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OTHER FINANCIAL DATA | 3 Months Ended
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Jun. 30, 2015
Notes to Consolidated Financial Statements [Abstract] |
Other Financial Data | NOTE 5. OTHER FINANCIAL DATA INVENTORIES The components of inventories by segment are as follows:
INVENTORY BALANCES
(Dollars in millions)
|  | Natural gas | Liquefied natural gas | Materials and supplies | Total
|  | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014
SDG&E | $ | 3 | $ | 8 | $ | ― | $ | ― | $ | 64 | $ | 65 | $ | 67 | $ | 73
SoCalGas |  | 29 |  | 155 |  | ― |  | ― |  | 28 |  | 26 |  | 57 |  | 181
Sempra South American |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Utilities |  | ― |  | ― |  | ― |  | ― |  | 35 |  | 33 |  | 35 |  | 33
Sempra Mexico |  | ― |  | ― |  | 10 |  | 9 |  | 9 |  | 9 |  | 19 |  | 18
Sempra Renewables |  | ― |  | ― |  | ― |  | ― |  | 2 |  | 2 |  | 2 |  | 2
Sempra Natural Gas |  | 81 |  | 83 |  | 4 |  | 5 |  | 1 |  | 1 |  | 86 |  | 89
Sempra Energy |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 113 | $ | 246 | $ | 14 | $ | 14 | $ | 139 | $ | 136 | $ | 266 | $ | 396
Temporary LIFO Liquidation SoCalGas value s natural gas inventory by the last-in first-out (LIFO) method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. Temporary LIFO liquidation represents the difference between the carrying value of natural gas inventory withdrawn during the period for delivery to customers and the projected cost of the replacement of that inventory during summer months. For interim periods, these dif ferences result in an asset or liability, which at June 30, 2015 is an asset recorded in Temporary LIFO Liquidation on SoCalGas’ Condensed Consolidated Balance Sheet and Other Current Assets on Sempra Energy’s Condensed Consolidated Balance Sheet. GOODWILL We discuss goodwill in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. The decrease in goodwill from $931 million at December 31, 2014 to $885 million at June 30, 2015 is due to foreign currency translation at Sempra South American Utilities. We record the offset of this fluctuation in Other Comprehensive Income (Loss). VARIABLE INTEREST ENTITIES (VIE) We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess the purpose and design of the VIE; the nature of the VIE’s risks and the risks we absorb; the power to direct activities that most significantly impact the economic performance of the VIE; and the obligation to absorb losses or right to receive benefits that could be significant to t he VIE. SDG&E Tolling Agreements SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power pla nt (i.e., tolling agreements). SDG&E’s obligation to absorb natural gas costs m ay be a significant variable interest. In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impact on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and pr ovide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the gener ating facility. We d etermine if SDG&E is the primary beneficiary in these cases based on a qualitative approach in which we consider the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, SDG&E and Sempra Energy consolidate the entity that owns the facility as a VIE, as we discuss below. Otay Mesa VIE SDG&E has a n agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-MW generating facility. In addition to tolling, the agreement provides SDG&E with the option to purchase the power plant at the end of the contract term in 2019, or upon e arlier termination of the purchased-power agreement, at a predetermined price subject to adjustments based on performance of the facility. If SDG&E does not exercise its option, under certain circumstances, it may be required to purchase the power plant at a predetermined price, which we refer to as the put option. The facility owner, Otay Mesa Energy Center LLC (OMEC LLC), is a VIE (Otay Mesa VIE), of which SDG&E is the primary beneficiary. SDG&E has no OMEC LLC voting rights, holds no equity in OMEC LLC and does not operate OMEC. In addition to the risks absorbed under the tolling agreement, SDG&E absorbs separately through the put option a significant portion of the risk that the value of Otay Mesa VIE could decline. Accordingly, SDG&E and Sempra Energy have consolidated Otay Mesa VIE. Otay Mesa VIE’s equity of $61 million at June 30, 2015 and $60 million at December 31, 2014 is included on the Condensed Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E. OMEC LLC has a loan outstanding of $320 million at June 30, 2015, the proceeds of which were used for the construction of OMEC. The loan is with third party lenders and is secured by OMEC’s property, plant and equipment. SDG&E is not a party to the loan agreement and does not have any additional implicit or explicit financial responsibility to OMEC LLC. The loan fully matures in April 2019 and bears interest at rates varying with market rates. In addition, OMEC LLC has entered into int erest rate swap agreements to moderate its exposure to interest rate changes. We provide additional information concerning the interest rate swaps in Note 7. The Condensed Consolidated Statements of Operations of Sempra Energy and SDG&E include the follow ing amounts associated with Otay Mesa VIE. The amounts are net of eliminations of transactions between SDG&E and Otay Mesa VIE. The captions in the table below generally correspond to SDG&E’s Condensed Consolidated Statements of Operations.
