DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No. )

 

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  LOGO   Definitive Proxy Statement
   
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  LOGO   Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

SEMPRA ENERGY

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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  Notes: Reg. (s) 240.14a-101 SEC 1913 (3-99)


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LOGO

Sempra Energy 2019 Notice of Annual Shareholders Meeting and Proxy Statement May 9, 2019 Newport Beach, California


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LOGO

March 22, 2019

Dear Fellow Shareholders:

We are pleased to invite you to attend our Annual Shareholders Meeting at 9 a.m. Pacific time, May 9, 2019, at Balboa Bay Resort in Newport Beach, California. Enclosed are the meeting notice, related proxy statement and proxy card.

2018 was a momentous year for our company. We successfully completed our acquisition of an indirect majority stake in Oncor Electric Delivery Company LLC, Texas’ largest utility, executed on our leadership succession plan, and have since closed several asset sales to realign our operations to reflect our mission — to become North America’s premier energy infrastructure company. We are proud to report that we are making progress toward this goal. Your investment in Sempra Energy is an investment in a cleaner energy future, through electric and natural gas infrastructure that delivers access to cleaner energy to over 40 million people.

This year’s Annual Shareholders Meeting will focus only on the shareholder business items outlined in the enclosed meeting notice and will not include a separate business update. For more information about our business, we encourage you to review our 2018 Annual Report which is available on the Internet at www.astproxyportal.com/ast/Sempra.

Please review the enclosed materials and promptly vote your shares. As in past years, there are several ways to vote in advance of the meeting: by completing, signing, dating and returning the enclosed proxy or voting instruction card; by telephone; or via the Internet.

In reviewing the materials, you’ll note that Director William G. Ouchi, who has served on our board since Sempra Energy’s inception in 1998, attained the age of 75 and, in keeping with our retirement policy, has not been nominated to stand for re-election as a director in 2019. Two highly qualified directors, who joined our board in October 2018, are up for election by shareholders for the first time this year:

Michael N. Mears, chairman, president and chief executive officer of Magellan Midstream Partners, L.P.; and

Cynthia L. Walker, senior vice president, midstream and marketing of Occidental Petroleum Corporation.

We appreciate your vote and your continued investment in Sempra Energy.

Sincerely,

 

LOGO

Jeffrey W. Martin

Chairman and Chief Executive Officer

 

LOGO

William C. Rusnack

Lead Director


Table of Contents

Table of Contents

 

Notice of Annual Shareholders Meeting

 

    

 

1

 

 

 

Proxy Statement Summary

 

    

 

2

 

 

 

Corporate Governance

 

    

 

8

 

 

 

Board of Directors

     8  

Board Committees

     13  

Communications with the Board

     16  

Director Compensation

     17  

Director Compensation Table

     18  

Audit Committee Report

 

    

 

21

 

 

 

Share Ownership

 

    

 

22

 

 

 

Proposals To Be Voted On

 

    

 

24

 

 

 

Board of Directors Proposals

     24  

Proposal 1: Election of Directors

     24  

Proposal 2: Ratification of Independent Registered Public Accounting Firm

     30  

Proposal 3: Advisory Approval of Our Executive Compensation

     31  

Proposal 4: Approval of Our 2019 Long-Term Incentive Plan

     32  

Shareholder Proposal

     40  

Proposal 5: Shareholder Proposal Requiring an Independent Board Chairman

     40  

Executive Compensation

 

    

 

44

 

 

 

Compensation Discussion and Analysis

     44  

Compensation Committee Report

     75  

Compensation Tables

     76  

About the Annual Shareholders Meeting and Voting

 

    

 

93

 

 

 

Shareholder Proposals and Director Nominations

 

    

 

100

 

 

 

Other Information

 

    

 

102

 

 

 

Appendix A: Reconciliation of Non-GAAP Financial Measures

 

    

 

104

 

 

 

Appendix  B: Companies Included in General Industry Benchmarking Review

 

    

 

106

 

 

 

Appendix  C: Companies Included in Utilities Benchmarking Review

 

    

 

107

 

 

 

Appendix  D: Performance-Based Annual Bonus Plan — Additional Information

 

    

 

108

 

 

 

Appendix E: Sempra Energy 2019 Long-Term Incentive Plan

 

    

 

111

 

 

 

Appendix F: Sempra Energy Annual Shareholders Meeting Proposed Program Agenda

 

    

 

126

 

 

 


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LOGO   

488 8th Avenue, San Diego, California 92101

(877) 736-7727

Notice of Annual Shareholders Meeting

Thursday, May 9, 2019, 9 a.m., Pacific time

Balboa Bay Resort, 1221 West Coast Highway, Newport Beach, California

Business Items

 

(1)

Elect the following director nominees, all of whom are currently directors: Alan L. Boeckmann; Kathleen L. Brown; Andrés Conesa; Maria Contreras-Sweet; Pablo A. Ferrero; William D. Jones; Jeffrey W. Martin; Michael N. Mears; William C. Rusnack; Lynn Schenk; Jack T. Taylor; Cynthia L. Walker; and James C. Yardley.

 

(2)

Ratification of independent registered public accounting firm.

 

(3)

Advisory approval of our executive compensation.

 

(4)

Approval of our 2019 Long-Term Incentive Plan.

 

(5)

Shareholder proposal requiring an independent board chairman, if properly presented at the meeting.

 

(6)

Consider other matters that may properly come before the meeting.

Adjournments and Postponements

The business items to be considered at the Annual Shareholders Meeting may be considered at the meeting or at any adjournment or postponement of the meeting.

Record Date

You are entitled to notice of and to vote at the Annual Shareholders Meeting, or at any adjournment or postponement thereof, only if you were a holder of Sempra Energy common stock at the close of business on March 14, 2019.

Meeting Admission

You are entitled to attend the Annual Shareholders Meeting, or any adjournment or postponement thereof, only if you were a holder of Sempra Energy common stock at the close of business on March 14, 2019, or you hold a valid proxy from any such holder to vote at the meeting. You should be prepared to present photo identification to be admitted to the meeting.

If you are a shareholder of record of common stock or hold shares of common stock through our Direct Stock Purchase Plan or Employee Savings Plans, an admission ticket is included as part of your notice of Internet availability of proxy materials or proxy card. If you plan to attend the meeting, please bring the admission ticket with you. If you do not bring the admission ticket, your name must be verified against our list of registered shareholders and plan participants. If you do not have appropriate admission materials, you will not be admitted to the meeting.

If your shares of common stock are not registered in your name but are held in “street name” through a bank, broker or other nominee, you must provide proof of beneficial ownership at the record date. Proof of beneficial ownership could include items such as your most recent account statement prior to March 14, 2019, a copy of the voting instruction card provided by your nominee, or other similar evidence of share ownership.

The meeting will begin promptly at 9 a.m. Pacific time. Check-in will begin at 8 a.m. Pacific time. You should allow ample time for check-in procedures.

Voting

Your vote is important. Whether or not you plan to attend the Annual Shareholders Meeting, we encourage you to read this proxy statement and promptly vote your shares. You may vote in advance of the meeting by completing, signing and dating the enclosed proxy or voting instruction card and returning it in the enclosed envelope, or by telephone or via the Internet. Internet and telephone voting for holders of record will be available until 11:59 p.m. Eastern time on May 8, 2019. For specific instructions on how to vote your shares, please refer to the section entitled “About the Annual Shareholders Meeting and Voting—How You Can Vote” and to the instructions on your proxy or voting instruction card. This Notice of Annual Shareholders Meeting and Proxy Statement, the accompanying form of proxy or voting instruction card and our 2018 Annual Report to Shareholders are being provided to shareholders beginning on or about March 22, 2019.

 

      

Jennifer F. Jett

Corporate Secretary

Important Notice Regarding the Availability of Proxy Statement Materials

for the Annual Shareholders Meeting to be Held on May 9, 2019.

The Proxy Statement for the Annual Shareholders Meeting to be held on May 9, 2019, and the

Annual Report to Shareholders are available on the Internet at www.astproxyportal.com/ast/Sempra.

 


Table of Contents

 

Proxy Statement Summary

This summary highlights selected information to assist you in your review of the proxy statement. It does not contain all of the information you should consider, and you should read the entire proxy statement carefully before voting. Information regarding the performance of Sempra Energy is available in the company’s Annual Report to Shareholders for the year ended December 31, 2018, that accompanies this proxy statement and which is available on the company’s website at www.sempra.com. For questions and answers and additional information about the Annual Shareholders Meeting and voting, see the “About the Annual Shareholders Meeting and Voting” section of the proxy statement. This proxy statement and the accompanying proxy card are first being made available to shareholders on or about March 22, 2019.

2019 Annual Shareholders Meeting Details

 

   
Date/Time   Location
   
   

Thursday,May 9, 2019

  Balboa Bay Resort
   

9:00a.m. Pacific Time

  1221 West Coast Highway
   
   

Newport Beach, California 92663

 

Shareholder Voting Matters

 

       Proposals      Board Recommendation   Page No.

  1.  Electionof Directors

     FOR each director Nominee   24

  2. Ratificationof independent registered public accounting firm

     FOR ratification of Deloitte & Touche LLP   30

  3. Advisoryapproval of our executive compensation

     FOR advisory approval of our executive compensation   31

  4. Approvalof our 2019 Long-Term Incentive Plan

     FOR approval of our 2019 Long-Term Incentive Plan   32

  5. Shareholder proposal requiring an independent board chairman

     AGAINST shareholder proposal requiring an independent board chairman   40

Director Nominees

 

     

  Name and Occupation

 

 

Age 

 

 

Director 

Since

 

 

Independent 

 

 

Standing Board
Committee Memberships

 

 

AC 

 

 

CC 

 

 

CGC 

 

 

EHSTC 

 

 

EC 

 

             

Alan L. Boeckmann

Former CEO and Chair, Fluor Corporation

  70   2011                
             

Kathleen L. Brown

Partner, Manatt, Phelps & Phillips, LLP

  73   2013                
             

Andrés Conesa, Ph.D.

CEO, Grupo Aeroméxico, S.A.B. de C.V

  49   2017                
             

Maria Contreras-Sweet

Managing Partner, Contreras-Sweet Enterprises and Rockway Equity Partners; Former Administrator, U.S. Small Business Administration

  63   2017                
             

Pablo A. Ferrero

Independent energy consultant

  56   2013                
             

William D. Jones

President and CEO, CityLink Investment Corp.

  63   1998           C      
             

Jeffrey W. Martin

Chairman and CEO, Sempra Energy

  57   2018                       C
             

Michael N. Mears

Chairman, President and CEO, Magellan Midstream Partners L.P.

  56   2018                    
             

William C. Rusnack — Lead Independent Director

Former President and CEO, Premcor Inc.

  74   2001         C        
             

Lynn Schenk

Private practice attorney, Former U.S. Congresswoman

  74   2008               C  
             

Jack T. Taylor

Former COO-Americas and Executive Vice Chair of U.S. Operations,

KPMG LLP (U.S.)

  67   2013     C F            
             

Cynthia L. Walker

Senior Vice President, Midstream and Marketing,

Occidental Petroleum Corporation

  43   2018                    
             

James C. Yardley

Former Executive Vice President, El Paso Corp.

  67   2013                  

    AC = Audit Committee

    CC = Compensation Committee

    CGC = Corporate Governance Committee

    EHSTC = Environmental, Health, Safety and Technology Committee

 

EC = Executive Committee

C = Committee Chair

F = Audit Committee Financial Expert

 

2   Sempra Energy 2019 Proxy Statement

 


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Proxy Statement Summary

 

Board Nominee Composition

 

 

LOGO

 

 

 

Our board has made diversity a priority, both of skills and experience and of gender and ethnicity. To assist our board in maintaining its focus on diversity, we conduct an annual skills assessment and board evaluation to help ensure that the board includes members with a diverse and appropriate mix of experience, competencies and backgrounds. The board uses those results to critically analyze both its effectiveness and its skill sets so that it is well positioned to oversee Sempra Energy’s current and future strategies and operations. We have a strong track record of board refreshment. Eight of our independent directors have been added since 2013, including two in 2017 and two in 2018.

Shareholder Engagement and Governance Practices

In 2018, we engaged with holders of approximately 55 percent of our outstanding shares of common stock to discuss corporate governance, executive compensation, business strategy, environmental and social matters and board composition. Supported by feedback from our shareholders, we believe our corporate governance policies, including the following, reflect best practices:

 

 

  Lead Director with clearly defined and robust responsibilities

 

  annual election of all directors

 

  proxy access right for shareholders

 

  majority-vote and director resignation policy for directors in uncontested elections

 

  shareholders representing in the aggregate 10 percent or more of our outstanding shares may call a special shareholders meeting

 

  comprehensive, ongoing succession planning for key executives by the board

 

  comprehensive board refreshment resulting in balanced director tenure

 

  annual board, director and committee self-evaluations for our standing committees (except for Executive Committee)

  

 

  12 of our 13 director nominees are independent

 

  standing board committees are 100 percent independent (except for Executive Committee)

 

  executive sessions of independent directors at all regular board meetings

 

  prohibition on hedging or pledging company stock

 

  robust director and executive share ownership requirements

 

  97 percent attendance of directors at board and committee meetings in the aggregate in 2018

 

  active shareholder engagement, including with our Lead Director meeting and speaking with shareholders

 

  code of conduct applicable to directors and senior officers

Executive Compensation

Company Overview

 

Sempra Energy operates regulated utilities and builds safe, reliable and sustainable energy infrastructure that serve our communities, while growing value for all of our stakeholders. Our strategic mission is to become North America’s premier energy infrastructure company, with a focus on owning and operating utility infrastructure with a transmission and distribution-like risk profile, developing our liquefied natural gas (LNG) export business and developing infrastructure in Mexico to meet that country’s growing needs. Our strategy is to develop, operate, and invest in long-term contracted energy infrastructure and utilities with shared growth drivers, with a focus on attractive markets.

 

 

Utilities

   Energy Infrastructure
 

 

  We hold diverse regulated electric and gas utilities with a large presence in California and Texas.

 

  Our utility businesses will continue to require investments in grid infrastructure, transmission, distribution and storage and other types of assets to help ensure safety and reliability of service and incorporate additional sources of renewable energy.

 

  

 

  Our energy infrastructure businesses are primarily focused on the import, export, transfer and storage of gas. We believe that diverse sources of energy will continue to be important domestically and internationally.

 

  Our revenues for these businesses generally are tied to long-term contracts with creditworthy counterparties.

