192		(238)
Deferred investment tax credits	—		(3)		(4)
Total income tax expense (benefit)	$	249	$	315	$	(49)
SDG&E:
Current:
U.S. federal	$	121	$	35	$	104
U.S. state	34		31		30
Total	155		66		134
Deferred:
U.S. federal	11		75		17
U.S. state	25		32		24
Total	36		107		41
Deferred investment tax credits	(1)		(2)		(2)
Total income tax expense	$	190	$	171	$	173
SoCalGas:
Current:
U.S. federal	$	163	$	8	$	4
U.S. state	45		24		10
Total	208		32		14
Deferred:
U.S. federal	(85)		79		78
U.S. state	(28)		10		2
Total	(113)		89		80
Deferred investment tax credits	1		(1)		(2)
Total income tax expense	$	96	$	120	$	92

The tables below present the components of deferred income taxes:

DEFERRED INCOME TAXES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	December 31,
	2020		2019
Deferred income tax liabilities:
Differences in financial and tax bases of fixed assets, investments and other assets(1)	$	4,891	$	4,052
U.S. state and non-U.S. withholding tax on repatriation of foreign earnings	46		153
Regulatory balancing accounts	587		468
Right-of-use assets – operating leases	144		131
Property taxes	51		44
Other deferred income tax liabilities	40		93
Total deferred income tax liabilities	5,759		4,941
Deferred income tax assets:
Tax credits	1,161		1,136
Net operating losses	1,299		911
Postretirement benefits	162		200
Compensation-related items	169		161
Operating lease liabilities	125		131
Other deferred income tax assets	152		72
Accrued expenses not yet deductible	130		52
Deferred income tax assets before valuation allowances	3,198		2,663
Less: valuation allowances	174		144
Total deferred income tax assets	3,024		2,519
Net deferred income tax liability(2)	$	2,735	$	2,422

(1)    In addition to the financial over tax basis differences in fixed assets, the amount also includes financial over tax basis differences in various interests in partnerships and certain subsidiaries.

(2)    At December 31, 2020 and 2019, includes $136 million and $155 million, respectively, recorded as a noncurrent asset and $2,871 million and $2,577 million, respectively, recorded as a noncurrent liability on the Consolidated Balance Sheets.

DEFERRED INCOME TAXES – SDG&E AND SOCALGAS
(Dollars in millions)
	SDG&E				SoCalGas
	December 31,				December 31,
	2020		2019		2020		2019
Deferred income tax liabilities:
Differences in financial and tax bases of utility plant and other assets	$	1,833	$	1,735	$	1,322	$	1,246
Regulatory balancing accounts	224		141		362		327
Right-of-use assets – operating leases	28		32		21		22
Property taxes	34		30		17		14
Other	2		14		1		1
Total deferred income tax liabilities	2,121		1,952		1,723		1,610
Deferred income tax assets:
Tax credits	5		6		3		3
Postretirement benefits	14		37		123		120
Compensation-related items	12		6		36		25
Operating lease liabilities	28		32		21		22
Bad debt allowance	18		3		15		1
State income taxes	8		7		11		8
Accrued expenses not yet deductible	14		9		93		15
Other	3		4		15		13
Total deferred income tax assets	102		104		317		207
Net deferred income tax liability	$	2,019	$	1,848	$	1,406	$	1,403

The following table summarizes our unused NOLs and tax credit carryforwards.

NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
(Dollars in millions)
	Unused amount at December 31, 2020		Year expiration begins
Sempra Energy Consolidated:
U.S. federal:
NOLs(1)	$	5,284	2031
General business tax credits(1)	428		2032
Foreign tax credits(2)	694		2024
U.S. state(2):
NOLs	3,047		2021
General business tax credits	39		2021
Non-U.S.(2) – NOLs	126		2021

(1)    We have recorded deferred income tax benefits on these NOLs and tax credits, in total, because we currently believe they will be realized on a more-likely-than-not-basis.

(2)    We have not recorded deferred income tax benefits on a portion of these NOLs and tax credits because we currently believe they will not be realized on a more-likely-than-not-basis, as discussed below.

A valuation allowance is recorded when, based on more-likely-than-not criteria, negative evidence outweighs positive evidence with regard to our ability to realize a deferred income tax asset in the future. Of the valuation allowances recorded to date, the negative evidence outweighs the positive evidence primarily due to cumulative pretax losses in various U.S. state and non-U.S. jurisdictions resulting in deferred income tax assets that we currently do not believe will be realized on a more-likely-than-not basis. The following table provides the valuation allowances that we recorded against a portion of our total deferred income tax assets shown above in the “Deferred Income Taxes – Sempra Energy Consolidated” table.