AMOUNTS ASSOCIATED WITH OTAY MESA VIE |  |  |  |
(Dollars in millions) |  |  |  |
| Three months ended June 30, | Six months ended June 30,
| 2015 | 2014 | 2015 | 2014
Operating expenses |  |  |  |  |  |  |  |
Cost of electric fuel and purchased power | $ | (21) | $ | (22) | $ | (39) | $ | (40)
Operation and maintenance |  | 6 |  | 5 |  | 10 |  | 10
Depreciation |  | 6 |  | 7 |  | 12 |  | 14
Total operating expenses |  | (9) |  | (10) |  | (17) |  | (16)
Operating income |  | 9 |  | 10 |  | 17 |  | 16
Interest expense |  | (5) |  | (4) |  | (9) |  | (8)
Income before income taxes/Net income |  | 4 |  | 6 |  | 8 |  | 8
Earnings attributable to noncontrolling interest |  | (4) |  | (6) |  | (8) |  | (8)
Earnings attributable to common shares | $ | ― | $ | ― | $ | ― | $ | ―
We provide additional information regarding Otay Mesa VIE in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. Sempra Natural Gas Cameron LNG JV Sempra Energy’s equity-method investment in Cameron LNG JV is considered to be a VIE generally due to contractual provisions that transfer certain risks to customers. Sempra Energy is not the primary beneficiary because we do not have the power to direct the most significant activities of Cameron LNG JV. We will continue to evaluate Ca meron LNG JV for any changes that may impact our determination of the primary beneficiary. The carrying value of our investment in Cameron LNG JV was $1,043 million and $1,007 million at June 30, 2015 and December 31, 2014, respectively. Our maximum exposu re to loss includes the carrying value of our investment and the guarantees discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. Other Variable Interest Entities SDG&E’s power procurement is subject to reliability req uirements that may require SDG&E to enter into various power purchase arrangements which include variable interests. SDG&E evaluates the respective entities to determine if variable interests exist and, based on the qualitative and quantitative analyses de scribed above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary. SDG&E has determined that no contracts, other than the one relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary at June 30, 2015. In additio n to the tolling agreements described above, other variable interests involve various elements of fuel and power costs, including certain construction costs, tax credits, and other components of cash flow expected to be paid to or received by our counterpa rties. In most of these cases, the expectation of variability is not substantial, and SDG&E generally does not have the power to direct activities that most significantly impact the economic performance of the other VIEs. If our ongoing evaluation of these VIEs were to conclude that SDG&E becomes the primary beneficiary and consolidation by SDG&E becomes necessary, the effects are not expected to significantly affect the financial position, results of operations, or liquidity of SDG&E. In addition, SDG&E is not exposed to losses or gains as a result of these other VIEs, because all such variability would be recovered in rates. Sempra Energy’s other operating units also enter into arrangements which could include variable interests. We evaluate these arrange ments and applicable entities based upon the qualitative and quantitative analyses described above. Certain of these entities are service companies that are VIEs. As the primary beneficiary of these service companies, we consolidate them; however, their financial statements are not material to the financial statements of Sempra Energy. In all other case s, we have determined that these contracts are not variable interests in a VIE and therefore are not subject to th e U.S. GAAP requirements concerning the consolidation of VIEs. PENSION AND OTHER POSTRETIREMENT BENEFITS Net Periodic Benefit Cost The following three tables provide the components of net periodic benefit cost:
NET PERIODIC BENEFIT COST – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
| Pension benefits | Other postretirement benefits
| Three months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 29 | $ | 26 | $ | 7 | $ | 6
Interest cost |  | 39 |  | 41 |  | 11 |  | 12
Expected return on assets |  | (44) |  | (43) |  | (17) |  | (16)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost (credit) |  | 2 |  | 3 |  | ― |  | (1)
Actuarial loss |  | 11 |  | 5 |  | ― |  | ―
Settlement |  | ― |  | 6 |  | ― |  | ―
Regulatory adjustment |  | (30) |  | ― |  | ― |  | ―
Total net periodic benefit cost | $ | 7 | $ | 38 | $ | 1 | $ | 1
| Six months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 59 | $ | 52 | $ | 14 | $ | 12
Interest cost |  | 78 |  | 82 |  | 23 |  | 24
Expected return on assets |  | (88) |  | (86) |  | (34) |  | (32)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost (credit) |  | 5 |  | 5 |  | (1) |  | (2)
Actuarial loss |  | 19 |  | 10 |  | ― |  | ―
Settlements |  | ― |  | 9 |  | ― |  | ―
Regulatory adjustment |  | (59) |  | (24) |  | ― |  | ―
Total net periodic benefit cost | $ | 14 | $ | 48 | $ | 2 | $ | 2
NET PERIODIC BENEFIT COST – SDG&E
(Dollars in millions)
| Pension benefits | Other postretirement benefits
| Three months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 8 | $ | 7 | $ | 2 | $ | 1
Interest cost |  | 10 |  | 11 |  | 2 |  | 2
Expected return on assets |  | (13) |  | (14) |  | (3) |  | (3)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost |  | 1 |  | 1 |  | 1 |  | 1
Actuarial loss |  | 2 |  | 1 |  | ― |  | ―
Settlements |  | ― |  | 2 |  | ― |  | ―
Regulatory adjustment |  | (7) |  | 6 |  | (2) |  | (1)
Total net periodic benefit cost | $ | 1 | $ | 14 | $ | ― | $ | ―
| Six months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 16 | $ | 15 | $ | 4 | $ | 3
Interest cost |  | 20 |  | 22 |  | 4 |  | 4
Expected return on assets |  | (27) |  | (28) |  | (6) |  | (6)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost |  | 1 |  | 1 |  | 2 |  | 2
Actuarial loss |  | 4 |  | 2 |  | ― |  | ―
Settlements |  | ― |  | 2 |  | ― |  | ―
Regulatory adjustment |  | (12) |  | 1 |  | (4) |  | (3)
Total net periodic benefit cost | $ | 2 | $ | 15 | $ | ― | $ | ―
NET PERIODIC BENEFIT COST – SOCALGAS
(Dollars in millions)
| Pension benefits | Other postretirement benefits
| Three months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 19 | $ | 16 | $ | 5 | $ | 4
Interest cost |  | 24 |  | 26 |  | 9 |  | 10
Expected return on assets |  | (27) |  | (26) |  | (14) |  | (13)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost (credit) |  | 2 |  | 2 |  | (2) |  | (2)
Actuarial loss |  | 6 |  | 2 |  | ― |  | ―
Regulatory adjustment |  | (23) |  | (6) |  | 2 |  | 1
Total net periodic benefit cost | $ | 1 | $ | 14 | $ | ― | $ | ―
| Six months ended June 30,
| 2015 | 2014 | 2015 | 2014
Service cost | $ | 38 | $ | 32 | $ | 10 | $ | 8
Interest cost |  | 49 |  | 51 |  | 18 |  | 19
Expected return on assets |  | (54) |  | (52) |  | (28) |  | (26)
Amortization of: |  |  |  |  |  |  |  |
Prior service cost (credit) |  | 4 |  | 4 |  | (4) |  | (4)
Actuarial loss |  | 11 |  | 4 |  | ― |  | ―
Regulatory adjustment |  | (47) |  | (25) |  | 4 |  | 3
Total net periodic benefit cost | $ | 1 | $ | 14 | $ | ― | $ | ―
Benefit Plan Contributions The following table shows our year-to-date contributions to pension and other postretirement benefit plans and the amounts w e expect to contribute in 20 15:
BENEFIT PLAN CONTRIBUTIONS
(Dollars in millions)
| Sempra Energy |  |
| Consolidated | SDG&E | SoCalGas
Contributions through June 30, 2015: |  |  |  |  |  |
Pension plans | $ | 17 | $ | 2 | $ | 1
Other postretirement benefit plans |  | 1 |  | ― |  | ―
Total expected contributions in 2015: |  |  |  |  |  |
Pension plans | $ | 36 | $ | 3 | $ | 7
Other postretirement benefit plans |  | 11 |  | 8 |  | ―
RABBI TRUST In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $483 m illion and $512 million at June 30, 2015 and December 31, 2014, respectively. EARN INGS PER SHARE The following table provides the per share computations for our earnings for the three months and six months ended June 30, 2015 and 2014. Basic earnings per common share (EPS) is calculated by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercise d or converted into common stock.
EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions, except per share amounts; shares in thousands)
|  | Three months ended June 30, |  | Six months ended June 30,
|  | 2015 | 2014 |  | 2015 | 2014
Numerator: |  |  |  |  |  |  |  |  |
Earnings/Income attributable to common shares | $ | 295 | $ | 269 |  | $ | 732 | $ | 516
Denominator: |  |  |  |  |  |  |  |  |
Weighted-average common shares |  |  |  |  |  |  |  |  |
| outstanding for basic EPS(1) |  | 248,108 |  | 245,688 |  |  | 247,916 |  | 245,484
Dilutive effect of stock options, restricted |  |  |  |  |  |  |  |  |
| stock awards and restricted stock units |  | 3,383 |  | 4,373 |  |  | 3,348 |  | 4,332
Weighted-average common shares |  |  |  |  |  |  |  |  |
| outstanding for diluted EPS |  | 251,491 |  | 250,061 |  |  | 251,264 |  | 249,816
Earnings per share: |  |  |  |  |  |  |  |  |
Basic | $ | 1.19 | $ | 1.10 |  | $ | 2.95 | $ | 2.10
Diluted |  | 1.17 |  | 1.08 |  |  | 2.91 |  | 2.07
(1) | Includes fully vested restricted stock units of 501 and 476 held in our Deferred Compensation Plan for the three months and six months ended June 30, 2015, respectively, and 221 and 202 for the three months and six months ended June 30, 2014, respectively. These fully vested restricted stock units are included in weighted-average common shares outstanding for basic EPS because there are no conditions under which the corresponding shares will not be issued.
The dilution from common stock options is based on the treasury stock method. Under this method, proceeds based on the exercise price plus unearned compensation and windfall tax benefits recognized, minus tax shortfalls recognized, are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits are tax deductions we would receive upon the assumed exercise of stock options in excess of the deferred income taxes we recorded related to the c ompensation expense on the stock options. Tax shortfalls occur when the assumed tax deductions are less than recorded deferred income taxes. The calculation of dilutive common stock equivalents excludes options for which the exercise price on common stock was greater than the average market price during the period (out-of-the-money options). We had no such antidilutive stock options outstanding for the three months or six months ended June 30, 2015 or 2014. For the three months and six months ended June 30, 201 5 and 2014, we had no stock options outstanding that were antidilutive because of the unearned compensation and windfall tax benefits included in the assumed proceeds u nder the treasury stock method. The dilution from unvested restricted stock awards (RSAs) and restricted stock units (RSUs) is also based on the treasury stock method. Proceeds equal to the unearned compensation and windfall tax benefits recognized, minus tax shortfalls recognized, related to the awards and units are assumed to be used to repurchase shares on the open market at the average market price for the period. The windfall tax benefits or tax shortfalls recognized are the difference between tax deductions we would receive upon the assumed vesting of RSAs or RSUs and the deferred in come taxes we recorded related to the compensation expense on such awards and units. There were no antidilutive RSAs and 4,715 antidilutive RSUs from the application of unearned compensation in the treasury stock method for the three months and six months ended June 30, 2015. There were no such antidilutive RSAs or RSUs for the three months or six months ended June 30, 2014. Our performance-based RSUs include awards that vest at the end of three-year (for awards granted in 2015) or four-year performance periods based on Sempra Energy’s total return to shareholders relative to that of specified market indices (Total Shareholder Return or TSR RSUs) or based on the compound annual growth rate of Sempra Energy’s EPS (EPS RSUs). The comparative market indices for the TSR RSUs are the Standard & Poor’s (S&P) 500 Utilities Index and the S&P 500 Index. Targets for our EPS RS Us were developed based on Sempra Energy’s long-term earnings-per-share growth guidance as well as analyst consensus long-term earnings-per-share growth estimates for S&P 500 Utilities Index peer companies. TSR RSUs represent the right to receive from zero to 1.5 shares (2.0 shares for awards granted during or after 2014) of Sempra Energy common stock if performance targets are met. EPS RSUs represent the right to receive from zero to 2.0 shares of Sempra Energy common stock if performance targets are met. If performance falls between the targets specified for each performance metric, we calculate the payout using linear interpolation. Participants also receive additional shares for dividend equivalents on shares subject to RSUs, which are deemed reinvested to purchase additional units that become subject to the same vesting conditions as the RSUs to which the dividends relate. Our RSAs, which are solely service-based, and those RSUs that are service-based or issued in connection with certain other performance goals represent the right to receive up to 1.0 share if the service requirements or certain other vesting conditions are met. These RSAs and RSUs have the same dividend equivalent rights as the performance-based RSUs described above. We include RSAs and these RSUs in potential dilutive shares at 100 percent, subject to the application of the treasury stock method. We includ e our TSR RSUs and EPS RSUs in potential dilutive shares at zero to up to 200 percent to the extent that they currently meet the performance requirements for vesting, subject to the application of the treasury stock method. Due to market fluctuations of bo th Sempra Energy stock and the comparative indices, dilutive TSR RSU shares may vary widely from period-to-period. If it were assumed that performance goals for all performance-based RSUs were met at maximum levels and if the treasury stock method were not applied to any of our RSAs or RSUs, the incremental potential dilutive shares would be 1,370,460 and 1,424,855 for the three months and six months ended June 30, 2015, respectively, and 1,137,593 and 1,206,873 for the three months and six months ended June 30, 201 4, re spectively. SHARE-BASED COMPENSATION We discuss our share-based compensation plans in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. We recorded share-based compensation expense, net of income taxes, of $7 million for each of the three-month periods ended June 30, 2015 and 2014, and $15 million and $14 million for the six-month periods ended June 30, 2015 and 2014, respectively. Pursuant to our Sempra Energy share-based compensation plans, Sempra Energy’s compensation committee granted 30 1,3 19 TSR RSUs, 76,675 EPS RSUs and 133,159 RSUs issued either as service-based awards or in connection with certain other performance goals during the six months ended June 30, 2015, primarily in January. During the six months ended June 30, 2015, IEnova iss ued 148,781 RSUs from the IEnova 2013 Long-Term Incentive Plan, under which awards are cash settled at vesting based on the price of IEnova common stock. CAPITALIZED FINANCING COSTS Capitalized financing costs include capitalized interest costs and, primarily at the California Utilities, an allowance for funds used during construction (AFUDC) related to both debt and equity financing of construction projects. Pipeline projects currently under construction by Sempra Mexico and Sempra Natural Gas that are both subject to certain regulation and meet U.S. GAAP regulatory accounting requirements record the impact of AFUDC related to equity. Sempra Interna tional’s and Sempra U.S. Gas & Power’s businesses capitalize interest costs incurred to finance capital projects and interest on equity method investments that have not commenced planned principal operations. The California Utilities also capitalize certain in terest costs. The following table shows capitalized financing costs for the three months and six months ended June 30, 2015 and 2014.