 

 

Sempra Energy 2019 Proxy Statement   3

 


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Proxy Statement Summary

 

2018 Performance

 

2018 was a pivotal year for Sempra Energy. The Board promoted Jeffrey W. Martin, previously the company’s Executive Vice President and Chief Financial Officer, to the position of Chief Executive Officer effective May 1, 2018 and Chairman effective December 1, 2018, following the retirement of Debra Reed from those positions. The leadership transition and the ensuing promotion of other key executives in 2018 illustrate our commitment to management development and succession planning. In addition, Sempra Energy experienced a number of strategic and financial accomplishments in 2018 to focus our electric and natural gas infrastructure platforms to provide visibility to stable, high quality earnings and cash flows that have similar risk profiles:

2018 Strategic Performance Highlights

 

2018 and Recent Accomplishments and Highlights

 

   Business Portfolio Developments

 

  Closed the acquisition of 80.25% indirect interest in Oncor Electric Delivery Company LLC (Oncor) in March 2018

 

  Together with Oncor, announced agreements in October 2018 for Oncor’s planned acquisition of 100% of InfraREIT, Inc. and its subsidiary, InfraREIT Partners, LP, and our planned acquisition of 50% of Sharyland Utilities, LP(1)

 

  Intend to use proceeds from asset sales discussed below to fund InfraREIT and Sharyland acquisitions and pay down debt

 

  Initiated portfolio optimization and continuous cost savings as part of ongoing strategic review

 

  Announced planned sale of U.S. renewables and non-utility natural gas storage assets in June 2018

 

  Completed sale of U.S. solar assets in December 2018 and received approximately $1.6 billion in proceeds

 

  Completed sale of midstream storage assets in February 2019 for approximately $328 million

 

  Announced sale agreement for remaining U.S. renewable assets in February 2019 for approximately $550 million(1)

 

  Announced in January 2019 the planned sale of South American businesses

  

 

Sempra Utilities

 

  SDG&E received the Edison Electric Institute’s 2018 Edison Award, the electric power industry’s most prestigious honor, in recognition of its investments to enhance grid resiliency and reduce climate-related and weather-related vulnerabilities

 

  SDG&E achieved a successful regulatory outcome regarding departing load, further helping to secure fair and equitable rates across its entire customer base

 

  SDG&E and SoCalGas completed all required filings for their General Rate Cases, which include requests for significant capital spending programs to continue to enhance safety and reliability

 

  SDG&E and SoCalGas received approval from the California Public Utilities Commission’s (CPUC) Safety Enforcement Division to begin constructing the $671 million L1600 pipeline replacement project

 

  SoCalGas announced a plan to replace 20 percent of its traditional natural gas supply with renewable natural gas by 2030

 

  SDG&E worked with California legislature and regulators to pass SB 901, which requires wildfire mitigation plans that are largely modeled after SDG&E’s existing programs

 

  SDG&E submitted a request to increase its Federal Energy Regulatory Commission (FERC) Return on Equity (ROE) from 10.05% to 11.2%, with settlement negotiations expected to begin in the second quarter of 2019

 

  

 

Sempra North American Infrastructure

 

  Progress made on development projects with the goal of building up to 45 million tonnes per annum (Mtpa) of LNG export capacity to serve global markets:

 

  Cameron: Cameron LNG joint venture (JV) continued construction of Trains 1-3; based on a number of factors, we believe it is reasonable to expect that Cameron LNG JV will start generating earnings in the middle of 2019

 

  Sempra LNG signed a memorandum of understanding (MOU) with Total S.A. in November 2018 for up to 9 Mtpa of capacity on Cameron Phase 2 and Energía Costa Azul (ECA)(2)

 

  ECA Midscale: Sempra LNG signed Heads of Agreements with affiliates of Mitsui & Co., Ltd., Tokyo Gas Co., Ltd. and Total S.A. in November 2018 for the entire expected approximately 2.4 Mtpa capacity of ECA Phase 1 (midscale)(2)

 

  Port Arthur: Sempra LNG signed a 20-year sale and purchase agreement (SPA) with PGNiG in December 2018 for 2 Mtpa of capacity from Port Arthur LNG, subject to certain conditions(3)

 

  Infraestructura Energética Nova, S.A.B. de C.V. (IEnova) announced three new liquids terminal projects (Topolobampo, Baja Refinados, and Manzanillo) totaling approximately $400 million in capital expenditures, as well as an expansion of the Valero terminals

 

 

(1)

The planned purchase by Oncor of InfraREIT, our planned acquisition of Sharyland and planned sale of our remaining U.S. renewable assets are subject to customary closing conditions and consents, including obtaining certain regulatory approvals.

 

(2)

These arrangements provide a framework for cooperation, but do not obligate the parties to enter into a definitive agreement or participate in the applicable project.

 

(3)

The SPA is subject to conditions precedent, including reaching a final investment decision.

 

4   Sempra Energy 2019 Proxy Statement

 


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Proxy Statement Summary

 

2018 Financial Performance Highlights

Our long-term growth has been strong, with market capitalization increasing by over $19 billion over the past 10 years. Our stock has provided investors with solid long-term returns, outperforming both the S&P 500 Utilities Index and the S&P 500 Index over a 10-year period. The compound annual growth rate (CAGR) of our dividend exceeded the median CAGR for companies in the S&P 500 Utilities Index over the past one, three, five and ten years. Our GAAP(4) earnings per diluted common share (EPS) were $4.40 in 2008, $4.01 in 2013 and $3.42 in 2018. On an adjusted basis, EPS increased from $4.40 in 2008 to $5.57 in 2018.(5)

 

(4)

GAAP represents accounting principles generally accepted in the United States of America.

 

(5)

Adjusted EPS is a non-GAAP financial measure. For a reconciliation of GAAP and adjusted earnings and EPS, please see Appendix A to this proxy statement.

 

 

LOGO               LOGO

 

(1)

See footnote (5) above

 

(2)

As of December 31, 2018, December 31, 2013 and December 31, 2008

 

(3)

For periods ending December 31, 2018

 

Sempra Energy 2019 Proxy Statement   5

 


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Proxy Statement Summary

 

Compensation Overview

 

Our executive compensation program is designed to attract, motivate and retain key executive talent and promote strong, sustainable long-term performance. We place an emphasis on variable performance-based pay, with each component designed to promote value creation and alignment of our management team’s compensation with our long-term strategic objectives.

 

 

LOGO

  

 

Performance-Based Annual Bonus

 

  

 

 85% Earnings

  Provides accurate, comprehensive, and understandable picture of annual financial performance

  Adjusted to exclude impact of non-contemplated acquisitions or divestitures, among other pre-defined adjustments

 15% Safety and Customer Service

  Promotes responsible and sustainable operations, and the safety of our customers and employees

 

  

 

Long-Term Equity-Based Incentives

 

  

 

 70% Performance Stock Units

  50% based on 3-year Relative Total Shareholder Return (TSR)

  35% based on 3-year Relative TSR vs. S&P 500 Utilities Index

  15% based on 3-year Relative TSR vs. S&P 500 Index

  20% based on 3-year EPS CAGR with payout scale set based on forward consensus estimates of S&P 500 Utilities peers

 30% Service-Based Restricted Stock Units

  Enhances our ability to retain key executives

  Added in 2018 in response to shareholder feedback

 

Note: Base salary is the base salary as of December 31, 2018. Performance-based annual incentive bonus is the target performance-based annual bonus calculated using the base salary of $1,100,000 and performance-based annual bonus target of 115 percent as of December 31, 2018. Long-Term Incentive Plan (LTIP) amounts are based on the target annual LTIP award percentage of 425 percent as of December 31, 2018 multiplied by the December 31, 2018 base salary. The annual performance-based bonus target and LTIP target reflected above are the targets established by the Compensation Committee when Mr. Martin became Chief Executive Officer (CEO). These targets were not fully implemented in 2018. The weightings of the performance measures in the performance-based annual bonus are based on performance at target. The weightings of the long-term equity-based incentive components are based on the target grant date value.

2018 Compensation Decisions and Outcomes

Base Salary. In connection with the execution of our planned executive succession process and executive promotions, adjustments were made to the base salaries of several key executives, including Mr. Martin whose salary increased from $700,000 to $1,100,000 when he became CEO. The Compensation Committee considered relevant market data and set pay levels consistent with our compensation philosophy, which generally favors setting initial compensation opportunities conservatively with the intent to align with the market median over time.

Annual Bonus. Our 2018 target earnings for annual bonus plan purposes was $1,487 million, a challenging 16 percent increase over our 2017 target and 8 percent over our 2017 actual earnings for annual bonus plan purposes. Actual 2018 earnings for annual bonus plan purposes was $1,576 million, above our maximum goal of $1,546 million. After accounting for performance on safety and customer service measures, 2018 annual bonuses were achieved at 196 percent of target.

Long-Term Incentive Plan. Long-term awards are the largest single component of each named executive officer’s total target compensation package. In accordance with our pay-for-performance philosophy, 70 percent of our 2018 annual long-term incentive awards were performance-based, with 50 percent of the award’s grant date value tied to relative TSR performance and 20 percent tied to EPS growth. In 2018, in response to shareholder concern about executive retention, we rebalanced our long-term equity mix to add a service-based restricted stock unit (RSU) component weighted at 30 percent of the award’s grant date value. In connection with their promotions and to support executive retention, on May 1, 2018 Mr. Martin, Mr. Householder and Mr. Mihalik received promotional grants of service-based restricted stock units.

 

6   Sempra Energy 2019 Proxy Statement

 


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Proxy Statement Summary

 

Pay-for-Performance Alignment. Performance-based restricted stock units tied to relative TSR performance are the most sizable element of our LTIP design. There was no payout on our 2016 TSR-based awards, based on below-threshold TSR performance over the three-year performance period. This represents the third consecutive tranche of TSR-based long-term awards that have had no payout, reflecting the alignment between performance and compensation. Based on relative TSR performance through December 31, 2018, the total value of the 2017 and 2018 TSR-based awards is below target.

 

 

LOGO

TSR-Based Awards (dollars in millions) 2014 Reported 2014 Realized 2015 Reported 2015 Realized 2016 Reported 2016 Realized 2017 Reported 2017 Realizable 2018 Reported 2018 Realizable Relative TSR-Based Restricted Stock Units Reported: Value based on grant date closing stock price Realized (2014, 2015 and 2016): Actual value Realizable value as of 12/31/18 (2017 and 2018 outstanding awards): Based on relative TSR performance through 12/31/18 and closing stock price on 12/31/18

 

Note: 2014 – 2017 are based on Ms. Reed’s awards and 2018 is based on Mr. Martin’s awards.

Voting Information

Eligibility: Shareholders of our common stock at the close of business on the record date, March 14, 2019, are entitled to notice of the Annual Shareholders Meeting and to vote their shares as described below. Each share of common stock is entitled to one vote on each director and one vote on each of the proposals to be voted on.

Record Shareholders may vote in the following ways:

 

 

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Using the Internet at

www.voteproxy.com

 

Calling 1-800-PROXIES

(1-800-776-9437)

in the U.S. and Canada

 

 

Mailing a signed and

dated proxy card

 

Attending the

 Annual Shareholders Meeting 

in person

For Internet and telephone voting, you will need to have your proxy card available and use the Company Number and Account Number shown thereon. Internet and telephone voting are available for shareholders of record until 11:59 p.m. Eastern time on May 8, 2019. Beneficial owners of shares should follow the voting instructions provided by their bank, broker or other nominee. If you hold shares in our Employee Savings Plans, your voting instructions must be received by 8 a.m. Eastern time on May 6, 2019.

 

Sempra Energy 2019 Proxy Statement   7

 


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Corporate Governance

Our business and affairs are managed and all corporate powers are exercised under the direction of our Board of Directors. The board establishes fundamental corporate policies and oversees the performance of the company and our Chairman and Chief Executive Officer and the other officers to whom the board has delegated authority to manage our day-to-day business operations.

The board has adopted Corporate Governance Guidelines that set forth expectations for directors, director independence standards, board committee structure and functions, and other policies for the company’s governance. It also has adopted a Code of Business Conduct and Ethics for Directors and Senior Officers. Officers also are subject to business conduct guidelines that apply to all employees. Several standing and ad hoc committees assist the board in carrying out its responsibilities. Each standing committee operates under a written charter adopted by the board.

Our Corporate Governance Guidelines, standing committee charters, including our Audit, Compensation, and Corporate Governance Committee charters, and Code of Business Conduct and Ethics for Directors and Senior Officers are posted on our website at www.sempra.com under the “Investors” and “Governance” tabs. Paper copies may be obtained upon request by writing to: Corporate Secretary, Sempra Energy, 488 8th Avenue, San Diego, CA 92101.

Board of Directors

Functions

 

In addition to its general oversight role, our Board of Directors performs a number of specific functions, including:

 

  Selecting our Chief Executive Officer and overseeing his or her performance and that of other senior management in the operation of the company.

 

  Planning for management succession.

 

  Reviewing and monitoring strategic, financial and operating plans and their development and implementation by management.

 

  Assessing and monitoring risks and risk-management strategies.
  Reviewing and monitoring processes designed to maintain the company’s integrity, including financial reporting, compliance with legal and regulatory obligations, and relationships with key stakeholders.

 

  Reviewing and approving significant corporate actions.

 

  Selecting director nominees, appointing board committee members, forming board committees and overseeing effective corporate governance.
 

 

Leadership Structure

 

The Board of Directors retains the flexibility to determine on a case-by-case basis whether the offices of Chief Executive Officer and Chairman of the Board should be combined or separated and whether an independent director should serve as Chairman. This flexibility permits the board to organize its functions and conduct its business in a manner it deems most effective in then prevailing circumstances.

In March 2018, Debra L. Reed announced to the board her retirement as President and Chief Executive Officer effective May 1, 2018 and as Chairman effective December 1, 2018. The board appointed Jeffrey W. Martin as Chief Executive Officer and a director effective May 1, 2018. The board subsequently evaluated our leadership structure and in September 2018 announced that it had determined it would be in the best interests of the company and its shareholders to continue to combine the roles of Chief Executive Officer and Chairman and elected Mr. Martin as Chairman of the Board effective December 1, 2018. In addition to being named Chairman at that time, Mr. Martin continues as our Chief Executive Officer. Mr. Martin is a 14-year employee of the Sempra Energy family of companies with an outstanding career of achievement, as well as extensive industry experience. Mr. Martin also has significant experience in working with and adhering to the rules established by the CPUC, the principal regulator of our California utilities. He has used his experience to bring additional and valuable perspectives on, among other areas, business development, mergers and acquisitions, investor relations, succession planning and regulated utilities.

By Mr. Martin serving as executive Chairman, he acts as a bridge between the board and the operating organization and provides critical leadership for future strategic initiatives and challenges. During those periods in which we do not have an independent Chairman, the independent directors annually select an independent director as the Lead Director. William C. Rusnack continues to serve as our Lead Director.

 

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Our robust Lead Director role includes the following functions and responsibilities:

 

  To lead the Board of Directors if circumstances arise in which the role of the Chairman of the Board may be, or may be perceived by the Lead Director or by the other independent directors to be, in conflict.

 

  To preside at all meetings of the Board of Directors at which the Chairman of the Board is not available.

 

  To organize, convene and preside over executive sessions of the independent directors and promptly communicate approved messages and directives to the Chairman of the Board and Chief Executive Officer.

 

  To act as the principal liaison between the independent directors and the Chairman of the Board and Chief Executive Officer.

 

  To review and approve all board and committee agendas and approve information sent to the board, providing input to management on the scope and quality of such information.

 

  To consult with the Chairman of the Board, Chief Executive Officer and committee chairs regarding the topics and schedules of the meetings of the board and committees and approve such schedules to assure that there is sufficient time for discussion of all agenda items.
  To call a special meeting of the Board of Directors or the independent directors at any time, at any place and for any purpose.

 

  To be available for consultation and direct communication with the company’s major shareholders.

 

  To collect and communicate to the Chairman of the Board and Chief Executive Officer the views and recommendations of the independent directors relating to his or her performance, other than with respect to the annual performance review.

 

  To consult with the Corporate Governance Committee as part of the committee’s review of director nominations and recommendations of director candidates.

 

  To consult with directors regarding acceptance of memberships on other boards to assure that multiple board service does not conflict or otherwise interfere with such directors’ service to the company.

 

  Led by the Compensation Committee and together with the Chairman of the Board, to report annually to the board on succession planning, including policies and principles for executive officer selection.

 

  To perform such other duties as may be assigned from time-to-time by the independent directors.
 

 

The position and role of the Lead Director is intended to provide board leadership where the roles of a combined Chairman and Chief Executive Officer may be in conflict. It is also intended to expand lines of communication between the board and members of management. It is not intended to reduce the free and open access and communications that each independent director has with other directors and members of management.

Based upon an extensive shareholder outreach program conducted in 2012 and again in the fall of 2015 and subsequent engagement with shareholders regarding our board leadership structure, we have determined that most of our largest institutional shareholders have no preference for an independent chair as long as the Lead Director has significant duties, as is the case at Sempra Energy.

The Board of Directors believes that its independence and oversight of management is maintained effectively through this flexible leadership structure, our board’s composition and sound corporate governance policies and practices.

