SOUTHERN CALIFORNIA GAS CO

We discuss herein SDG&E’s results of operations and significant changes in earnings, revenues and costs for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of SDG&E’s results of operations and significant changes in earnings, revenues and costs for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to “Part II – Item 7. MD&A – Results of Operations” in our 2022 annual report on Form 10-K filed with the SEC on February 28, 2023.

RESULTS OF OPERATIONS

(Dollars in millions)

In 2023 compared to 2022, the increase in SDG&E’s earnings of $21 million (2%) was primarily due to:

▪$40 million higher CPUC base operating margin, net of operating expenses and $24 million from lower authorized cost of capital

▪$21 million higher electric transmission margin

▪$18 million higher net regulatory interest income

▪$30 million higher net interest expense

▪$15 million lower income tax benefit from the resolution of prior year income tax items

▪$5 million Wildfire Fund accelerated amortization in 2023

Electric Revenues and Cost of Electric Fuel and Purchased Power

In 2023 compared to 2022, SDG&E’s electric revenues decreased by $446 million (9%) to $4.3 billion primarily due to:

▪$549 million lower cost of electric fuel and purchased power, which we discuss below

▪$197 million in 2023 from the recognition of investment tax credits from standalone energy storage projects, which are offset in income tax benefit (expense)

▪$97 million higher revenues from incremental and balanced capital projects

▪$92 million higher revenues associated with refundable programs, which are fully offset in O&M

▪$50 million higher revenues from transmission operations

▪$45 million higher CPUC-authorized revenues

In 2023 compared to 2022, SDG&E’s cost of electric fuel and purchased power decreased by $549 million to $445 million primarily due to:

▪$396 million lower purchased power from the California ISO due to lower customer demand from departing load now served by CCAs and lower market prices

▪$170 million lower purchased power due to higher excess capacity sales to third parties

▪$157 million lower utility-owned generation costs

▪$65 million higher realized gains on derivative contracts for fixed-price natural gas, which are entered into to hedge the cost of electric fuel, and GHG allowances

▪$259 million lower sales to the California ISO due to lower market prices

Natural Gas Revenues and Cost of Natural Gas

SDG&E’s average cost of natural gas per thousand cubic feet was $11.05 in 2023 and $8.01 in 2022. The average cost of natural gas sold at SDG&E is impacted by market prices, as well as transportation, tariff and other charges.

In 2023 compared to 2022, SDG&E’s natural gas revenues increased by $205 million (20%) to $1.2 billion primarily due to:

▪$169 million increase in cost of natural gas sold, which we discuss below

▪$32 million higher revenues from incremental and balanced capital projects

▪$29 million higher revenues associated with refundable programs, which are fully offset in O&M

▪$12 million higher CPUC-authorized revenues

▪$44 million lower regulatory revenues in 2023 from the election to change the tax accounting method under Revenue Procedure 2023-15, which are offset in income tax benefit (expense)

In 2023 compared to 2022, SDG&E’s cost of natural gas increased by $169 million (47%) to $532 million primarily due to:

▪$146 million higher average natural gas prices

▪$23 million higher volumes driven by weather

In 2023 compared to 2022, SDG&E’s O&M increased by $169 million (10%) to $1.8 billion primarily due to:

▪$121 million higher expenses associated with refundable programs, which costs incurred are recovered in revenue

▪$48 million higher non-refundable operating costs, including Wildfire Fund accelerated amortization in 2023

Other Income, Net

In 2023 compared to 2022, SDG&E’s other income, net, increased by $5 million (5%) to $97 million primarily due to:

▪$24 million higher net interest income on regulatory balancing accounts due to higher commercial paper rates

▪$8 million higher non-service components of net periodic benefit cost

In 2023 compared to 2022, SDG&E’s interest expense increased by $48 million (11%) to $497 million primarily from higher debt balances from debt issuances and higher interest rates.

SDG&E had an income tax benefit in 2023 compared to income tax expense in 2022 primarily due to lower pretax income and the following tax matters.

Under the IRA, in 2023, the scope of projects eligible for investment tax credits was expanded to include standalone energy storage projects. The IRA also provided an election that permits investment tax credits related to standalone energy storage projects to be returned to utility customers over a period that is shorter than the life of the applicable asset. Under this election, SDG&E recorded an income tax benefit of $142 million for these investment tax credits, offset by a regulatory liability, which reduced SDG&E’s ETR in 2023.

In April 2023, the IRS issued Revenue Procedure 2023-15, which provides a safe harbor method of accounting for gas repairs expenditures. SDG&E intends to elect this change in tax accounting method in Sempra’s consolidated 2023 income tax return filing and has recorded an estimated income tax benefit of $34 million in 2023. SDG&E recorded an associated regulatory liability for the portion of these benefits that will be flowed through to customers in the future.