CAPITALIZED FINANCING COSTS |  |  |  |
(Dollars in millions) |  |  |  |
|  | Three months ended June 30, | Six months ended June 30,
|  | 2015 | 2014 | 2015 | 2014
Sempra Energy Consolidated: |  |  |  |  |  |  |  |
AFUDC related to debt | $ | 7 | $ | 4 | $ | 13 | $ | 10
AFUDC related to equity |  | 31 |  | 24 |  | 58 |  | 49
Other capitalized financing costs |  | 17 |  | 8 |  | 34 |  | 16
Total Sempra Energy Consolidated | $ | 55 | $ | 36 | $ | 105 | $ | 75
SDG&E: |  |  |  |  |  |  |  |
AFUDC related to debt | $ | 4 | $ | 3 | $ | 7 | $ | 7
AFUDC related to equity |  | 10 |  | 7 |  | 18 |  | 18
Total SDG&E | $ | 14 | $ | 10 | $ | 25 | $ | 25
SoCalGas: |  |  |  |  |  |  |  |
AFUDC related to debt | $ | 3 | $ | 1 | $ | 6 | $ | 3
AFUDC related to equity |  | 10 |  | 6 |  | 19 |  | 11
Total SoCalGas | $ | 13 | $ | 7 | $ | 25 | $ | 14
COMPREHENSIVE INCOME The following tables present the changes in Accumulated Other Comprehensive Income (Loss) (AOCI) by component and amounts reclassified out of AOCI to net income, excluding amounts attributable to noncontrolling interests:
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
|  |  |  | Pension and other |  |  |  |
|  |  |  | postretirement benefits |  |  |  |
|  | Foreign |  |  |  |  |  | Total
|  | currency | Unamortized | Unamortized |  | accumulated other
|  | translation | net actuarial | prior service | Financial | comprehensive
|  | adjustments | gain (loss) | cost | instruments | income (loss)
|  | Three months ended June 30, 2015 and 2014
2015: |  |  |  |  |  |  |  |  |  |
Balance as of March 31, 2015 | $ | (384) | $ | (82) | $ | (2) | $ | (145) | $ | (613)
Other comprehensive (loss) income before |  |  |  |  |  |  |  |  |  |
reclassifications |  | (43) |  | ― |  | ― |  | 57 |  | 14
Amounts reclassified from accumulated other |  |  |  |  |  |  |  |  |  |
comprehensive income |  | ― |  | 1 |  | ― |  | 2 |  | 3
Net other comprehensive (loss) income |  | (43) |  | 1 |  | ― |  | 59 |  | 17
Balance as of June 30, 2015 | $ | (427) | $ | (81) | $ | (2) | $ | (86) | $ | (596)
2014: |  |  |  |  |  |  |  |  |  |
Balance as of March 31, 2014 | $ | (172) | $ | (70) | $ | ― | $ | (31) | $ | (273)
Other comprehensive income (loss) before |  |  |  |  |  |  |  |  |  |
reclassifications |  | 2 |  | ― |  | ― |  | (12) |  | (10)
Amounts reclassified from accumulated other |  |  |  |  |  |  |  |  |  |
comprehensive income |  | ― |  | 5 |  | ― |  | 5 |  | 10
Net other comprehensive income (loss) |  | 2 |  | 5 |  | ― |  | (7) |  | ―
Balance as of June 30, 2014 | $ | (170) | $ | (65) | $ | ― | $ | (38) | $ | (273)
|  | Six months ended June 30, 2015 and 2014
2015: |  |  |  |  |  |  |  |  |  |
Balance as of December 31, 2014 | $ | (322) | $ | (83) | $ | (2) | $ | (90) | $ | (497)
Other comprehensive (loss) income before |  |  |  |  |  |  |  |  |  |
reclassifications |  | (105) |  | ― |  | ― |  | 3 |  | (102)
Amounts reclassified from accumulated other |  |  |  |  |  |  |  |  |  |
comprehensive income |  | ― |  | 2 |  | ― |  | 1 |  | 3
Net other comprehensive (loss) income |  | (105) |  | 2 |  | ― |  | 4 |  | (99)
Balance as of June 30, 2015 | $ | (427) | $ | (81) | $ | (2) | $ | (86) | $ | (596)
2014: |  |  |  |  |  |  |  |  |  |
Balance as of December 31, 2013 | $ | (129) | $ | (73) | $ | ― | $ | (26) | $ | (228)
Other comprehensive loss before |  |  |  |  |  |  |  |  |  |
reclassifications |  | (41) |  | ― |  | ― |  | (26) |  | (67)
Amounts reclassified from accumulated other |  |  |  |  |  |  |  |  |  |
comprehensive income |  | ― |  | 8 |  | ― |  | 14 |  | 22
Net other comprehensive (loss) income |  | (41) |  | 8 |  | ― |  | (12) |  | (45)
Balance as of June 30, 2014 | $ | (170) | $ | (65) | $ | ― | $ | (38) | $ | (273)
(1) | All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT(1)
SAN DIEGO GAS & ELECTRIC COMPANY
(Dollars in millions)
|  | Pension and other |  |  |
|  | postretirement benefits |  |  |
|  |  |  |  |  | Total
|  | Unamortized | Unamortized |  | accumulated other
|  | net actuarial | prior service |  | comprehensive
|  | gain (loss) | credit |  | income (loss)
|  | Three months ended June 30, 2015 and 2014
2015: |  |  |  |  |  |  |
Balance as of March 31, and June 30, 2015 | $ | (13) | $ | 1 |  | $ | (12)
2014: |  |  |  |  |  |  |
Balance as of March 31, 2014 | $ | (10) | $ | 1 |  | $ | (9)
Amounts reclassified from accumulated other |  |  |  |  |  |  |
comprehensive income |  | 1 |  | ― |  |  | 1
Net other comprehensive income |  | 1 |  | ― |  |  | 1
Balance as of June 30, 2014 | $ | (9) | $ | 1 |  | $ | (8)