Director Independence

 

The Board of Directors determines the independence of our directors by applying the independence principles and standards established by the New York Stock Exchange. These provide that a director is independent only if the board affirmatively determines that the director has no direct or indirect material relationship with the company. They also identify various relationships that preclude a determination of director independence. Material relationships may include, depending on the circumstances, commercial, industrial, banking, consulting, legal, accounting, charitable, family and other business, professional and personal relationships.

Applying these standards, the board annually reviews the independence of the company’s directors and director nominees. In its most recent review, the board considered, with respect to the company’s directors and director nominees other than Mr. Martin, who is an executive officer of the company, among other things, the absence of any employment relationships between the company and its current directors and nominees and their immediate family members; the absence of any of the other specific relationships that would preclude a determination of independence under New York Stock Exchange independence rules; the absence of any affiliation of the company’s directors and their immediate family members with the company’s independent registered public accounting firm, compensation consultants, legal counsel, and investment bankers; the absence of any transactions with directors and members of their families that would require disclosure in this proxy statement under Securities and Exchange Commission (SEC) rules regarding related person transactions; and the modest amount of our discretionary contributions to non-profit organizations with which some of our directors or their immediate family members may be associated.

 

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Based upon this review, the board has affirmatively determined that each of the company’s non-employee directors is independent. The independent directors are:

 

Alan L. Boeckmann

 

Kathleen L. Brown

 

Andrés Conesa

 

Maria Contreras-Sweet

  Pablo A. Ferrero

 

William D. Jones

 

Michael N. Mears

 

William C. Rusnack

  Lynn Schenk

 

Jack T. Taylor

 

Cynthia L. Walker

 

James C. Yardley

Director Share Ownership Guidelines

 

The board has established share ownership guidelines for directors and officers to further strengthen the link between company performance and compensation. For non-employee directors, the guideline is ownership of a number of our shares having a value of five times the directors’ annual base retainer of $85,000, resulting in an ownership guideline equal to $425,000. The Compensation Committee annually reviews adherence to this guideline, which is expected to be attained within five years of becoming a director. For these purposes, share ownership includes phantom shares into which compensation has been deferred, restricted stock units, and the vested portion of certain in-the-money stock options, as well as shares owned directly. All of our non-employee directors who have been on the board for at least five years meet or exceed the guideline. For information regarding executive officer share ownership requirements, please see “Executive Compensation — Compensation Discussion and Analysis — Share Ownership Requirements.”

Board and Committee Meetings; Executive Sessions; Annual Shareholders Meetings

 

At regularly scheduled board and committee meetings, directors review and discuss management reports regarding the company’s performance, prospects and plans, as well as significant opportunities and immediate issues facing the company. At least once a year, the board reviews management’s long-term strategic and financial plans, including an annual detailed broad strategy discussion.

The Chairman of the Board proposes the agenda and schedule for each board meeting to the Lead Director who then reviews and modifies or approves it. Committee agendas and schedules are set by or in consultation with the committee chair and with the approval of the Lead Director.

Directors are encouraged to propose agenda items, and any director also may raise at any meeting subjects that are not on the agenda.

Information and other materials important to understanding the business to be conducted at board and committee meetings, to the extent available, are distributed in writing to the directors in advance of the meeting. Additional information may be presented at the meetings.

An executive session of independent board members is held at each regular board meeting, and any director may call for an executive session at any board meeting. The Lead Director presides over executive sessions during which the independent directors discuss issues such as succession planning, Chief Executive Officer performance and compensation, executive development and board performance.

During 2018, the board held 16 meetings and committees of the board held 53 meetings. Directors, on an aggregate basis, attended 97 percent of the combined number of these meetings. Each director attended at least 94 percent of the combined number of meetings of the board and each committee of which the director was a member.

The board encourages all nominees standing for election as directors to attend the Annual Shareholders Meeting. All of the nominees standing for election at the 2018 Annual Shareholders Meeting, except for Alan L. Boeckmann, attended the 2018 meeting.

Evaluation of Board and Director Performance

 

The Corporate Governance Committee annually reviews and evaluates the performance of the Board of Directors, including such criteria as board oversight, leadership, composition and independence, conduct of meetings and committees.

 

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As illustrated below, the board also conducts an annual peer evaluation by which each director is afforded the opportunity to comment anonymously on the other board members’ performance.

 

 

LOGO

In order to help ensure the objectivity and integrity of this process, an outside law firm is engaged every year to conduct the peer review portion of this evaluation and compile the results. The Corporate Governance Committee assesses the board’s contribution as a whole and identifies areas in which the board or senior management believes a better contribution may be made. The purpose of the review is to increase the effectiveness of the board, and the results are reviewed with the board and its committees. The results also are considered in connection with board refreshment efforts. In addition, each standing committee, other than the Executive Committee, conducts an annual self-evaluation, in accordance with its charter.

Our board annually reviews the individual performance and qualifications of each director who may wish to be considered for nomination for election by shareholders of our common stock to an additional term. The evaluations are reviewed by the Corporate Governance Committee, which makes recommendations to the board regarding nominees to stand for election as directors. Our board appreciates the importance of critically evaluating directors and their contributions to the board in connection with the re-nomination decision, including skills, qualifications and experience, feedback from the annual board evaluation, and individual performance, attendance, participation, independence and outside board and other affiliations.

Risk Oversight

 

The board, in cooperation with management, has developed an integrated risk management framework to assess, prioritize, manage and monitor risks across the company’s operations, including with respect to safety and operational risks, regulatory and compliance risks, cybersecurity risks, climate risks and reputational risks. Sempra Energy’s board has ultimate responsibility for risk oversight under this framework. Consistent with this approach, our Corporate Governance Guidelines provide that the specific functions of the Board of Directors include assessing and monitoring risks and risk management strategies.

The board believes that risk stretches far beyond any one committee. As a result, the board has diversified its risk oversight responsibilities across its membership, housing categories of risk oversight within board committees by topic. In addition, the board may form ad hoc committees to deal with certain risks. Any risk oversight that does not fall within a particular committee remains with the full board. The committee chairs report to the full board regarding their respective committee’s risk oversight role during committee reports.

The board reviews and monitors strategic, financial and operating plans that are intended to provide sustainable long-term growth with what the board deems to be an acceptable level of risk. Each of our principal operating units is responsible for identifying and moderating risk in a manner consistent with these goals. The board fulfills its risk oversight function through receipt of reports provided both directly to the board and to appropriate board committees. Based on these reports, the board or appropriate committees establish or amend existing risk oversight and control mechanisms. In addition, the company has a robust internal audit function that reports directly to the Audit Committee.

The board and its committees seek to mitigate risk through establishing policies that include:

 

  Leverage limitations.

 

  Establishing utility investment plans consistent with state policy objectives and seeking regulatory review and approval of significant investments.

 

  Establishing non-utility investment policies, including requiring substantial third-party pre-construction contractual commitments to purchase the capacity or output of major non-utility construction projects, subject to exceptions.
  Setting an employee compensation program that encourages and rewards sustainable growth in our business that is within an acceptable risk profile.

 

  Establishing commitment policies which require board review and/or approval above certain dollar thresholds.

 

  Reviewing performance on key operating measures, such as safety.

 

  Overseeing operating risks.
 

 

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In addition, the board’s Environmental, Health, Safety and Technology Committee is devoted to issues affecting the environment and is regularly briefed on the progress the company has made on environmental and sustainability matters. This committee also oversees the company’s overall safety policies, reinforcing our strong commitment to safety. Finally, this committee oversees cybersecurity and other information technology risks and keeps abreast of technology advancements of importance to our business.

With respect to investments where we do not operate or control the related entity or operations, we closely monitor these investments and mitigate risk by carefully selecting our business partners. In addition, we may have representation on the entity’s governing body, or we may negotiate contractual protections such as limiting our liability, having independent audit rights or prohibiting certain actions without our consent; or we may utilize a combination thereof.

The risks inherent in our businesses, which primarily involve utilities, the transmission and distribution of energy and natural gas, the development of LNG liquefaction facilities, and the construction and operation of natural gas and liquefied petroleum gas pipelines in the United States and Mexico and liquid fuels storage terminals in Mexico, are periodically reviewed by our board and the appropriate board committees. In addition, a review of Sempra Energy’s major risks and mitigation strategies is presented to the full board annually.

Board and Management Approach to Sustainability

 

The board takes an active role in providing oversight of sustainability through its Environmental, Health, Safety and Technology Committee. This includes reviewing business strategies on safety and reliability, system modernization, and electrification and decarbonization, while overseeing efforts that minimize the impact of company operations on the environment. We rigorously track performance on environmental, social and governance-related topics and issues and incorporate many elements of sustainability into our risk management approach.

Our annual sustainability report includes goals and results in the areas of emissions reduction, renewable energy, energy efficiency, water use, employee and public safety, electric reliability, customer assistance programs, diversity and inclusion, employee engagement and community giving. We also publicly report detailed information annually on our greenhouse gas emissions and climate-related risks and opportunities.

Succession Planning and Management Development

 

Our Compensation Committee oversees and regularly evaluates leadership succession planning practices and results. The committee reports annually to the Board of Directors on succession planning, including policies and principles for executive officer selection. In connection with this review and Debra L. Reed’s retirement as President and Chief Executive Officer effective May 1, 2018, and as Chairman and a director effective December 1, 2018, the board appointed Jeffrey W. Martin as Chief Executive Officer and a director effective May 1, 2018 and as Chairman effective December 1, 2018. In addition, the board appointed Joseph A. Householder as President and Chief Operating Officer effective May 1, 2018 and Trevor I. Mihalik, who had been serving as Senior Vice President, Controller and Chief Accounting Officer, as Executive Vice President and Chief Financial Officer effective May 1, 2018.

Review of Related Person Transactions

 

SEC rules require us to disclose certain transactions involving more than $120,000 in which we are a participant and any of our directors, nominees as directors or executive officers, or any member of their immediate families, has or will have a direct or indirect material interest. The charter of our Corporate Governance Committee requires the committee to review and approve or ratify any such “related person transaction” that is required to be disclosed. There were no transactions requiring review during 2018 or 2019 through the date of the mailing of this proxy statement.

Director Orientation and Education Programs

 

Every new director participates in an orientation program and receives materials and briefings to acquaint him or her with our business, industry, management and corporate governance policies and practices. Continuing education is provided for all directors through board materials and presentations, discussions with management, visits to corporate facilities and other sources. Several directors, at the company’s expense, also attend third-party offered education courses and participate in the National Association of Corporate Directors (NACD), of which the company is a member. In 2018, one of our directors, Ms. Schenk, chair of our Environmental, Health, Safety and Technology Committee, completed the NACD Cyber-Risk Oversight Program and received a CERT Certificate in Cybersecurity Oversight.

 

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Board Access to Senior Management, Independent Accountants and Counsel

 

Directors have complete access to our senior management and other employees, as well as to our independent registered public accounting firm. They also have complete access to counsel, advisors and experts of their choice with respect to any issues relating to the board’s discharge of its duties.

Retirement Policy

 

In accordance with our Corporate Governance Guidelines, directors should not be nominated to stand for election after attaining the age of 75.

Board Committees

The following chart sets forth our standing board committees and membership on these committees.

 

 

LOGO

Audit Committee

 

Our Audit Committee is composed entirely of independent directors. It is directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm, which reports directly to the committee. The committee prepares the report included in the proxy statement under the caption “Audit Committee Report.” It also assists the Board of Directors in fulfilling oversight responsibilities regarding:

 

  The integrity of our financial statements.

 

  Our compliance with legal and regulatory requirements.
  Our internal audit function.

 

  The independent registered public accounting firm’s qualifications and independence.
 

 

The board has determined that each member of the Audit Committee is financially literate. It also has determined that Mr. Taylor, who chairs the committee, is an audit committee financial expert as defined by the rules of the SEC.

During 2018, the Audit Committee held eight meetings.

 

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Compensation Committee

 

Our Compensation Committee is composed entirely of independent directors. It assists the Board of Directors in the evaluation and compensation of our executives. It establishes our compensation principles and policies and oversees our executive compensation program and executive succession planning. The committee’s responsibilities include:

 

  Reviewing and approving corporate goals and objectives relevant to the Chief Executive Officer’s compensation.

 

  Evaluating our Chief Executive Officer’s performance in light of those goals and objectives and approving (and recommending for ratification by the board acting solely through the independent directors) his or her compensation level based on the committee’s performance evaluation.

 

  Evaluating and overseeing risk in our compensation programs.

 

  Determining and approving (and periodically reviewing with the board) other executive officer compensation.

 

  Making recommendations to the board with respect to incentive compensation plans and equity-based plans that are subject to board approval.

 

  Preparing the report included in the proxy statement under the caption “Compensation Committee Report.”

 

  Reporting to the board annually on succession planning.
 

 

During 2018, the Compensation Committee held 10 meetings.

For additional information regarding the Compensation Committee’s principles, policies and practices, please see the discussion under “Executive Compensation — Compensation Discussion and Analysis.”

Corporate Governance Committee

 

Our Corporate Governance Committee is composed entirely of independent directors. The committee’s responsibilities include:

 

  Identifying individuals qualified to become directors.

 

  Recommending nominees to stand for election as directors and candidates to fill board vacancies.

 

  Recommending directors for appointment as members of board committees.
  Developing and recommending corporate governance guidelines.

 

  Overseeing the evaluation of the board and management.
 

 

The committee reviews with the board the skills and characteristics required of directors in the context of current board membership, as well as the company’s long-term business strategy. It seeks a group of individuals who bring to the board a variety of complementary skills and a range of viewpoints, backgrounds, experiences and other individual qualities and attributes that contribute to overall board diversity. It solicits the names of director candidates from a variety of sources, including members of the board and search firms. The committee also considers candidates submitted by shareholders. The committee assesses the effectiveness of its policies as part of its annual review of board composition and board, committee and individual director performance and in its recommendations to the board of nominees to stand for election as directors at the next Annual Shareholders Meeting.

The committee reviews biographical data and other relevant information regarding potential board candidates, may request additional information from the candidates or other sources and, if the committee deems it appropriate, may interview candidates and consult references and others who may assist in candidate evaluation. The committee evaluates all candidates in the same manner whether identified by shareholders or through other sources.

In considering potential director candidates, the committee evaluates each candidate’s integrity, independence, judgment, knowledge, experience and other relevant factors to develop an informed opinion of his or her qualifications and ability and commitment to meet the board’s expectations for directors as set forth in our Corporate Governance Guidelines. The committee’s deliberations reflect the board’s requirement that substantially all directors shall be independent and that all director nominees must be financially literate or must become financially literate within a reasonable time after becoming a director. They also reflect the board’s view regarding the appropriate number of directors and the composition of the board, including its belief that the membership of the board should reflect diversity.

The committee, in recommending nominees to stand for election as directors at the 2019 Annual Shareholders Meeting, and the board, in approving the nominees, considered the individual experience, qualifications, attributes and skills of each nominee (including his or her prior contributions to the board), with a view to constituting a board that, as a whole, is well-qualified to oversee our businesses. In 2018, Sempra Energy engaged a third-party director search firm to assist the committee in identifying and evaluating director candidates. On September 18, 2018, the company entered into a cooperation agreement (Cooperation Agreement) with Elliott Associates, L.P. and Elliott

 

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International, L.P. (together, Elliott), Bluescape Resources Company LLC (Bluescape) and Cove Key Management, LP (together with Elliott and Bluescape, each an Investor and collectively, the Investors). As part of the Cooperation Agreement and our ongoing board refreshment process, the company agreed, among other things, to work together with the Investors to mutually agree upon and appoint two new directors to our board. The Investors, the company and the director search firm identified a list of potential board nominees and, as a result of this process, in October 2018 our board appointed Michael N. Mears and Cynthia L. Walker to serve on our board. Mr. Mears and Ms. Walker are being nominated for election by our shareholders for the first time. Prior to their appointment to the board, the committee and other members of the board reviewed Mr. Mears’ and Ms. Walker’s backgrounds and qualifications and conducted interviews with them, on which basis the committee recommended each of them to the board. Each Investor has agreed to vote all shares which they are entitled to vote in favor of the election of all directors nominated by our board and otherwise in accordance with our board’s recommendation. For additional information about the nominees and their qualifications, please see below under “Proposal 1: Election of Directors.”