VALUATION ALLOWANCES
(Dollars in millions)
	December 31,
	2020		2019
Sempra Energy Consolidated:
U.S. federal	$	118	$	90
U.S. state	32		33
Non-U.S.	24		21
	$	174	$	144

Following is a reconciliation of the changes in unrecognized income tax benefits and the potential effect on our ETR for the years ended December 31:

RECONCILIATION OF UNRECOGNIZED INCOME TAX BENEFITS
(Dollars in millions)
	2020		2019		2018
Sempra Energy Consolidated:
Balance at January 1	$	93	$	119	$	89
Increase in prior period tax positions	3		5		7
Decrease in prior period tax positions	(1)		—		(1)
Increase in current period tax positions	4		2		24
Settlements with taxing authorities	—		(32)		—
Expiration of statutes of limitations	—		(1)		—
Balance at December 31	$	99	$	93	$	119
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate(1)	$	(87)	$	(81)	$	(107)
increase the effective tax rate(1)	31		27		24
SDG&E:
Balance at January 1	$	12	$	11	$	10
Increase in prior period tax positions	1		1		1
Balance at December 31	$	13	$	12	$	11
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate(1)	$	(10)	$	(9)	$	(9)
increase the effective tax rate(1)	1		1		1
SoCalGas:
Balance at January 1	$	64	$	61	$	35
Increase in prior period tax positions	1		1		2
Increase in current period tax positions	3		2		24
Balance at December 31	$	68	$	64	$	61
Of December 31 balance, amounts related to tax positions that if recognized in future years would
decrease the effective tax rate(1)	$	(59)	$	(55)	$	(51)
increase the effective tax rate(1)	30		26		23

(1)    Includes temporary book and tax differences that are treated as flow-through for ratemaking purposes, as discussed above.

It is reasonably possible that within the next 12 months, unrecognized income tax benefits could decrease due to the following:

POSSIBLE DECREASES IN UNRECOGNIZED INCOME TAX BENEFITS WITHIN 12 MONTHS
(Dollars in millions)
	At December 31,
	2020		2019		2018
Sempra Energy Consolidated:
Expiration of statutes of limitations on tax assessments	$	—	$	—	$	(1)
Potential resolution of audit issues with various U.S. federal, state and local and non-U.S. taxing authorities	(8)		(8)		(40)
	$	(8)	$	(8)	$	(41)
SDG&E:
Potential resolution of audit issues with various U.S. federal, state and local taxing authorities	$	(6)	$	(6)	$	(6)
SoCalGas:
Potential resolution of audit issues with various U.S. federal, state and local taxing authorities	$	(2)	$	(2)	$	(2)

Amounts accrued for interest and penalties associated with unrecognized income tax benefits are included in Income Tax Expense on the Consolidated Statements of Operations. Sempra Energy Consolidated accrued negligible amounts and $1 million for

interest expense and penalties at December 31, 2020 and 2019, respectively, on the Consolidated Balance Sheets, and recorded $1 million of interest expense and penalties in 2018 and negligible amounts in each of 2020 and 2019 on the Consolidated Statements of Operations. SDG&E and SoCalGas each accrued negligible amounts for interest expense and penalties at December 31, 2020 and 2019 on the Consolidated Balance Sheets, and recorded negligible amounts of interest expense and penalties in each of 2020, 2019 and 2018 on the Consolidated Statements of Operations.

INCOME TAX AUDITS

Sempra Energy is subject to U.S. federal income tax as well as income tax of multiple state and non-U.S. jurisdictions. We remain subject to examination for U.S. federal tax years after 2016. We are subject to examination by major state tax jurisdictions for tax years after 2012. Certain major non-U.S. income tax returns for tax years 2013 through the present are open to examination. We are also open to examination for non-U.S. income tax returns related to our prior interest in our commodities business, which we divested in 2010, for years 1999 through 2010.

SDG&E and SoCalGas are subject to U.S. federal income tax and state income tax. They remain subject to examination for U.S. federal tax years after 2016 and state tax years after 2012.

In addition, Sempra Energy has filed protests to contest proposed state audit adjustments for tax years 2009 through 2012. The pre-2013 tax years for our major state tax jurisdictions are closed to new issues; therefore, no additional tax may be assessed by the taxing authorities for these tax years.