|  | Six months ended June 30, 2015 and 2014
2015: |  |  |  |  |  |  |
Balance as of December 31, 2014 and June 30, 2015 | $ | (13) | $ | 1 |  | $ | (12)
2014: |  |  |  |  |  |  |
Balance as of December 31, 2013 | $ | (10) | $ | 1 |  | $ | (9)
Amounts reclassified from accumulated other |  |  |  |  |  |  |
comprehensive income |  | 1 |  | ― |  |  | 1
Net other comprehensive income |  | 1 |  | ― |  |  | 1
Balance as of June 30, 2014 | $ | (9) | $ | 1 |  | $ | (8)
(1) | All amounts are net of income tax, if subject to tax, and exclude noncontrolling interests.
RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated | Amounts reclassified |  |
other comprehensive income (loss) | from accumulated other |  | Affected line item on Condensed
components | comprehensive income (loss) |  | Consolidated Statements of Operations
|  |  | Three months ended June 30, |  |  |  |  |
|  |  | 2015 |  | 2014 |  |  |  |  |
Sempra Energy Consolidated: |  |  |  |  |  |  |  |  |  |
Financial instruments: |  |  |  |  |  |  |  |  |  |
Interest rate and foreign exchange instruments | $ | 3 |  | $ | 6 |  | Interest Expense
Interest rate instruments |  | 3 |  |  | 2 |  | Equity Earnings, Before Income Tax
Total before income tax |  | 6 |  |  | 8 |  |
|  |  |  | (1) |  |  | (1) |  | Income Tax Expense
Net of income tax |  | 5 |  |  | 7 |  |
|  |  |  | (3) |  |  | (2) |  | Earnings Attributable to Noncontrolling Interests
|  |  | $ | 2 |  | $ | 5 |  |  |  |  |
Pension and other postretirement benefits: |  |  |  |  |  |  |  |  |  |
Amortization of actuarial loss | $ | 2 |  | $ | 8 |  | See note (1) below
|  |  |  | (1) |  |  | (3) |  | Income Tax Expense
Net of income tax | $ | 1 |  | $ | 5 |  |
Total reclassifications for the period, net of tax | $ | 3 |  | $ | 10 |  |  |  |  |
SDG&E: |  |  |  |  |  |  |  |  |  |
Financial instruments: |  |  |  |  |  |  |  |  |  |
Interest rate instruments | $ | 3 |  | $ | 2 |  | Interest Expense
|  |  |  | (3) |  |  | (2) |  | Earnings Attributable to Noncontrolling Interest
| $ | ― |  | $ | ― |  |  |  |  |
Pension and other postretirement benefits: |  |  |  |  |  |  |  |  |  |
Amortization of actuarial loss | $ | ― |  | $ | 2 |  | See note (1) below
|  |  |  | ― |  |  | (1) |  | Income Tax Expense
Net of income tax | $ | ― |  | $ | 1 |  |
Total reclassifications for the period, net of tax | $ | ― |  | $ | 1 |  |  |  |  |
(1) | Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).
RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Details about accumulated | Amount reclassified |  |
other comprehensive income (loss) | from accumulated other |  | Affected line item on Condensed
components | comprehensive income (loss) |  | Consolidated Statements of Operations
|  |  | Six months ended June 30, |  |  |  |  |
|  |  | 2015 | 2014 |  |  |  |  |
Sempra Energy Consolidated: |  |  |  |  |  |  |  |  |
Financial instruments: |  |  |  |  |  |  |  |  |
Interest rate and foreign exchange instruments | $ | 9 | $ | 9 |  | Interest Expense
Interest rate instruments |  | ― |  | 2 |  | Gain on Sale of Equity Interest and Assets
Interest rate instruments |  | 6 |  | 5 |  | Equity Earnings, Before Income Tax
Commodity contracts not subject to |  |  |  |  |  | Revenues: Energy-Related
| rate recovery |  | (7) |  | 10 |  | Businesses
Total before income tax |  | 8 |  | 26 |  |
|  |  |  | ― |  | (7) |  | Income Tax Expense
Net of income tax |  | 8 |  | 19 |  |
|  |  |  | (7) |  | (5) |  | Earnings Attributable to Noncontrolling Interests
|  |  | $ | 1 | $ | 14 |  |  |  |  |
Pension and other postretirement benefits: |  |  |  |  |  |  |  |  |
Amortization of actuarial loss | $ | 4 | $ | 13 |  | See note (1) below
|  |  |  | (2) |  | (5) |  | Income Tax Expense
Net of income tax | $ | 2 | $ | 8 |  |
Total reclassifications for the period, net of tax | $ | 3 | $ | 22 |  |  |  |  |
SDG&E: |  |  |  |  |  |  |  |  |
Financial instruments: |  |  |  |  |  |  |  |  |
Interest rate instruments | $ | 6 | $ | 5 |  | Interest Expense
|  |  |  | (6) |  | (5) |  | Earnings Attributable to Noncontrolling Interest
|  |  | $ | ― | $ | ― |  |  |  |  |
Pension and other postretirement benefits: |  |  |  |  |  |  |  |  |
Amortization of actuarial loss | $ | ― | $ | 2 |  | See note (1) below
|  |  |  | ― |  | (1) |  | Income Tax Expense
Net of income tax | $ | ― | $ | 1 |  |
Total reclassifications for the period, net of tax | $ | ― | $ | 1 |  |  |  |  |
(1) | Amounts are included in the computation of net periodic benefit cost (see "Pension and Other Postretirement Benefits" above).