In addition, on March 11, 2019, the company announced that, as recommended by the committee, the board intends to appoint Cynthia J. Warner to the board in June 2019. Ms. Warner was recommended for board consideration by the committee due to her considerable management experience in the international oil and natural gas industry, among other reasons. The board also committed to the Investors to nominate Ms. Warner, who is a Qualified Director candidate within the meaning of the Cooperation Agreement, for election to the board at the company’s 2020 annual meeting of shareholders, and the Investors have consented to such nomination. As a result, and pursuant to the Cooperation Agreement, the Cooperation Period (as defined in the Cooperation Agreement) is now extended to 11:59 p.m. New York time on September 30, 2020.

Pursuant to the Cooperation Agreement, we agreed that William G. Ouchi, Ph.D. will not be nominated to stand for re-election as a director at the 2019 Annual Shareholders Meeting, which is in accordance with our policy that directors should not stand for re-election after having attained age 75.

During 2018, the Corporate Governance Committee held eight meetings.

Environmental, Health, Safety and Technology Committee

 

Our Environmental, Health, Safety and Technology Committee is composed entirely of independent directors, and is responsible for:

 

  Assisting the board in overseeing the company’s programs and performance related to environmental, health, safety, cybersecurity and technology matters.

 

  Assisting the board on environmental, health and safety laws, regulations and developments at the global, national, regional and local level and evaluating ways to address these matters as part of the company’s business strategy and operations.

 

  Assisting the board on cybersecurity programs and issues; and review and evaluation of technology developments that advance the company’s overall business strategy.

 

  Reviewing with management and, where appropriate, making recommendations to management and the Board of Directors regarding the company’s policies and practices with respect to environmental, health, safety and cybersecurity matters.
 

 

During 2018, the Environmental, Health, Safety and Technology Committee held four meetings.

Executive Committee

 

Our Executive Committee meets on call by the Chairman of this committee to act on emergency or time-sensitive issues during periods between meetings of the Board of Directors when scheduling or other requirements make it difficult to convene the full board. During 2018, the Executive Committee held one meeting.

In addition to the standing board committees described above, the board may, from time to time, establish ad hoc committees to address particular matters, transactions and projects. During 2018, the board maintained ad hoc committees, three of which are described below:

LNG and Business Development Committee

 

Under the Cooperation Agreement discussed above, the company agreed, among other things, to rename the LNG Construction and Technology Committee as the “LNG and Business Development Committee,” the members of which would include the existing committee members and the two new directors, for the purpose of conducting a comprehensive review of the company’s business.

Our LNG and Business Development Committee, whose members are Alan L. Boeckmann, Chair, Michael N. Mears, William C. Rusnack, Cynthia L. Walker and James C. Yardley, is responsible for:

 

 

Advising the board and management in conducting a comprehensive review of the company’s business.

 

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Reviewing and analyzing issues pertaining to the comprehensive review, overseeing the management and resolution of issues relating thereto, and reporting results and formal recommendations of the committee to the board.

During 2018, the LNG and Business Development Committee held three meetings.

Special Matters Committee

 

Our Special Matters Committee, whose members are William C. Rusnack, Chair, William D. Jones, Jack T. Taylor and James C. Yardley, meets at the direction of the board to serve as an advisor to the board with respect to special matters that affect the company, to review and analyze issues pertaining to special matters, and to oversee the management and resolution of issues relating to special matters. The Special Matters Committee is advising the board on the natural gas well leak at the SoCalGas Aliso Canyon natural gas storage facility and related matters. The committee will continue to operate in close coordination with the full board and closely track developments with respect to the Aliso Canyon natural gas storage facility.

During 2018, the Special Matters Committee held three meetings.

Demand Review Committee

 

Our Demand Review Committee, whose members are William C. Rusnack, Chair, and Alan L. Boeckmann, meets on call by the Chairman of this committee as needed to investigate allegations set forth in demands received from shareholders relating to the natural gas well leak at the SoCalGas Aliso Canyon natural gas storage facility and related matters, and to provide a recommendation to the Board of Directors for any actions that the committee determines are necessary or appropriate in light of its review of the demands.

During 2018, the Demand Review Committee held one meeting.

Communications with the Board

Shareholders, employees and interested parties who wish to communicate with the board, non-management directors as a group, a board committee or a specific director may do so by mail addressed to the attention of our Corporate Secretary. All such communications regarding executive compensation will be relayed to the Compensation Committee Chair for appropriate evaluation and consideration. All such communications regarding accounting, accounting policies, internal accounting controls and procedures, auditing matters, financial reporting processes, or disclosure controls and procedures will be relayed to the Audit Committee Chair.

All other communications are reviewed by the Corporate Secretary and provided to the directors consistent with a screening policy providing that unsolicited items, sales materials, and other routine items and items unrelated to the duties and responsibilities of the board are not relayed to directors. Any communication that is not relayed is recorded in a log and made available to the directors.

The address for these communications is:

 

LOGO  

Corporate Secretary

Sempra Energy

488 8th Avenue

San Diego, CA 92101

 

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Director Compensation

Summary

 

The Compensation Committee of the Sempra Energy Board of Directors reviews director compensation on an annual basis. The committee’s independent compensation consultant, Exequity, provides the committee with a report that analyzes the competitiveness of Sempra Energy’s director compensation in total and by component. Any changes to director compensation are approved by the Board of Directors. Our 2018 director compensation program is summarized in the table below:

 

2018 Director Compensation Program

 

Board Retainers:

  

Annual Base Retainer

   $ 85,000  

Lead Director Retainer

   $ 40,000  

Committee Chair Retainers:

  

Audit Committee Chair Retainer

   $ 20,000  

Compensation Committee Chair Retainer

   $ 15,000  

Other Committee Chair Retainer (A)

   $ 10,000  

Committee Member Retainers:

  

Audit Committee Retainer

   $ 20,000  

Other Committee Retainer (B)

   $ 10,000  

Equity:

  

Deferred Equity

   $ 50,000  

Annual Equity Grant

   $ 90,000  

Initial Equity Grant for New Director

   $ 180,000  

 

(A)

Applicable to the Corporate Governance Committee and Environmental, Health, Safety and Technology Committee.

 

(B)

Applicable to the Corporate Governance Committee, Environmental, Health, Safety and Technology Committee and Executive Committee.

Retainers

 

Directors who are not employees of Sempra Energy received annual retainers as set forth in the table above. Directors may elect to receive their retainer in cash or to defer it into phantom investment funds (including a fund for which interest is credited at the higher of 110 percent of the Moody’s Corporate Bond Yield Average or the Moody’s Corporate Bond Yield Average plus 1 percent) or phantom shares of our common stock.

Equity

 

Each quarter, non-employee directors are credited with a number of vested phantom shares of our common stock having a market value of $12,500, which we refer to as Mandatory Deferred Equity, and are required to hold these phantom shares until retirement or separation from the board. Following the director’s retirement or separation from the board, the current market value of the shares credited to the director’s account (together with reinvested dividend equivalents) is paid to the director in cash. Directors also receive initial or annual grants of restricted stock units or phantom shares of our common stock, which are subject to the vesting requirements described below.

Upon first becoming a director, each non-employee director receives an initial grant of restricted stock units or phantom shares having a market value of $180,000 and vesting in three equal annual installments (together with related reinvested dividend equivalents) on each of the first three anniversaries of the grant date.

Thereafter, at each annual meeting (other than the annual meeting that coincides with or first follows the director’s election to the board), each non-employee director who continues to serve as a director will receive an additional grant of restricted stock units or phantom shares having a market value of $90,000 and vesting on the date of the next annual meeting.

Unvested restricted stock units or phantom shares immediately vest if the director’s service on the board terminates by reason of death, disability or removal without cause. Upon any other termination event, all unvested units or phantom shares are forfeited.

The following changes were made to the Director Compensation Program during 2018:

 

 

Increased the annual retainer from $7,500 to $10,000 for members of the Compensation, Corporate Governance, Environmental, Health, Safety and Technology, and Executive Committees;

 

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Corporate Governance

 

 

 

Increased the annual retainer for Lead Director from $25,000 to $40,000;

 

 

Eliminated the annual retainer of $10,000 for members and $5,000 for the chair of the LNG and Business Development Committee (formerly the LNG Construction and Technology Committee); and

 

 

Increased the annual equity grant from $60,000 to $90,000 per year in restricted stock units or deferred phantom shares with the same vesting period of one year.

Director Compensation Table

We summarize below the 2018 compensation of our non-employee directors who served on our board during the year.

 

2018 Director Compensation

 

  

Fees Earned or

Paid in Cash

 

      

Stock
Awards

(B)

 

    

Change in Pension Value
and Nonqualified Deferred

Compensation Earnings

(C)

 

    

All Other

Compensation

(D)

 

    

Total

 

 

Alan L. Boeckmann

     $105,000          $140,000               $20,000        $265,000  

Kathleen L. Brown

     $105,000          $140,000               $25,000        $270,000  

Andrés Conesa

     $111,429          $140,000        $  1,164               $252,593  

Maria Contreras-Sweet

     $111,429          $140,000               $  2,075        $253,504  

Pablo A. Ferrero

     $108,571          $140,000                      $248,571  

William D. Jones

     $125,000          $140,000        $  1,436        $25,000        $291,436  

Bethany J. Mayer (A)

     $101,429          $140,000               $  5,000        $246,429  

Michael N. Mears (A)

     $  18,940          $180,000                      $198,940  

William G. Ouchi

     $115,000          $140,000               $24,940        $279,940  

William C. Rusnack

     $170,000          $140,000        $45,081        $20,000        $375,081  

Lynn Schenk

     $125,000          $140,000               $25,000        $290,000  

Jack T. Taylor

     $145,000          $140,000        $  6,902        $15,900        $307,802  

Cynthia L. Walker (A)

     $  18,940          $180,000                      $198,940  

James C. Yardley

     $115,000          $140,000               $25,000        $280,000  

 

(A)

Ms. Mayer resigned from the board effective October 30, 2018 and joined the company’s management team as Executive Vice President — Corporate Development and Technology in November 2018. She resigned from this position in January 2019. Mr. Mears and Ms. Walker joined the board on October 11, 2018.

 

(B)

Represents the grant date fair value of the equity grants of restricted stock units and phantom shares of our common stock granted during the year. These amounts represent our grant date estimate of the aggregate compensation expense that we will recognize over the service period of the awards. They are calculated in accordance with accounting principles generally accepted in the United States of America (GAAP) for financial reporting purposes based on the assumptions described in Note 10 of the Notes to Consolidated Financial Statements included in our Annual Report to Shareholders but disregarding estimates of forfeitures related to service-based vesting conditions. These awards were valued at the fair market value of our shares at the crediting date without reduction for non-transferability. The amounts set forth in this column are equal to the number of shares subject to awards multiplied by the grant date closing price of Sempra Energy’s common stock. The restricted stock units will be settled in shares of Sempra Energy common stock upon vesting.

 

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Corporate Governance

 

The following tables reflect the components of the stock awards granted to each non-employee director in 2018 and the outstanding equity balances with respect to those awards for each director as of December 31, 2018.

 

                 

 

Restricted Equity Grant

 

           

2018 Director Equity Grants

 

    

 

Mandatory

Deferred Equity

 

      

 

Phantom

Shares

 

      

 

Stock Units

 

      

Total

 

 

Alan L. Boeckmann

       $50,000          $  90,000                   $140,000  

Kathleen L. Brown

       $50,000          $  90,000                   $140,000  

Andrés Conesa

       $50,000                   $  90,000          $140,000  

Maria Contreras-Sweet

       $50,000                   $  90,000          $140,000  

Pablo A. Ferrero

       $50,000                   $  90,000          $140,000  

William D. Jones

       $50,000          $  90,000                   $140,000  

Bethany J. Mayer

       $50,000          $  90,000                   $140,000  

Michael N. Mears (1)

                $180,000                   $180,000  

William G. Ouchi

       $50,000                   $  90,000          $140,000  

William C. Rusnack

       $50,000          $  90,000                   $140,000  

Lynn Schenk

       $50,000          $  90,000                   $140,000  

Jack T. Taylor

       $50,000          $  90,000                   $140,000  

Cynthia L. Walker (1)

                         $180,000          $180,000  

James C. Yardley

       $50,000          $  90,000                   $140,000  

 

(1)

In January 2019, Ms. Walker and Mr. Mears each were credited with 204 phantom shares valued at $21,739, which includes pro rata mandatory deferred equity of $9,239 for the fourth quarter of 2018 plus $12,500 for the first quarter of 2019. These amounts will be reported as 2019 equity grants and are not included in the amounts shown above.

In 2018, all long-term incentive compensation was delivered through phantom shares and restricted stock units, and no stock options were granted. The following table summarizes the number of stock options, phantom shares and restricted stock units outstanding for each non-employee director at December 31, 2018:

 

Director Equity Balances as of December 31, 2018

 

  

 

Phantom

Shares

 

      

 

Restricted

Stock Units

 

    

 

Stock

Options

 

    

Total

 

 

Alan L. Boeckmann

     18,055                        18,055  

Kathleen L. Brown

     8,168                        8,168  

Andrés Conesa

     835          2,029               2,864  

Maria Contreras-Sweet

     811          1,980               2,791  

Pablo A. Ferrero

     2,662          859               3,521  

William D. Jones

     29,480                        29,480  

Bethany J. Mayer

     1,421                        1,421  

Michael N. Mears (1)

     1,565                        1,565  

William G. Ouchi

     21,523          859               22,382  

William C. Rusnack

     28,376                        28,376  

Lynn Schenk

     15,710                 5,000        20,710  

Jack T. Taylor

     9,267                        9,267  

Cynthia L. Walker (1)

              1,565               1,565  

James C. Yardley

     9,034                        9,034  

 

(1)

In January 2019, Ms. Walker and Mr. Mears each were credited with 204 phantom shares valued at $21,739, which includes pro rata mandatory deferred equity of $9,239 for the fourth quarter of 2018 plus $12,500 for the first quarter of 2019. These amounts will be reported as 2019 equity grants and are not included in the balances shown above.

 

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Corporate Governance

 

 

(C)

Consists of (i) the aggregate change in the actuarial value of accumulated benefits under defined benefit pension plans and (ii) above-market interest (interest in excess of 120 percent of the federal long-term rate) on deferred compensation. The 2018 amounts are:

 

  2018 Change in Pension Value and Above-Market Interest

 

  

 

Change in

Accumulated

Benefits

 

      

 

Above-Market

Interest

 

    

Total

 

 

Alan L. Boeckmann

                      

Kathleen L. Brown

                      

Andrés Conesa

                        $ 1,164      $ 1,164  

Maria Contreras-Sweet

                      

Pablo A. Ferrero

                      

William D. Jones

               $ (8,949                  $ 1,436      $ (7,513

Bethany J. Mayer

                      

Michael N. Mears

                      

William G. Ouchi

               $ (22,648             $ (22,648

William C. Rusnack

                        $ 45,081      $ 45,081  

Lynn Schenk

                      

Jack T. Taylor

                        $ 6,902      $ 6,902  

Cynthia L. Walker

                      

James C. Yardley

                      

 

    

Only Mr. Jones and Dr. Ouchi are entitled to receive grandfathered pension benefits and both have attained the maximum years of service credit. The annual benefit is based on the annual board retainer at the date the benefit is paid. It commences upon the latter of the conclusion of board service or attaining age 65 and continues for a period not to exceed the director’s years of service as a director of predecessor companies plus up to 10 years of service as a director of the company. The actuarial equivalent of the total retirement benefit is paid to the retiring director in a single lump sum upon the conclusion of board service, unless the director has elected to receive the annual benefit.