For the three months and six months ended June 30, 2015 and 2014, Other Comprehensive Income, excluding amounts attributable to noncontrolling interests, at SoCalGas was negligible, and reclassifications out of Accumulated Other Comprehensive Inc ome (Loss) to Net Income were also negligible for SoCalGas. SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS The following tables provide reconciliations of changes in Sempra Energy’s, SDG&E’s and SoCalGas’ shareholders’ equity and noncontrolling interests for the six months ended June 30, 2015 an d 2014.
SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS ― SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
|  |  | Sempra Energy |  | Non- |  |
|  |  | shareholders’ |  | controlling |  | Total
|  |  | equity |  | interests |  | equity
Balance at December 31, 2014 | $ | 11,326 | $ | 774 | $ | 12,100
Comprehensive income |  | 634 |  | 33 |  | 667
Preferred dividends of subsidiary |  | (1) |  | ― |  | (1)
Share-based compensation expense |  | 26 |  | ― |  | 26
Common stock dividends declared |  | (347) |  | ― |  | (347)
Issuance of common stock |  | 59 |  | ― |  | 59
Repurchase of common stock |  | (66) |  | ― |  | (66)
Tax benefit related to share-based compensation |  | 52 |  | ― |  | 52
Equity contributed by noncontrolling interest |  | ― |  | 1 |  | 1
Distributions to noncontrolling interests |  | ― |  | (16) |  | (16)
Balance at June 30, 2015 | $ | 11,683 | $ | 792 | $ | 12,475
Balance at December 31, 2013 | $ | 11,008 | $ | 842 | $ | 11,850
Comprehensive income |  | 472 |  | 39 |  | 511
Preferred dividends of subsidiary |  | (1) |  | ― |  | (1)
Share-based compensation expense |  | 21 |  | ― |  | 21
Common stock dividends declared |  | (324) |  | ― |  | (324)
Issuance of common stock |  | 42 |  | ― |  | 42
Repurchase of common stock |  | (37) |  | ― |  | (37)
Tax benefit related to share-based compensation |  | 13 |  | ― |  | 13
Equity contributed by noncontrolling interest |  | ― |  | 1 |  | 1
Distributions to noncontrolling interests |  | ― |  | (25) |  | (25)
Balance at June 30, 2014 | $ | 11,194 | $ | 857 | $ | 12,051
SHAREHOLDER'S EQUITY AND NONCONTROLLING INTEREST ― SDG&E
(Dollars in millions)
|  | SDG&E |  | Non- |  |
|  | shareholder’s |  | controlling |  | Total
|  | equity |  | interest |  | equity
Balance at December 31, 2014 | $ | 4,932 | $ | 60 | $ | 4,992
Comprehensive income |  | 273 |  | 9 |  | 282
Distributions to noncontrolling interest |  | ― |  | (8) |  | (8)
Balance at June 30, 2015 | $ | 5,205 | $ | 61 | $ | 5,266
Balance at December 31, 2013 | $ | 4,628 | $ | 91 | $ | 4,719
Comprehensive income |  | 223 |  | 7 |  | 230
Distributions to noncontrolling interest |  | ― |  | (13) |  | (13)
Balance at June 30, 2014 | $ | 4,851 | $ | 85 | $ | 4,936
SHAREHOLDERS' EQUITY ― SOCALGAS
(Dollars in millions)
|  | SoCalGas
|  | shareholders'
|  | equity
Balance at December 31, 2014 | $ | 2,781
Comprehensive income |  | 285
Preferred stock dividends declared |  | (1)
Balance at June 30, 2015 | $ | 3,065
Balance at December 31, 2013 | $ | 2,549
Comprehensive income |  | 159
Preferred stock dividends declared |  | (1)
Balance at June 30, 2014 | $ | 2,707
Ownership interests that are held by owners other than Sempra Energy and SDG&E in subsidiaries or entities consolidated by them are accounted for and reported as noncontrolling interests. As a result, noncontrolling interests are reported as a separate component of equity on the Condensed Consolidated Balance Sheets. Earnings or losses attributable to noncontrolling interests are separately identified on the Condensed Consolidated Statements of Operations, and compre hensive income or loss attributable to noncontrolling interests is separately identified on the Condensed Consolidated Statements of Comprehensive Income. Preferred Stock At Sempra Energy, the preferred stock of SoCalGas is presented as a noncontrolling interest and preferred stock dividends are charges against income related to noncontrolling interests. We provide additional information concerning preferred stock in Note 11 of the Notes to Consolidated Financial Statements in the Annual Report. Other Noncontrolling Interests At June 3 0, 2015 and December 31, 2014, we reported the following noncontrolling ownership interests held by others (not including preferred shareholders) recorded in Other Noncontrolling Interests in Total Equity on Sempra Energy’s Condensed Consolidated Balance S heets:
OTHER NONCONTROLLING INTERESTS
(Dollars in millions) |  |
|  | Percent ownership held by others |  |  |  |  |
|  | June 30, |  | December 31, |  |  | June 30, |  | December 31,
|  | 2015 |  | 2014 |  |  | 2015 |  | 2014
SDG&E: |  |  |  |  |  |  |  |
Otay Mesa VIE | 100 | % | 100 | % | $ | 61 | $ | 60
Sempra South American Utilities: |  |  |  |  |  |  |  |
Chilquinta Energía subsidiaries(1) | 23.5 – 43.4 |  | 23.6 – 43.4 |  |  | 22 |  | 23
Luz del Sur | 16.4 |  | 16.4 |  |  | 171 |  | 177
Tecsur | 9.8 |  | 9.8 |  |  | 3 |  | 4
Sempra Mexico: |  |  |  |  |  |  |  |
IEnova, S.A.B. de C.V. | 18.9 |  | 18.9 |  |  | 476 |  | 452
Sempra Natural Gas: |  |  |  |  |  |  |  |
Bay Gas Storage Company, Ltd. | 9.1 |  | 9.1 |  |  | 24 |  | 23
Liberty Gas Storage, LLC | 25.0 |  | 25.0 |  |  | 14 |  | 14
Southern Gas Transmission Company | 49.0 |  | 49.0 |  |  | 1 |  | 1
Total Sempra Energy |  |  |  |  | $ | 772 | $ | 754
(1) | Chilquinta Energía has four subsidiaries with noncontrolling interests held by others. Percentage range reflects the highest and lowest ownership percentages amongst these subsidiaries.