 

(D)

Consists of our contributions to charitable, educational and other non-profit organizations to match those of directors on a dollar-for-dollar basis up to an annual maximum match of $25,000 for each director.

In addition to the compensation for non-employee directors set forth above, Sempra Energy has agreements with these directors that provide for indemnification for monetary damages to the fullest extent permissible under California law so they will not be unduly concerned about personal liability in connection with their service to the company.

Directors who also are employees of the company are not additionally compensated for service as a director. Compensation of Debra L. Reed (who retired from the company effective December 1, 2018) and Jeffrey W. Martin (who became the Chief Executive Officer and a director on May 1, 2018 and the Chairman on December 1, 2018) is summarized in the Summary Compensation Table appearing under “Executive Compensation — Compensation Tables.”

 

20   Sempra Energy 2019 Proxy Statement


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Audit Committee Report

The Audit Committee of the Board of Directors is composed of the five directors named below, all of whom have been determined by the board to be independent directors. The board also has determined that all members of the committee are financially literate and that Mr. Taylor, the chair of the committee, is an audit committee financial expert as defined by the rules of the Securities and Exchange Commission. The committee’s charter, adopted by the board, is posted on the company’s website at www.sempra.com under the “Investors” and “Governance” tabs.

The committee’s responsibilities include appointing the company’s independent registered public accounting firm, pre-approving both audit and non-audit services to be provided by the firm and assisting the board in providing oversight of the company’s financial reporting process. In fulfilling its oversight responsibilities, the committee meets with the company’s independent registered public accounting firm, internal auditors and management to review accounting, auditing, internal control and financial reporting matters.

It is not the committee’s responsibility to plan or conduct audits or to determine that the company’s financial statements and disclosures are complete, accurate and in accordance with accounting principles generally accepted in the United States and applicable laws, rules and regulations. Management is responsible for the company’s financial statements, including the estimates and judgments on which they are based, as well as the company’s financial reporting process, accounting policies, internal audit function, internal control over financial reporting, disclosure controls and procedures, and risk management. The company’s independent registered public accounting firm, Deloitte & Touche LLP, is responsible for performing an audit of the company’s annual financial statements, expressing an opinion as to the conformity of the annual financial statements with accounting principles generally accepted in the United States, expressing an opinion as to the effectiveness of the company’s internal control over financial reporting and reviewing the company’s quarterly financial statements.

The committee has discussed with Deloitte & Touche LLP the matters required to be discussed by the rules of the Public Company Accounting Oversight Board Auditing Standard No. 1301, “Communications with Audit Committees,” which requires the independent registered public accounting firm to communicate information to the committee regarding the scope and results of its audit of the company’s financial statements, including information with respect to the firm’s responsibilities under auditing standards generally accepted in the United States, significant accounting policies, management judgments and estimates, any significant unusual transactions or audit adjustments, any disagreements with management and any difficulties encountered in performing the audit and other such matters required to be discussed with the committee by those standards.

The committee also has received from Deloitte & Touche LLP a report providing the disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence. Deloitte & Touche LLP also has discussed its independence with the committee and confirmed in the report that, in its professional judgment, it is independent of the company within the meaning of the federal securities laws. The committee also considered whether Deloitte & Touche LLP’s provision of non-audit services to the company and its affiliates is compatible with its independence.

The committee also has reviewed and discussed with the company’s senior management the audited financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2018, and management’s reports on the financial statements and internal control over financial reporting. Management has confirmed to the committee that the financial statements have been prepared with integrity and objectivity and that management has maintained an effective system of internal control over financial reporting. Deloitte & Touche LLP has expressed its professional opinions that the financial statements conform with accounting principles generally accepted in the United States of America and that management has maintained an effective system of internal control over financial reporting. In addition, the company’s Chief Executive Officer and Chief Financial Officer have reviewed with the committee the certifications that each will file with the Securities and Exchange Commission pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and the policies and procedures management has adopted to support the certifications.

Based on these considerations, the Audit Committee has recommended to the Board of Directors that the company’s audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2018, for filing with the Securities and Exchange Commission.

Audit Committee

Jack T. Taylor, Chair

Andrés Conesa

Maria Contreras-Sweet

William G. Ouchi

James C. Yardley

 

Sempra Energy 2019 Proxy Statement   21


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Share Ownership

The following table shows the number of shares of our common stock beneficially owned at March 5, 2019, by each of our directors, by each of our executive officers named in the executive compensation tables in this proxy statement, and by all of our directors and executive officers as a group. The shares of common stock beneficially owned by our directors and executive officers as a group total less than 1.0 percent of our outstanding shares. In calculating these percentages, shares under the heading “Phantom Shares” are not included because these phantom shares cannot be voted. In addition, these shares may be settled only for cash or cannot be settled for common stock within 60 days of March 5, 2019.

 

 

Share Ownership (A)

 

  

 

Current Beneficial
Holdings (B)

 

    

 

Shares Subject
to Exercisable
Options (C)

 

    

 

Total Without
Phantom Shares

 

    

 

Phantom

Shares (D)

 

    

 

Total

Including
Phantom Shares

 

 

 

Dennis V. Arriola

  

 

 

 

25,354

 

 

  

 

 

 

 

 

  

 

 

 

25,354

 

 

  

 

 

 

 

 

  

 

 

 

25,354

 

 

 

Alan L. Boeckmann

  

 

 

 

6,000

 

 

  

 

 

 

 

 

  

 

 

 

6,000

 

 

  

 

 

 

17,646

 

 

  

 

 

 

23,646

 

 

 

Kathleen L. Brown

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

7,483

 

 

  

 

 

 

7,483

 

 

 

Andrés Conesa

  

 

 

 

990

 

 

  

 

 

 

 

 

  

 

 

 

990

 

 

  

 

 

 

959

 

 

  

 

 

 

1,949

 

 

 

Maria Contreras-Sweet

  

 

 

 

1,117

 

 

  

 

 

 

 

 

  

 

 

 

1,117

 

 

  

 

 

 

934

 

 

  

 

 

 

2,051

 

 

 

Pablo A. Ferrero

  

 

 

 

2,870

 

 

  

 

 

 

 

 

  

 

 

 

2,870

 

 

  

 

 

 

2,800

 

 

  

 

 

 

5,670

 

 

 

Joseph A. Householder (E)

  

 

 

 

74,990

 

 

  

 

 

 

 

 

  

 

 

 

74,990

 

 

  

 

 

 

5,601

 

 

  

 

 

 

80,591

 

 

 

William D. Jones

  

 

 

 

4,053

 

 

  

 

 

 

 

 

  

 

 

 

4,053

 

 

  

 

 

 

28,982

 

 

  

 

 

 

33,035

 

 

 

Jeffrey W. Martin

  

 

 

 

22,113

 

 

  

 

 

 

 

 

  

 

 

 

22,113

 

 

  

 

 

 

17,530

 

 

  

 

 

 

39,643

 

 

 

Michael N. Mears

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

204

 

 

  

 

 

 

204

 

 

 

Trevor I. Mihalik

  

 

 

 

10,332

 

 

  

 

 

 

 

 

  

 

 

 

10,332

 

 

  

 

 

 

2,687

 

 

  

 

 

 

13,019

 

 

 

William G. Ouchi (F)

  

 

 

 

14,954

 

 

  

 

 

 

 

 

  

 

 

 

14,954

 

 

  

 

 

 

21,810

 

 

  

 

 

 

36,764

 

 

 

Debra L. Reed (G)

  

 

 

 

147,196

 

 

    

 
  

 

 

 

147,196

 

 

  

 

 

 

 

 

  

 

 

 

147,196

 

 

 

William C. Rusnack

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

27,851

 

 

  

 

 

 

27,851

 

 

 

Lynn Schenk

  

 

 

 

11,306

 

 

  

 

 

 

5,000

 

 

    
16,306
 
  

 

 

 

15,086

 

 

  

 

 

 

31,392

 

 

 

Jack T. Taylor

  

 

 

 

131

 

 

  

 

 

 

 

 

  

 

 

 

131

 

 

  

 

 

 

8,591

 

 

  

 

 

 

8,722

 

 

 

Cynthia L. Walker

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

204

 

 

  

 

 

 

204

 

 

 

Martha B. Wyrsch (H)

  

 

 

 

10,108

 

 

  

 

 

 

 

 

  

 

 

 

10,108

 

 

  

 

 

 

10,642

 

 

  

 

 

 

20,750

 

 

 

James C. Yardley

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

    
8,357
 
  

 

 

 

8,357

 

 

 

Directors and Executive Officers as a Group (21 persons)

  

 

 

 

351,520

 

 

  

 

 

 

5,000

 

 

    
356,520
 
    
182,541
 
    
539,061
 

 

(A)

Our directors and officers did not beneficially own shares of our 6% Mandatory Convertible Preferred Stock, Series A or our 6.75% Mandatory Convertible Preferred Stock, Series B, at March 5, 2019; therefore, no such shares are shown in the table above.

 

(B)

Includes unvested restricted stock units that are convertible into our common stock and that vest within 60 days of March 5, 2019. These total 590 unvested restricted stock units for Dr. Conesa, 565 unvested restricted stock units for Ms. Contreras-Sweet, 11,459 unvested restricted stock units for Mr. Householder, 12,376 unvested restricted stock units for Mr. Martin, 3,080 unvested restricted stock units for Mr. Mihalik and 473 unvested restricted stock units for Peter R. Wall.

 

(C)

Shares which may be acquired through the exercise of stock options that currently are exercisable or will become exercisable within 60 days of March 5, 2019.

 

(D)

The phantom shares represent deferred compensation deemed invested in shares of our common stock. These phantom shares track the performance of our common stock but cannot be voted and may only be settled for cash, or, in the case of 10,642 shares of vested common stock units deferred by Ms. Wyrsch, cannot be settled for common stock within 60 days of March 5, 2019. Phantom shares and deferred units are either fully vested or will vest within 60 days of March 5, 2019.

 

(E)

Mr. Householder shares with his spouse the power to vote and dispose of 55,697 shares.

 

(F)

Pursuant to the Cooperation Agreement and in keeping with our retirement policy, Dr. Ouchi was not nominated to stand for re-election in 2019 and will retire as a director effective May 9, 2019.

 

(G)

Ms. Reed retired as President and Chief Executive Officer of the company effective May 1, 2018, and as Chairman of the company effective December 1, 2018.

 

(H)

Ms. Wyrsch, who retired as Executive Vice President and General Counsel of the company effective March 1, 2019, shares with her spouse the power to vote and dispose of 2,000 shares.

 

22   Sempra Energy 2019 Proxy Statement


Table of Contents

Share Ownership

 

Based on a review of filings made under Section 13(g) of the Securities Exchange Act of 1934, as amended, as of December 31, 2018, the only persons or entities known by us to be a beneficial owner of more than 5 percent of our common stock were as follows:

 

 

Name and Address of Beneficial Owner

 

 

 

Shares of Sempra Energy Common Stock

 

 

 

Percent of Class

 

 

T. Rowe Price Associates, Inc. (A)

100 E. Pratt Street

Baltimore, MD 21202

 

 

32,425,914

 

 

11.8%

 

BlackRock, Inc. (B)

55 East 52nd Street

New York, NY 10055

 

 

24,135,885

 

 

8.8%

 

The Vanguard Group (C)

100 Vanguard Blvd

Malvern, PA 19355

 

 

21,165,723

 

 

7.7%

 

Capital International Investors (D)

11100 Santa Monica Boulevard, 16th Floor

Los Angeles, CA 90025

 

 

14,990,024

 

 

5.5%

 

Franklin Resources, Inc. (E)

One Franklin Parkway

San Mateo, CA 94403

 

 

14,968,122

 

 

5.4%

 

(A)

The information regarding T. Rowe Price Associates, Inc. is based solely on a Schedule 13G/A filed by T. Rowe Price Associates, Inc. with the SEC on February 14, 2019 (the TRP 13G/A). According to the TRP 13G/A, includes sole voting power with respect to 13,454,705 shares and sole dispositive power with respect to 32,402,968 shares.

 

(B)

The information regarding BlackRock, Inc. is based solely on a Schedule 13G/A filed by BlackRock, Inc. with the SEC on February 11, 2019 (the BlackRock 13G/A). According to the BlackRock 13G/A, includes sole voting power with respect to 21,426,224 shares and sole dispositive power with respect to 24,135,885 shares.

 

(C)

The information regarding The Vanguard Group is based solely on a Schedule 13G/A filed by The Vanguard Group with the SEC on February 13, 2019 (the Vanguard 13G/A). According to the Vanguard 13G/A, includes sole voting power with respect to 369,079 shares, sole dispositive power with respect to 20,712,458 shares, shared voting power with respect to 142,244 shares and shared dispositive power with respect to 453,265 shares.

 

(D)

The information regarding Capital International Investors is based solely on a Schedule 13G filed by Capital International Investors with the SEC on February 14, 2019 (the Capital 13G). According to the Capital 13G, includes sole voting power with respect to 14,916,086 shares and sole dispositive power with respect to 14,990,024 shares.

 

(E)

The information regarding Franklin Resources, Inc. is based solely on a Schedule 13G filed by Franklin Resources, Inc. with the SEC on January 28, 2019 (the Franklin 13G). According to the Franklin 13G, includes 1,559,595 shares of common stock issuable on conversion of preferred stock (as computed under Rule 13d-3(d)(1)(i)), sole voting power with respect to 14,916,122 shares and sole dispositive power with respect to 14,968,122 shares. Holders of our preferred stock are not entitled to vote on any item of business at our Annual Shareholders Meeting.

For information regarding share ownership guidelines applicable to our directors and officers, please see “Corporate Governance—Board of Directors—Director Share Ownership Guidelines” and “Executive Compensation—Compensation Discussion and Analysis—Share Ownership Requirements.”

Section 16(a) Beneficial Ownership Reporting Compliance

Our directors and executive officers are required to file reports with the SEC regarding their ownership of our shares. Based solely on our review of the reports filed and written representations from directors and executive officers that no other reports were required, we believe that all filing requirements were timely met during 2018.

 

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Board of Directors Proposals

Proposals 1, 2, 3 and 4 have been included in this proxy statement at the direction of the Board of Directors. The board recommends that you vote “FOR” each director nominee in Proposal 1 and “FOR” each of Proposals 2, 3 and 4.

Proposal 1: Election of Directors

 

Directors are elected at each Annual Shareholders Meeting for terms expiring at the next Annual Shareholders Meeting.

The Board of Directors has nominated the following 13 individuals for election as directors, all of whom are currently directors:

 

Alan L. Boeckmann

 

Kathleen L. Brown

 

Andrés Conesa

 

Maria Contreras-Sweet

  Pablo A. Ferrero

 

William D. Jones

 

Jeffrey W. Martin

 

Michael N. Mears

 

William C. Rusnack

  Lynn Schenk

 

Jack T. Taylor

 

Cynthia L. Walker

 

James C. Yardley

Properly executed proxies will be voted for these 13 nominees unless other instructions are specified. If any nominee should become unavailable to serve, the proxies may be voted for a substitute nominee designated by the board, or the board may reduce the authorized number of directors. In no event may the proxies be voted for more than 13 nominees.

Pursuant to the Cooperation Agreement and in keeping with our retirement policy, William G. Ouchi was not nominated to stand for re-election and, immediately following this year’s Annual Shareholders Meeting, as adjourned or postponed, Dr. Ouchi will no longer serve as a director of the company.

We have not received notice of any additional candidates to be nominated to stand for election as directors at the 2019 Annual Shareholders Meeting and the deadline for notice of the nomination of additional candidates has passed. Consequently, the election of directors will be an uncontested election and our bylaw providing for majority voting in uncontested elections will apply. Under majority voting, to be elected as a director, a nominee must receive votes “FOR” his or her election constituting a majority of the shares represented and voting at the Annual Shareholders Meeting at which a quorum is present, and the “FOR” votes must also represent more than 25 percent of our outstanding shares. If a nominee who currently is serving as a director does not receive sufficient “FOR” votes to be re-elected, the director will cease to be a director not later than 90 days following the certification of the election results, and the resulting vacancy in the board may be filled by the remaining directors.

The board has determined that each non-employee nominee is an independent director. Information concerning the board’s independence standards is contained under the caption “Corporate Governance—Board of Directors—Director Independence.”

 

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Our directors possess a valuable breadth and depth of experience and qualifications to oversee the company’s multiple businesses and global operations. The following chart sets forth the varied qualifications, experiences and backgrounds of the director nominees in the aggregate:

 

 

LOGO

Experience/Qualifications

Biographical information regarding each director nominee and his or her qualifications to serve as a director is set forth on the succeeding pages.

In each biography below, the year shown as election as a director is the year that the director was first elected as a director of Sempra Energy. Unless otherwise indicated, each director has held his or her principal occupation or other positions with the same or predecessor organizations for at least the last five years. In addition, the following charts summarize the diversity, tenure and independence of our directors standing for election: 54 percent of our directors are women or people of color; 38 percent of our directors have served less than five years, with average tenure being 6.6 years; and 92 percent of our directors are independent.

 

 

LOGO

 

The Board of Directors recommends that on Proposal 1 you vote “FOR” each of its nominees for election to the board.

 

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LOGO

  

 

Alan L. Boeckmann, 70, has been a director since 2011. In 2012, he retired as the Non-Executive Chairman of Fluor Corporation, a leading engineering, procurement, construction and maintenance services company. From 2002 to early 2011, Mr. Boeckmann was the Chairman and Chief Executive Officer of Fluor. Prior to that, he held a number of senior management and operating positions at Fluor. Mr. Boeckmann is a director of Archer-Daniels-Midland Company and BP p.l.c. Mr. Boeckmann, a former director of Fluor Corporation, will rejoin the Fluor Corporation board on May 1, 2019, and will not run for reelection as a director at BP p.l.c.’s 2019 annual general meeting. He is a former director of BHP Billiton, Burlington Northern Santa Fe Corporation and the National Petroleum Council.

 

Mr. Boeckmann has been an outspoken business leader in promoting international standards for business ethics and was instrumental in the formation of the World Economic Forum’s Partnering Against Corruption Initiative in 2004. His extensive board, executive management and infrastructure construction experience, coupled with his commitment to ethical conduct in international business activities, makes him a valuable member of our board.

 

 

 

LOGO

  

 

Kathleen L. Brown, 73, has been a director since 2013. She is a partner of the law firm Manatt, Phelps & Phillips, LLP and serves as a director of Stifel Financial Corp., Five Point Holdings, LLC and Renew Financial. Prior to joining Manatt in September 2013, she worked in various leadership positions at Goldman Sachs Group, Inc., a global investment banking and securities firm. From 2011 to 2013, Ms. Brown served as the chairman of investment banking for Goldman’s Midwest division in Chicago and was managing director and head of the firm’s Los Angeles-based western region public sector and infrastructure group from 2003 to 2011. From 1995 to 2000, Ms. Brown was a senior executive at Bank of America where she served in various positions, including President of the Private Bank. She served as California state treasurer from 1991 to 1995. Ms. Brown currently serves on the board of directors of the Mayor’s Fund-Los Angeles and on the Investment Committee for the Annenberg Foundation and is a former director of Forestar Group, Inc. She is on the Advisory Boards of the Stanford Center on Longevity and the University of California Los Angeles (UCLA) Medical Center. Ms. Brown is a member of the Council on Foreign Relations.

 

Ms. Brown has extensive experience in both the public and private financial sectors, as well as in-depth knowledge of California government processes. Her knowledge of the law and experience as a partner at Manatt give her insight into the effects of laws and regulations on our businesses. This combination of public and private financial experience, legal experience and public service in the State of California makes her a valuable member of our board.

 

 

 

LOGO

  

 

Andrés Conesa, Ph.D., 49, has been a director since 2017. He has been the Chief Executive Officer of Grupo Aeroméxico, S.A.B. de C.V. since 2005 and is a director and member of its audit committee. Previously, Dr. Conesa held several positions in the Mexico Federal Government: from 2003 to 2005, he was Chairman of the Board of Directors of CINTRA (the holding company of Aeroméxico and Mexicana), and from 1991 to 2004, he served in various capacities at the Mexican Ministry of Finance, most recently as Deputy Undersecretary of Public Credit. He was a member of the Board of Governors of the International Air Transport Association from 2008 until June 2018 and served as its Chairman during the 2015 term. Dr. Conesa is a former director of IEnova, Genomma Lab International and the Mexican Stock Exchange.

 

Dr. Conesa’s extensive experience and knowledge of transnational business activities and the Mexican regulatory and financial sectors make him a valuable member of the board, particularly as we look to expand our operations in Mexico.

 

 

 

LOGO

  

 

Maria Contreras-Sweet, 63, has been a director since 2017. She became the Managing Partner of both Contreras-Sweet Enterprises and Rockway Equity Partners in October 2017. From April 7, 2014 through January 20, 2017, she served as the Administrator of the U.S. Small Business Administration and as a member of President Obama’s cabinet. Ms. Contreras-Sweet was a founder of ProAmerica Bank where she served as Executive Chairwoman from 2006 to 2014. She was Co-Founder and Managing Partner of Fortius Holdings from 2003 to 2006. Prior to that, she served as the California cabinet Secretary of the Business, Transportation and Housing Agency from 1999 to 2003. She was appointed chair to the finance committee of CA-ISO (California Independent System Operator) to help solve the state’s 2000-2001 energy crisis. Ms. Contreras-Sweet served as director of public affairs for Westinghouse Electric Company’s 7-Up/RC Bottling Company, where she rose to vice president and became an equity partner. She is a director of Regional Management Corp. and the Bipartisan Policy Center and is a distinguished fellow of the Larta Institute.

 

Ms. Contreras-Sweet possesses extensive knowledge and executive experience in both the public and private sectors. She brings a strong understanding of financial markets, infrastructure, supply chains, and global innovation, as well as Latin-American governments, and experience with small and medium-sized businesses, which makes her a valuable contributor to the board.

 

 

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LOGO

  

 

Pablo A. Ferrero, 56, has been a director since 2013. He is an independent energy consultant. From 2006 to 2011, Mr. Ferrero served as Executive Vice President for the Southern Cone at AEI Energy, a power generation and distribution and gas transmission and distribution company. From 2004 to 2006, he was the Chief Executive Officer of Transportadora de Gas del Sur S.A. He is executive director at MSU Energy S.A. He is a former director of Metrogas, Pampa Energía, RDA Renting, S.A., TGS, Transener Edesur, Petrobras Energía, Emdersa, EDESA Holding, EDEN, Emgasud, Servicios Petroleros Argentina, Refinor, Oldelval, Termap, Chilquinta Energía (Chile), Luz del Sur (Peru), Petrolera Andina (Bolivia) and Promigas (Colombia).

 

Mr. Ferrero has a deep understanding of the energy industry and in particular energy operations in South America. This understanding of international energy operations along with his extensive executive and board experience make him a valuable member of our board.

 

 

 

LOGO

  

 

William D. Jones, 63, has been a director since Sempra Energy’s inception in 1998. He has been the President and Chief Executive Officer and a director of CityLink Investment Corporation, a real estate investment, development and management firm, since 1994. From 2001 through 2018, Mr. Jones was the President, Chief Executive Officer and a director of City Scene Management Company. From 1989 to 1993, Mr. Jones served as General Manager/Senior Asset Manager and Investment Manager with certain real estate subsidiaries of The Prudential. Previously, he served as a San Diego City Council member and as Deputy Mayor of San Diego. Mr. Jones is a director and, in some cases, Board Chair of certain funds under management by the Capital Group. He is a member of the NACD and the University of California San Diego (UCSD) Real Estate Advisory Council. Mr. Jones is a former director of The Price Real Estate Investment Trust, Southwest Water Company, the Federal Reserve Bank of San Francisco and the San Diego Padres baseball team and is a former Chairman of the Board of the Los Angeles Branch of the Federal Reserve Bank of San Francisco, the former Chairman of the Board of Trustees of the Francis Parker School and former Board Trustee of the University of San Diego. Mr. Jones has extensive experience as a real estate developer in San Diego, where he built the City Heights Urban Village, an award-winning redevelopment project.

 

Mr. Jones’ background in the public and financial arenas, along with his real estate expertise, has been helpful to our board as it considers the development of large infrastructure projects, which requires extensive amounts of land and an understanding of the construction and real estate industries. He is also an experienced director of board governance matters and has earned the NACD board leadership fellow designation. His expertise in these areas makes him a vital member of our board.

 

 

 

LOGO

  

 

Jeffrey W. Martin, 57, has been a director since May 1, 2018. Mr. Martin has served as Chief Executive Officer of the company since May 1, 2018, and as Chairman since December 1, 2018. Previously, Mr. Martin served as Executive Vice President and Chief Financial Officer of the company since January 2017. Prior to that, he served at SDG&E as the Chief Executive Officer and a director from January 2014 to December 2016, as the Chairman from November 2015 to December 2016 and as the President from October 2015 to December 2016. From 2010 to 2013, Mr. Martin served as the President and Chief Executive Officer of Sempra U.S. Gas & Power (USGP), a business unit of the company, and USGP’s predecessor organization, Sempra Generation. Before that, he served as the company’s Vice President — Investor Relations. Prior to joining Sempra Energy in December 2004, Mr. Martin was chief financial officer of NewEnergy, Inc. He also formerly served as corporate counsel at UniSource Energy Corporation and was an attorney at the law firm of Snell & Wilmer, LLP. Mr. Martin currently serves as a director of Oncor Electric Delivery Company LLC, of which Sempra Energy indirectly owns 80.25 percent. Mr. Martin is on the Business Roundtable and the board of trustees of the University of San Diego. He previously served on the boards of directors of the Edison Electric Institute, California Chamber of Commerce and National Association of Manufacturers.

 

Mr. Martin, in his position as Chairman and Chief Executive Officer of Sempra Energy, oversees the management of all aspects of our business. His performance and leadership in previous senior executive positions at Sempra Energy, his experience as an employee of the company and its subsidiaries for more than 14 years, and his broad understanding of the energy industry, make Mr. Martin a valuable member of our board.

 

 

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LOGO

  

 

Michael N. Mears, 56, has been a director since October 2018. He has been Chairman, President and Chief Executive Officer of Magellan Midstream Partners, L.P. since 2011. From 2008 through 2011, he served as Chief Operating Officer of Magellan. Mr. Mears was a Senior Vice President of Magellan GP, LLC, general partner of Magellan, from 2007 through 2008 and a Vice President from 2004 to 2007. Prior to joining Magellan in 2004, he served as a vice president of subsidiaries of The Williams Companies, Inc. from 1996 to 2004. Mr. Mears also worked in various management positions with Williams Pipe Line Company (now known as Magellan Pipeline Company, L.P.) since joining Williams in 1985. He is a member of the board of directors of the Association of Oil Pipelines and is a director of the Tulsa Regional Chamber and Tulsa Area United Way.

 

Mr. Mears’ extensive knowledge of the energy industry, as well as his executive, commercial and operational experience, make him a valuable addition to our board.

 

 

 

LOGO

  

 

William C. Rusnack, 74, has been a director since 2001. He was the President and Chief Executive Officer and a director of Premcor Inc., an independent oil refiner, from 1998 to 2002. Prior to 1998, Mr. Rusnack was an executive of Atlantic Richfield Company, an integrated petroleum company. He is a former director of Flowserve Corporation, Peabody Energy Corporation, and Solutia Inc. Mr. Rusnack is a member of the Dean’s Advisory Council of the Graduate School of Business at the University of Chicago.

 

Mr. Rusnack brings a deep understanding of the energy industry to our board. He spent 31 years at Atlantic Richfield Company, many of which he worked in a senior leadership capacity. Mr. Rusnack also offers knowledge and insight gained as a senior executive with the oil refinery company, Premcor. This specialized energy industry experience, along with his deep understanding of effective executive management development, makes him a valuable member of our board.

 

 

 

LOGO

  

 

Lynn Schenk, 74, has been a director since 2008. She is an attorney in private practice. Ms. Schenk served as Chief of Staff to the Governor of California from 1999 to 2003 and was elected to the U.S. House of Representatives representing San Diego, California, from 1993 to 1995, serving on the House Energy and Commerce Committee. From 1978 to 1983, she served as the Deputy and then Secretary of California’s Business, Transportation and Housing Agency; prior to that she was on the in-house counsel staff of SDG&E and a California Deputy Attorney General. Ms. Schenk is a director of Biogen, where she chairs the Risk Committee and serves on the Compensation Committee. She is a member of the Board of Overseers of The Scripps Research Institute and served on its Governance Committee, a member of the California High Speed Rail Authority, a trustee of the UCSD Foundation, a member of the University of San Diego School of Law, Board of Visitors and a fellow of the Graduate Program, UCLA Luskin School of Public Affairs. She is an NACD Board Leadership Fellow, a member of the NACD Advisory Council on Risk Oversight and has received the NACD’s CERT Certificate in Cybersecurity Oversight.

 

Ms. Schenk has an extensive history of government, political and public service and an in-depth knowledge of the inner workings of federal and state governmental processes. Along with her insight and experience in government, Ms. Schenk’s legal background within our business sector has equipped her with the tools to help our board identify and manage risk. She also has served on the boards of a number of publicly listed companies. This combination enables Ms. Schenk to provide our board with unique perspective on matters pertaining to California’s complex government and regulatory environment, as well as corporate governance.

 

 

 

LOGO

  

 

Jack T. Taylor, 67, has been a director since 2013. He was the Chief Operating Officer-Americas and Executive Vice Chair of U.S. Operations for KPMG LLP from 2005 to 2010. From 2001 to 2005, he served as the Vice Chairman of U.S. Audit and Risk Advisory Services for KPMG. Mr. Taylor is an NACD Board Leadership Fellow and a member of the NACD Audit Committee Chair Advisory Council. He is a director of Genesis Energy LP and Murphy USA Inc.

 

Mr. Taylor has extensive experience with financial and public accounting issues as well as a deep knowledge of the energy industry. He spent over 35 years as a public accountant at KPMG LLP, many of which he worked in a leadership capacity. This experience with financial and public accounting issues, together with his executive experience and knowledge of the energy industry, makes him a valuable member of the board.

 

 

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LOGO

  

 

Cynthia L. Walker, 43, has been a director since October 2018. She has been the Senior Vice President, Midstream and Marketing of Occidental Petroleum Corporation since 2016. From 2014 to 2016, she was Occidental’s Senior Vice President, Strategy and Development. She joined Occidental in 2012 as Executive Vice President and Chief Financial Officer. Prior to that, Ms. Walker was a managing director at Goldman Sachs & Co. where she worked for 12 years providing strategic advice in high-profile energy industry transactions as a senior member of the Global Natural Resources Group and Mergers and Acquisitions Group. She is a director of the Houston Zoo and the Children’s Museum of Houston.

 

Ms. Walker’s extensive knowledge and executive experience in the natural gas and energy industries, as well as her prior experience in finance and mergers and acquisitions, make her a valuable addition to our board.

 

 

 

LOGO

  

 

James C. Yardley, 67, has been a director since 2013. He was Executive Vice President of El Paso Corporation and President of its Pipeline Group from 2006 through 2012. Mr. Yardley was also the President and Chief Executive Officer of El Paso Pipeline GP Company LLC, the general partner of El Paso Pipeline Partners, L.P., a master limited partnership that owned and operated interstate natural gas transportation pipelines, storage and other midstream assets, from 2007 through 2012. From 1998 through 2006, he was the President of Southern Natural Gas Company, previously a unit of El Paso Corporation and now a unit held jointly by Kinder Morgan Inc. and The Southern Company. Mr. Yardley was formerly a director of El Paso Pipeline GP Company LLC, and of Scorpion Offshore Ltd.