TRANSACTIONS WITH AFFILIATES Current and noncurrent amounts due from unconsolidated affiliates on the Sempra Energy Condensed Consolidated Balance Sheets are as follows:
DUE FROM UNCONSOLIDATED AFFILIATES(1)
(Dollars in millions)
|  |  | June 30, 2015 |  | December 31, 2014
Sempra South American Utilities: |  |  |  |
Eletrans S.A.: |  |  |  |
4% Note(2) | $ | 61 | $ | 41
Sempra Mexico: |  |  |  |
Affiliates of joint venture with PEMEX: |  |  |  |
Note due November 13, 2017(3)(4) |  | 3 |  | 44
Note due November 14, 2018(3) |  | 41 |  | 40
Note due November 14, 2018(3) |  | 33 |  | 33
Note due November 14, 2018(3) |  | 8 |  | 8
Energía Sierra Juárez: |  |  |  |
Note due June 15, 2018(5) |  | 23 |  | 22
Other(6) |  | 4 |  | 38
Total | $ | 173 | $ | 226
(1) | Amounts include principal balances plus accumulated interest outstanding.
(2) | U.S. dollar-denominated loan, at a fixed interest rate with no stated maturity date, to provide project financing for the construction of transmission lines at Eletrans S.A., an affiliate of Chilquinta Energía.
(3) | U.S. dollar-denominated loan, at a variable interest rate based on a 30-day LIBOR plus 450 basis points (4.68 percent at June 30, 2015), to finance the Los Ramones Norte pipeline project.
(4) | In May 2015, approximately $41 million was paid with proceeds from project financing at the joint venture.
(5) | U.S. dollar-denominated loan, at a variable interest rate based on a 30-day LIBOR plus 637.5 basis points (6.56 percent at June 30, 2015), to finance the first phase of the Energía Sierra Juárez wind project.
(6) | Amounts represent accounts receivable from various Sempra Renewables and Sempra Mexico joint venture investments.
Service Agreements Sempra Energy, SDG&E and SoCalGas provide certain services to each other and are charged an allocable share of the cost of such services. Also, from time-to-time, SDG&E and SoCalGas may loan surplus cash to Sempra Energ y at interest rates based on one-month commercial paper rates. Amounts due to/from affiliates are as follows:
AMOUNTS DUE TO AND FROM AFFILIATES AT SDG&E AND SOCALGAS
(Dollars in millions)
|  | June 30, 2015 |  | December 31, 2014
SDG&E: |  |  |  |  |
Current: |  |  |  |  |
Due from various affiliates | $ | 1 |  | $ | 1
Due to Sempra Energy | $ | 7 |  | $ | 17
Due to SoCalGas |  | ― |  |  | 4
| $ | 7 |  | $ | 21
Income taxes due from Sempra Energy(1) | $ | 97 |  | $ | 16
SoCalGas: |  |  |  |  |
Current: |  |  |  |  |
Due from Sempra Energy(2) | $ | 273 |  | $ | ―
Due from SDG&E |  | ― |  |  | 4
|  | $ | 273 |  | $ | 4
Due to Sempra Energy | $ | ― |  | $ | 13
Income taxes due (to) from Sempra Energy(1) | $ | (19) |  | $ | 9
(1) | SDG&E and SoCalGas are included in the consolidated income tax return of Sempra Energy and are allocated income tax expense from Sempra Energy in an amount equal to that which would result from each company having always filed a separate return.
(2) | Net receivable includes a loan to Sempra Energy of $279 million at June 30, 2015 at an interest rate of 0.08 percent.
Revenues from unconsolidated affiliates at SDG&E and SoCalGas are as follows:
REVENUES FROM UNCONSOLIDATED AFFILIATES AT SDG&E AND SOCALGAS |  |  |  |
(Dollars in millions) |  |  |  |
| Three months ended June 30, | Six months ended June 30,
| 2015 | 2014 | 2015 |  | 2014
SDG&E | $ | 2 | $ | 3 | $ | 5 | $ | 6
SoCalGas |  | 17 |  | 16 |  | 36 |  | 34
OTHER INCOME, NET Other Income, N et on the Condensed Consolidated Statements of O perations consists of the following:
OTHER INCOME, NET |  |  |  |  |  |
(Dollars in millions) |  |  |  |  |  |
|  | Three months ended June 30, | Six months ended June 30,
|  |  | 2015 |  | 2014 |  | 2015 |  | 2014
Sempra Energy Consolidated: |  |  |  |  |  |  |  |
Allowance for equity funds used during construction | $ | 31 | $ | 24 | $ | 58 | $ | 49
Investment (losses) gains(1) |  | (2) |  | 15 |  | 7 |  | 23
(Losses) gains on interest rate and foreign exchange instruments, net |  | (3) |  | 11 |  | (3) |  | 16
Electrical infrastructure relocation income(2) |  | 4 |  | 3 |  | 4 |  | 3
Regulatory interest, net(3) |  | 1 |  | 2 |  | 2 |  | 3
Foreign currency (losses) gains |  | (2) |  | 1 |  | (3) |  | 1
Sundry, net |  | 8 |  | (7) |  | 11 |  | (6)
Total | $ | 37 | $ | 49 | $ | 76 | $ | 89
SDG&E: |  |  |  |  |  |  |  |
Allowance for equity funds used during construction | $ | 10 | $ | 7 | $ | 18 | $ | 18
Regulatory interest, net(3) |  | 1 |  | 2 |  | 2 |  | 3
Sundry, net |  | (2) |  | (2) |  | (2) |  | (1)
Total | $ | 9 | $ | 7 | $ | 18 | $ | 20
SoCalGas: |  |  |  |  |  |  |  |
Allowance for equity funds used during construction | $ | 10 | $ | 6 | $ | 19 | $ | 11
Sundry, net |  | (1) |  | (3) |  | (2) |  | (4)
Total | $ | 9 | $ | 3 | $ | 17 | $ | 7
(1) | Represents investment (losses) gains on dedicated assets in support of our executive retirement and deferred compensation plans. These amounts are partially offset by corresponding changes in compensation expense related to the plans.