 

Mr. Yardley has extensive experience in the natural gas industry and in particular the midstream portion of that industry. He has spent over 34 years in the energy sector, many of which he worked in a leadership capacity, and has public company board experience. This specialized energy industry experience, together with Mr. Yardley’s executive and public company board experience, makes him a valuable member of our board.

 

 

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Proposal 2: Ratification of Independent Registered Public Accounting Firm

 

The Audit Committee of the Board of Directors has retained Deloitte & Touche LLP as the independent registered public accounting firm to audit our financial statements and the effectiveness of our internal control over financial reporting for 2019. Deloitte & Touche LLP has served as our independent public accounting firm continuously since our inception in 1998. Deloitte & Touche LLP or its predecessors have continuously served as the independent public accounting firm of SDG&E and SoCalGas or their parent companies since 1935 and 1937, respectively. Representatives of Deloitte & Touche LLP are expected to attend the Annual Shareholders Meeting and will have the opportunity to make a statement if they desire to do so and to respond to appropriate questions from shareholders.

The following table shows Deloitte & Touche LLP fees for 2018 and 2017.

 

        2018

 

       2017

 

 

 

Dollars in Thousands

 

    

 

Fees

 

      

 

% of Total

 

      

 

Fees

 

      

 

% of Total

 

 

 

Audit Fees

                   

 

Sempra Energy Consolidated Financial Statements and Internal Controls Audits, Subsidiary and Statutory Audits

    

 

$

 

9,998

 

 

         

 

$

 

10,049

 

    

 

Regulatory Filings and Related Services

    

 

 

 

598

 

 

               

 

 

 

610

 

 

          

 

Total Audit Fees

    

 

 

 

10,596

 

 

    

 

 

 

82%

 

 

    

 

 

 

10,659

 

 

    

 

 

 

87%

 

 

 

Audit-Related Fees

                   

 

Employee Benefit Plan Audits

    

 

 

 

460

 

 

         

 

 

 

430

 

 

    

 

Accounting Consultation

    

 

 

 

1,744

 

 

               

 

 

 

1,000

 

 

          

 

Total Audit-Related Fees

    

 

 

 

2,204

 

 

    

 

 

 

17%

 

 

    

 

 

 

1,430

 

 

    

 

 

 

12%

 

 

 

Tax Planning and Compliance Fees

    

 

 

 

97

 

 

    

 

 

 

1%

 

 

    

 

 

 

118

 

 

    

 

 

 

1%

 

 

 

All Other Fees

    

 

 

 

20

 

 

    

 

 

 

-%

 

 

    

 

 

 

47

 

 

    

 

 

 

-%

 

 

 

Total Fees

    

 

$

 

12,917

 

 

               

 

$

 

12,254

 

 

          

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm, including the oversight of the audit fee negotiations. Except where pre-approval is not required by SEC rules, the committee pre-approves all audit and permissible non-audit services provided by Deloitte & Touche LLP. The committee’s pre-approval policies and procedures provide for the general pre-approval of specific types of services and give detailed guidance to management as to the services that are eligible for general pre-approval. They require specific pre-approval of all other permitted services. For both types of pre-approval, the committee considers whether the services to be provided are consistent with maintaining the firm’s independence. The policies and procedures also delegate authority to the chair of the committee to address any requests for pre-approval of services between committee meetings, with any pre-approval decisions to be reported to the committee at its next scheduled meeting.

The Audit Committee regularly meets in executive session with only committee members present and with Deloitte & Touche LLP’s lead engagement partner without members of management present. This provides an opportunity for the Audit Committee to assess Deloitte & Touche LLP’s effectiveness and independence for determining reappointment as well as consideration of rotating audit firms. The Audit Committee considers various factors in determining whether to reappoint Deloitte & Touche LLP, including: the firm’s level of service, quality, professional integrity and objectivity in executing audits; professional qualifications; understanding of our businesses and industry and capability and expertise in handling the breadth and complexity of our business; independence policies and processes for maintaining independence; and external data such as peer reviews and recent Public Company Accounting Oversight Board reports on the firm. The Audit Committee also considers the firm’s tenure in serving as our independent registered public accounting firm. While the Public Company Accounting Oversight Board has acknowledged that there is no conclusive linkage between tenure and audit quality, auditor tenure may be one data point. Deloitte & Touche LLP’s tenure as our independent public accounting firm has allowed it to gain institutional knowledge and a deep understanding of our businesses, accounting policies, and internal control over financial reporting, which is considered beneficial. In addition, in conjunction with mandated five-year rotation of the audit firm’s lead engagement partner, the Audit Committee and its chairman are directly involved in the selection of the new lead engagement partner.

We are asking our shareholders to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2019. Ratification would be advisory only, but the Audit Committee would reconsider the appointment if it were not ratified. The members of the Audit Committee and the Board of Directors believe the continued retention of Deloitte & Touche LLP as our independent registered public accounting firm is in the best interests of the company and our shareholders. Ratification requires the receipt of “FOR” votes constituting a majority of the shares represented and voting at the Annual Shareholders Meeting at which a quorum is present, and the approving majority also must represent more than 25 percent of our outstanding shares.

 

The Board of Directors recommends that you vote “FOR” Proposal 2.

 

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Proposal 3: Advisory Approval of Our Executive Compensation

 

Our board recognizes that performance-based executive compensation is an important element in driving long-term shareholder value. Pursuant to Section 14A of the Securities Exchange Act of 1934, as amended, we are asking our shareholders to approve an advisory resolution on the compensation of the named executive officers, as reported in this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives our shareholders the opportunity to express their views on our 2018 executive compensation program.

We are asking our shareholders to indicate their support for the compensation of our named executive officers as described in this proxy statement by voting in favor of the following resolution.

“RESOLVED, as an advisory matter, the shareholders of Sempra Energy approve the compensation paid to the company’s named executive officers as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.”

Approval requires the receipt of “FOR” votes constituting a majority of the shares represented and voting at the Annual Shareholders Meeting at which a quorum is present, and the approving majority must represent more than 25 percent of our outstanding shares.

Even though the say-on-pay vote is advisory and will not be binding on the company, the Compensation Committee and the Board of Directors value the opinions of our shareholders. Accordingly, to the extent there is a significant vote against the compensation of our named executive officers, we will consider our shareholders’ concerns, and the Compensation Committee will evaluate what actions may be necessary or appropriate to address those concerns.

 

The Board of Directors recommends that you vote “FOR” Proposal 3.

 

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Proposal 4: Approval of Our 2019 Long-Term Incentive Plan

 

On February 22, 2019, the Board of Directors, upon the recommendation of its Compensation Committee, unanimously approved the Sempra Energy 2019 Long-Term Incentive Plan (Plan), subject to the approval of our shareholders at the Annual Shareholders Meeting. The purpose of the Plan is to provide compensation awards to employees and non-employee directors that align their interests with those of the company and its shareholders. Further purposes of the Plan are to attract and retain employees and non-employee directors and to provide them with an opportunity to acquire an equity interest in the company and to reward good performance.

If approved, the Plan will replace the Sempra Energy 2013 Long-Term Incentive Plan (2013 Plan) that our shareholders previously approved. The 2013 Plan allows us to grant stock awards, stock-based incentive awards and cash-based incentive awards to our employees and non-employee directors. The Plan permits the grant of similar awards to our employees and non-employee directors. The following summary of the material provisions of the Plan is not intended to be exhaustive and is qualified in its entirety by the terms of the Plan, a copy of which is set forth as Appendix E to this proxy statement.

Why We Believe You Should Vote for Proposal 4

We believe our future success depends on our ability to attract, motivate and retain high quality employees and non-employee directors and that the ability to provide stock and stock-based awards under the Plan is critical to achieving this success. We would be at a severe competitive disadvantage if we could not use stock-based awards to recruit and compensate our employees and non-employee directors.

The use of our stock as part of our compensation program is also important to our continued success in that it fosters a pay-for-performance culture, which is an important element of our overall compensation philosophy. We believe that equity-based compensation motivates employees to create shareholder value because the value employees realize from equity-based compensation is based on our company and stock performance. Equity-based compensation also aligns the goals and objectives of our employees and non-employee directors with the interests of our shareholders and promotes a focus on long-term value creation because our equity-based compensation awards are subject to vesting and/or performance criteria.

If the Plan is not approved, we may be compelled to significantly increase the cash component of our employee compensation when shares from the 2013 Plan are depleted, which may not necessarily align employee interests with those of shareholders as effectively as the alignment provided by stock-based awards. Replacing equity awards with cash would also increase cash compensation expense and use cash that would be better utilized if reinvested in our businesses or returned to our shareholders.

We are seeking shareholder approval at this time for these reasons:

 

 

As a matter of good corporate governance, we believe that sufficient time has elapsed since we put a long-term incentive plan to a shareholder vote;

 

 

To increase the number of shares available to be granted under our long-term incentive plan;

 

 

To establish a limit on annual compensation of non-employee directors; and

 

 

Due to the changes to Section 162(m) of the Internal Revenue Code, significant changes to our long-term incentive plan are required.

If approved by shareholders, a total of 7,700,000 shares will be available for issuance under the Plan on the day following such approval (Effective Date) and no further awards will be granted under the 2013 Plan. No shares under the 2013 Plan will be available for use under the Plan.

If the Plan is approved, we intend to use the shares authorized under the Plan to continue our practice of incentivizing key employees and non-employee directors through annual and special equity-based grants. Based on our current projections, we anticipate that the shares requested under the Plan will last for at least four years.

We believe that we have demonstrated our commitment to sound equity compensation practices. We recognize that equity compensation awards dilute shareholder equity and, therefore, we have carefully managed our equity incentive compensation. Our equity compensation practices are targeted to be competitive and consistent with market practices, and we believe our historical share usage has been responsible and mindful of shareholder interests, as described above.

Plan Highlights

The Plan authorizes our Board of Directors and the Compensation Committee to grant equity-based compensation awards in the form of stock options, stock appreciation rights, full value awards (such as restricted stock, restricted stock units and stock payment awards), and dividend equivalent awards, as well as cash-based awards, for the purpose of providing incentives and rewards for performance to our employees and non-employee directors. Some of the key features of the Plan that reflect our commitment to effective management

 

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of incentive compensation are set forth below and are described more fully under the heading “Summary of the Plan” and in the Plan itself, a copy of which is attached as Appendix E to this proxy statement.

Administration. The Compensation Committee will administer the Plan with respect to awards to employees, and the Board of Directors will administer the Plan with respect to awards to non-employee directors. The Compensation Committee or the Board of Directors, as applicable, are sometimes referred to herein as the Committee. The Committee may delegate its authority under the Plan to a subcommittee. The Compensation Committee may also delegate administrative duties or powers to one or more of its members or to one or more officers of the company, or to one or more agents or advisors, and the Compensation Committee may also delegate powers to one or more of our officers (subject to limitations described in the Plan) to designate employees to receive awards under the Plan, including the size of any such awards.

Shares Reserved for Issuance. The total number of shares of our common stock reserved for issuance under the Plan is 7,700,000. If the Plan is approved by our shareholders, no further awards may be made under the 2013 Plan on or after the Effective Date and no shares under the 2013 Plan may be available for use under the Plan.

Share Recycling. Shares of our common stock that are subject to awards granted under the Plan that expire or that are forfeited or cancelled or otherwise terminate without the issuance of such shares will again be available for issuance under the Plan; provided that, in the case of a stock appreciation right, the gross number of shares subject to the stock appreciation right originally granted will be counted against the shares reserved under the Plan. Shares withheld or surrendered in satisfaction of the exercise price or taxes relating to any award granted under the Plan shall not constitute shares issued and will also again be available for issuance under the Plan.

No Repricing. Except as approved by our shareholders (or in connection with adjustments relating to certain corporate transactions), the exercise price or grant price of stock options or stock appreciation rights may not be reduced after the date of grant nor may an outstanding stock option or stock appreciation right be surrendered to the company as consideration for the grant of a replacement or substitute stock option with a lower exercise price or grant price or a full value award. In addition, unless approved by our shareholders, in no event may a stock option or stock appreciation right be surrendered to the company in consideration for a cash payment if, at the time of such surrender, the exercise price or grant price of the stock option or stock appreciation right is greater than the then current fair market value of a share of common stock.

Fair Market Value Exercise Price/Grant Price Requirement. The Plan provides that no stock options or stock appreciation rights will be granted with an exercise price or grant price less than the fair market value of our shares of common stock on the date of grant.

Dividends and Dividend Equivalent Awards. The Plan provides that any dividends or dividend equivalents that become payable with respect to an award that remains subject to vesting conditions will be subject to the same vesting conditions that apply to the underlying award.

Double-Trigger Vesting Provisions. The Plan provides that awards generally will not be accelerated in connection with a change in control of the company if an acquirer replaces or substitutes outstanding awards in accordance with the requirements of the Plan, unless a participant holding the replacement or substitute award terminates his or her employment for Good Reason (as defined in the Plan), the participant is involuntarily terminated other than for Cause (as defined in the Plan), or the termination is due to Retirement (as defined in the Plan), death, or Disability (as defined in the Plan), in each case within three years following the change in control, as further discussed below.

 

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Grant Practices, Outstanding Awards and Dilution

As of February 28, 2019, 5,697,799 shares of our common stock in the aggregate remained available for issuance under the 2013 Plan, assuming that all outstanding performance-based awards achieve maximum performance and service-based awards vest and that all outstanding options are exercised in full. This amount does not take into account shares issuable pursuant to dividend equivalent rights for awards that have not yet vested. Between February 28, 2019 and the Effective Date, we expect to grant awards covering no more than 90,000 shares of our common stock under the 2013 Plan.

In our 2018 fiscal year, we granted awards under the 2013 Plan to 406 individuals covering 1,005,200 shares of our common stock, assuming that all outstanding performance-based awards achieve maximum performance and service-based awards vest (excluding dividend equivalent rights). In January 2019, we added stock options to the mix of equity compensation granted to certain executive officers and we may decide to broaden the pool of people receiving options in future years. We anticipate that our future award grants will be in line with our current practice of granting options to certain individuals as part of the equity mix together with our historic practice of granting performance-based units (currently based on total shareholder return and EPS growth performance metrics) and service-based units, as more fully described in “Executive Compensation — Compensation Discussion and Analysis — Compensation Components.”

The vast majority of our equity-based grants each year are made in the month of January and in January 2019, we granted awards to individuals under the 2013 Plan covering 1,244,323 shares of our common stock (assuming all outstanding options are exercised in full and all outstanding performance-based awards achieve maximum performance and service-based awards vest, but excluding dividend equivalent rights). As of February 28, 2019, we had the following number of awards outstanding under our equity compensation plans:

 

Outstanding Awards(1)

   Outstanding Options,
Units or Shares
At Target
Performance
     Weighted-Average
Exercise Price of
Stock Options
     Weighted-Average
Remaining Term
of Stock Options
 

Stock Options

     287,137      $ 98.80        8.4 Years  
  

 

 

       

Full Value Awards:

        

Performance-based Restricted Stock Units(2)

     1,172,683        

Service-based Restricted Stock Units

     504,820        

Restricted Stock Awards

     0        
  

 

 

       

Total Full Value Awards

     1,677,503        
  

 

 

       

Total Options and Full Value Awards

     1,964,640                    

 

(1)

Dividend equivalent rights are not included in this table.

 

(2)

Performance-based restricted stock units generally are eligible to vest in up to 2.0 shares for every share subject to such units at maximum performance levels.