(2) | Income at Luz del Sur associated with the relocation of electrical infrastructure.
(3) | Interest on regulatory balancing accounts.
INCOME TAXES
INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
|  |  |  |  | Effective |  |  |  |  | Effective |
|  |  | Income tax |  | income |  |  | Income tax |  | income |
|  |  | expense |  | tax rate |  |  | expense |  | tax rate |
|  |  | Three months ended June 30,
|  |  | 2015 | 2014
Sempra Energy Consolidated | $ | 98 |  | 25 | % | $ | 93 |  | 25 | %
SDG&E |  | 54 |  | 29 |  |  | 69 |  | 35 |
SoCalGas |  | 16 |  | 18 |  |  | 28 |  | 26 |
|  |  | Six months ended June 30,
|  |  | 2015 | 2014
Sempra Energy Consolidated | $ | 261 |  | 26 | % | $ | 220 |  | 29 | %
SDG&E |  | 142 |  | 34 |  |  | 152 |  | 40 |
SoCalGas |  | 111 |  | 28 |  |  | 66 |  | 29 |
Changes in Income Tax Expense and Effective Income Tax Rates Sempra Energy Consolidated The increase in income tax expense in the three months ended June 30, 2015 was mainly due to higher pretax income. The increase in income tax expense in the six months ended June 30, 2015 was mainly due to higher pretax income, offset by a lower effective income tax rate. The lower effective income tax rate was primarily due to: a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in the San Onofre Nuclear Generating Station (SONGS) that we discuss in Note 9; and favorable resolution of prior years’ income tax items in 2015. Sempra Energy, SDG&E and SoCalGas record income taxes for interim periods utilizing a foreca sted effective tax rate anticipated for the full year, as required by U.S. GAAP. The income tax effect of items that can be reliably forecasted are factored into the forecasted effective tax rate and their impact is recognized proportionately over the year. The forecasted items, anticipated on a full year basis, may include, among others: utility self-developed software expenditures repairs to certain utility plant assets renewable energy income tax credits deferred income tax benefits related to renewabl e energy projects exclusions from taxable income of the equity portion of AFUDC depreciation on a certain portion of utility plant assets U.S. tax on repatriation of current year earnings from non-U.S. subsidiaries Items that cannot be reliably forecast ed (e.g., adjustments related to prior years’ income tax items, remeasurement of deferred tax asset valuation allowances, Mexican currency translation and inflation adjustments, and deferred income tax benefit associated with the impairment of a book inves tment) are recorded in the interim period in which they actually occur, which can result in variability to income tax expense. SDG&E The decrease in SDG&E’s income tax expense in the three months ended June 30, 2015 was due to lower pretax income and a low er effective income tax rate, which was primarily from the favorable resolution of prior years’ income tax items in 2015. The decrease in SDG&E’s income tax expense in the six months ended June 30, 2015 was due to a lower effective income tax rate, offset by higher pretax income. The lower effective income tax rate was primarily due to: a $17 million charge in 2014 to reduce certain tax regulatory assets attributed to SDG&E’s investment in SONGS that we discuss in Note 9; and favorable resolution of prior years’ income tax items in 2015. The results for Sempra Energy Consolidated and SDG&E include Otay Mesa VIE, which is not included in Sempra Energy’s federal or state income tax returns but is consolidated for financial statement purposes, and therefore, Sempra Energy Consolidated’s and SDG&E’s effective income tax rates are impacted by the VIE’s stand-alone effective income tax rate. We discuss Otay Mesa VIE above in “Variable Interest Entities.” SoCalGas The decrease in SoCalGas’ income tax expense in th e three months ended June 30, 2015 was due to lower pretax income and a lower effective income tax rate. The lower pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10. The lower effective income tax rate was primarily due to: favorable resolution of prio r years’ income tax items in 2015; higher exclusions from taxable income of the equity portion of AFUDC; and higher favorable impact of deductions for self-developed software expenditures. The increase in SoCalGas’ income tax expense in the six months ende d June 30, 2015 was mainl y due to higher pretax income, offset by a lower effective income tax rate. The h igher pretax income was primarily due to recognizing core gas authorized revenue during interim periods based on seasonal factors beginning January 1, 2015 in accordance with the TCAP, compared to recognizing such revenue ratably over the year in 2014. We discuss the impact of the TCAP decision further in Note 10. The lower effective incom e tax rate was primarily due to the favorable resolution of prior years’ income tax items in 2015. 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 fin ancial 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 current effective income tax rate. As a result, changes in the relative size of these items compared to pretax income, from period to period, can cause variations in the effective income tax rate. The following items are subject to flow-through treatment: repairs expenditures related to a certain portion of utility plant assets the equity portion of AFUDC a portion of the cost of removal of utility plant assets utility self-developed software expe nditures depreciation on a certain portion of utility plant assets The AFUDC related to equity recorded for regulated construction projects at Sempra Mexico and Sempra Natural Gas has similar flow-through treatment. We provide additional information about our accounting for income taxes in Notes 1 and 6 of the Notes to Consolidated Financial Statements in the Annual Report.

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