If the Plan is approved, our full dilution level on a pro forma basis on February 28, 2019 was approximately 3.07 percent. Full dilution is (a) the 7,700,000 new shares requested for issuance under the Plan; plus (b) 90,000 shares available for issuance under the 2013 Plan between February 28, 2019 and the Effective Date; plus (c) 1,964,640 shares that were subject to equity awards that remained outstanding under prior equity plans as of February 28, 2019 (assuming that all outstanding options will be exercised in full and that all outstanding performance awards will achieve target performance and service-based restricted stock units will vest, but excluding dividend equivalent rights) divided by the sum of (a), (b) and (c) above (9,754,640) plus common stock outstanding. For purposes of this calculation, as of February 28, 2019, common stock outstanding was 308,434,108, which includes 274,155,448 of our shares of common stock outstanding plus 17,372,475 in convertible equity (assuming the minimum conversion rate for our outstanding 6.00% mandatory convertible preferred stock, Series A and 6.75% mandatory convertible preferred stock Series B) and 16,906,185 in forward contracts for common equity. Management, our Board of Directors and our Compensation Committee are cognizant of dilution levels and strive to maintain dilution at an appropriate level.

Our burn rate and run rate for the most recent three years were as follows:

 

Fiscal Year

   Stock Options and
SARs Granted (A)
    

Full Value Awards
at Target
Performance
(Service-Based
Awards Granted +

Performance-

Based Awards
Vested) (B)

     Weighted Average
Common Shares
Outstanding (C)
     Burn Rate      Run Rate  

2018

     0        446,219        269,852,000        0.50%        0.17%  

2017

     0        731,196        252,300,000        0.87%        0.29%  

2016

     0        856,918        251,155,000        1.02%        0.34%  

Three-Year Average

                       0.80%        0.27%  

 

(1)

Burn Rate = [A + (B x 3.0 full value award multiplier)] / C

 

(2)

Run Rate = (A + B) / C

The closing price of our common stock on the NYSE on February 28, 2019 was $120.44 per share.

 

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Summary of the Plan

Incentive Awards and Award Limits

Under the Plan, we may award a wide variety of incentive awards relating to shares of our common stock to employees of the company and its subsidiaries and to non-employee directors of the company. These awards consist of stock options and stock appreciation rights, full value awards (such as restricted stock, restricted stock units and stock payment awards), and dividend equivalent awards. The Committee may also grant cash-based awards.

The maximum number of our shares available for issuance under the Plan is 7,700,000 shares.

The Plan also includes the following limits that apply in the case of awards to participants other than non-employee directors:

 

 

the maximum aggregate number of shares of our common stock that may be issued pursuant to incentive stock options will not exceed 7,700,000 shares of our common stock;

 

 

the maximum aggregate number of shares of our common stock that may be subject to full value awards (such as restricted stock, restricted stock units, and stock payment awards) and dividend equivalent awards granted in any calendar year to any participant will not exceed 500,000 shares;

 

 

the maximum aggregate number of shares of our common stock that may be subject to stock options and stock appreciation rights granted in any calendar year to any participant will not exceed 750,000 shares; and

 

 

the maximum aggregate amount that may be awarded with respect to cash-based awards to any participant in any calendar year will not exceed $10,000,000.

With respect to non-employee directors, the sum of any cash compensation or other compensation and the value (determined as of the grant date in accordance with Financial Accounting Standards Board Accounting Standards Codification 718 or any successor thereto) of awards granted to a non-employee director as compensation for services as a non-employee director during any calendar year may not exceed $1,000,000. The Committee may make exceptions to this limit for individual non-employee directors in extraordinary circumstances as the Committee determines in its sole discretion, provided that the non-employee director receiving such additional compensation shall not participate in the decision to award such compensation.

Shares of our common stock that are subject to awards granted under the Plan that expire or that are forfeited or cancelled or otherwise terminate without the issuance of such shares will again be available for issuance under the Plan; provided that, in the case of a stock appreciation right, the gross number of shares subject to the stock appreciation right originally granted will be counted against the shares reserved under the Plan. Shares withheld or surrendered in satisfaction of the exercise price or taxes relating to any award granted under the Plan will not constitute shares issued and will also again be available for issuance under the Plan. In addition, the full number of shares subject to awards under the Plan will be counted for purposes of compliance with the annual limits described above.

Without affecting the number of shares reserved or available under the Plan or the annual award limits, the Committee may authorize the grant of substitute awards under the Plan in connection with any merger, consolidation, recapitalization, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with certain tax rules where applicable.

Adjustments

In the event of any corporate event or transaction, including changes in our shares or capitalization (such as stock dividends and stock splits, spin-offs and property distributions, share combinations and exchanges, and mergers and consolidations), the Committee, in its discretion (including to prevent dilution or enlargement of participants’ rights under the Plan) will make substitutions or adjustments, as applicable, to the number and kind of shares that may be issued under the Plan or under particular forms of awards under the Plan, the number and kind of shares subject to outstanding awards, the exercise and stock appreciation right grant prices of outstanding awards, the annual award limits under the Plan, and the terms and conditions of outstanding awards. Generally, and for the avoidance of doubt, no such substitutions or adjustments shall be made by reason of the issuance by us of any (i) shares under any incentive plan or retirement plan, (ii) shares or stock of any class for cash, and (iii) shares or stock of any class upon exercises, exchanges, or conversions of convertible, exchangeable, or exercisable securities issued by us.

Eligibility and Plan Administration

Our employees and non-employee directors and employees of our subsidiaries are eligible to receive awards under the Plan. We estimate that as of February 28, 2019, there were approximately 21,000 employees who would have been eligible for the grant of awards under the Plan had it been in effect on such date. In addition, all of our 13 non-employee directors would have been eligible for the grant of awards under the Plan had it been in effect on such date. In practice, we typically grant awards to a much smaller population of approximately 400 to 450 employees and all of our non-employee directors. Independent contractors are not eligible to receive awards under the Plan. No eligible individual is entitled to participate in the Plan as a matter of right, and participation in the Plan does not constitute assurance of continued employment or service.

 

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The Committee administers the Plan with respect to awards to employees and the Board of Directors administers the Plan with respect to awards to non-employee directors. The Committee selects from the individuals eligible to participate those who will receive awards and determines the terms and conditions of each award including those related to vesting, forfeiture, payment and exercisability and the effect of a termination of service.

The Committee conclusively interprets the Plan and the intent of the Plan and any award agreements and any other agreement or document ancillary to or in connection with the Plan and prescribes administrative rules and guidelines and makes all other determinations necessary or advisable with respect to the Plan. The Committee, subject to certain limitations, may delegate such administrative duties or powers as it deems advisable to others, including officers of the company, and may, subject to limitations set forth in the Plan, authorize officers of the company to designate employees to receive awards and to determine the size of the awards.

Types of Incentive Awards

Stock Options and Stock Appreciation Rights

Stock options granted to Plan participants entitle them to purchase our shares at the prices and during the term specified in the related stock option agreement. Stock options granted under the Plan may be incentive stock options or nonqualified stock options. Stock options are exercisable in accordance with their terms and any exercise must be accompanied by payment of the exercise price of the shares being exercised. The exercise price may be paid (a) in cash or its equivalent (b) by a cashless (broker-assisted) exercise, or (c) by such other methods as are authorized by the Committee in its sole discretion, whether by award agreement or otherwise, including, (i) by tendering (either by actual delivery or attestation) previously acquired shares having an aggregate fair market value at the time of exercise equal to the exercise price; (ii) by surrendering shares otherwise then issuable upon exercise of the stock option (net exercise) having an aggregate fair market value at the time of exercise equal to the exercise price; or (iii) by a combination of the foregoing.

Stock appreciation rights granted to Plan participants entitle them to receive all or a portion of the appreciation in the fair market value of our shares that are subject to the award over the grant price specified in the related award agreement. At the discretion of the Committee, as reflected in an award agreement, payments upon the exercise or settlement of a stock appreciation right may be made in cash, shares of our common stock or a combination of cash and shares.

The exercise price of stock options and the grant price for stock appreciation rights may not be less than 100 percent of the fair market value of our shares on the date the award is granted, and the term of the award may not exceed ten years. The Plan prohibits reductions in the exercise price or grant price of stock options or stock appreciation rights after the date of grant and also prohibits an outstanding stock option or stock appreciation right from being surrendered to the company as consideration for the grant of a replacement or substitute stock option or stock appreciation right with a lower exercise price or grant price or a full value award. The foregoing limitations do not apply if our shareholders approve the reduction or other award or if such adjustments or awards are made in connection with the adjustment provisions of the Plan relating to certain corporate transactions. In addition, unless approved by our shareholders, in no event may a stock option or stock appreciation right be surrendered to the company in consideration for a cash payment if, at the time of such surrender, the exercise price or grant price of the stock option or stock appreciation right is greater than the then current fair market value of a share of common stock.

Full Value Awards

A full value award is a grant of one or more shares of our common stock or a right to receive one or more shares in the future (including restricted stock, restricted stock units, deferred stock units, performance shares, performance-based restricted stock units, and stock payment awards). Such grants may be in consideration of a participant’s previously performed services or surrender of other compensation that may be due, contingent on the achievement of performance or other objectives (including completion of service) during a specified period, subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant or achievement of performance or other objectives, and/or may be granted for other purposes and shall be subject to such conditions, restrictions and contingencies, as determined by the Committee, including provisions relating to dividend or dividend equivalent rights and deferred payment or settlement.

The Committee determines the terms and conditions of full value awards including any vesting terms, the number of shares subject to the award, the extent to which the participant shall have the right to retain the full value award following termination of the participant’s employment or provision of services and such other provisions as the Committee determines that are not inconsistent with the terms of the Plan.

Dividend Equivalent Awards

Dividend equivalent awards granted to Plan participants entitle them to receive all or a portion of the dividends they would have received had they held the number of our shares subject to another outstanding award until the vesting, payment, settlement, distribution or expiration of the other award. Dividend equivalent awards also may be granted as “free-standing” awards that do not relate to other awards and entitle the participant to receive the dividends that would have been paid on the number of our shares specified in the award. Dividend equivalent awards

 

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may provide for payment on a current basis as dividends are paid on our shares or for the deemed reinvestment of the dividends (together with successive dividends) to purchase additional shares and the payment of the award in cash or in shares, provided that any dividend equivalent awards that are granted with respect to an award that is subject to vesting conditions will be subject to the same vesting conditions as apply to the underlying award. Dividend equivalent awards may not be granted with respect to stock options or stock appreciation rights.

Cash-Based Awards

Cash-based awards granted to Plan participants entitle them to receive cash payments in an amount or range of amounts that may be subject to the satisfaction of performance measures or other conditions specified in the award agreement.

Change in Control

Generally, upon a “Change in Control” (as defined in the Plan), each then-outstanding award may be adjusted or substituted in the transaction with a “Replacement Award” (as defined in the Plan). If no Replacement Award is provided to the applicable participant then, unless otherwise provided in an applicable individual agreement, each then-outstanding stock option and stock appreciation right will become fully vested and exercisable and the restrictions applicable to each outstanding full value award, dividend equivalent award and cash-based award will lapse and the awards will be fully vested (with any applicable performance goals deemed to have been achieved at the greater of target level as of the date of such vesting or actual performance as of the Change in Control).

Upon the termination of the employment of a participant who holds Replacement Awards (i) by the participant for “Good Reason” (as defined in the Plan), (ii) by the company without “Cause” (as defined in the Plan), or (iii) due to the participant’s death, “Disability” (as defined in the Plan) or “Retirement” (as defined in the Plan), in any case during the period of three years after a Change in Control, (1) all Replacement Awards held by the participant will become fully vested and, if applicable, exercisable and free of restrictions (with any applicable performance goals deemed to have been achieved at the greater of a target level as of the date of such vesting or the actual performance level had the performance period ended on such date of vesting), and (2) all stock options and stock appreciation rights held by the participant immediately before such termination of employment that the participant also held as of the date of the Change in Control or that constitute Replacement Awards will remain exercisable for a period of not less than three years following such termination of employment or until the expiration of the stated term of such option or stock appreciation right, whichever period is shorter (subject to any longer period of exercisability that may be provided in the applicable award agreement).

Restrictions on Transfer

Except as set forth in a participant’s award agreement or otherwise determined by the Committee, no award granted under the Plan will be transferable by the participant except by will or the laws of descent and distribution, and in no event may any such award granted under the Plan be transferred for value. Except as set forth in a participant’s award agreement or otherwise determined by the Committee, stock options and stock appreciation rights will be exercisable during the participant’s lifetime only by the participant. Incentive stock options and awards that result in a deferral of compensation as defined in Section 409A of the Code will in no event be transferred other than by will or the laws of descent and distribution.

Withholding

The company shall have the power and the right to deduct or withhold, or require a participant to remit to the company, the minimum amount necessary to satisfy federal, state, local and foreign taxes required by law or regulation to be withheld with respect to any taxable event relating to an award. With respect to withholding required upon the exercise of stock options or stock appreciations rights, upon the lapse of restrictions on or settlement, as applicable, of full value awards, or upon the achievement of performance goals related to awards, or any other taxable event arising as a result of an award granted under the Plan, the participant may elect to satisfy the withholding requirement, in whole or in part, by having the company withhold shares to which the participant would otherwise be entitled to receive upon exercise or settlement of the award (or accepting the surrender of shares that the participant already owns) having a fair market value on the date the tax is to be determined equal to the minimum amount necessary to satisfy the federal, state, local and foreign taxes required by law or regulation to be withheld with respect to such transaction.

Effective Date; Amendment and Termination

The Plan will become effective the day following its approval by shareholders and expire ten years from the date of shareholder approval. No awards will be granted under the Plan until it has been approved by shareholders and becomes effective. Upon the Effective Date of the Plan, no awards will be granted under the 2013 Plan.

Our Board of Directors or the Compensation Committee may alter, amend, modify, suspend or terminate the Plan and any award agreement in whole or in part without shareholder approval unless doing so would increase the number of shares available for awards under the Plan (except for substitutions or adjustments otherwise permitted under the Plan), would reprice or permit the repricing of stock options or stock appreciation rights or would require shareholder approval to comply with any applicable law or stock exchange rule. However, except for amendments that are intended to cause awards to comply with applicable laws, regulations or rulings, no amendment, modification or termination of the Plan or any award agreement may adversely affect in any material respect any award previously granted to a Plan participant without the participant’s consent.

 

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Federal Income Tax Consequences of Plan Awards

THE FOLLOWING DISCUSSION OF CERTAIN RELEVANT FEDERAL INCOME TAX EFFECTS APPLICABLE TO AWARDS GRANTED UNDER THE PLAN IS A SUMMARY ONLY, AND REFERENCE IS MADE TO THE INTERNAL REVENUE CODE AND REGULATIONS PROMULGATED THEREUNDER FOR A COMPLETE STATEMENT OF ALL RELEVANT FEDERAL TAX PROVISIONS. HOLDERS OF AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE REALIZATION OF ANY SUCH AWARDS, AND HOLDERS OF THE COMPANY’S COMMON STOCK PURSUANT TO AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE DISPOSING OF ANY SUCH SHARES. THIS SUMMARY IS NOT INTENDED TO BE EXHAUSTIVE AND DOES NOT DESCRIBE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES. Under current federal income tax laws, awards under the Plan will generally have the following tax consequences:

The grant of a stock option or stock appreciation right under the Plan will create no tax consequences for the participant or the company. A participant will have no taxable income upon exercise of an incentive stock option, except that the alternative minimum tax may apply. Upon exercise of an option other than an incentive stock option, a participant generally must recognize ordinary income equal to the fair market value of the shares acquired minus the exercise price. Upon a disposition of shares acquired by exercise of an incentive stock option before the end of the applicable holding periods, the participant generally must recognize ordinary income equal to the lesser of (i) the fair market value of the shares at the date of exercise minus the exercise price or (ii) the amount realized upon the disposition of the incentive stock option shares minus the exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option for which the applicable holding periods are met) generally will result in only capital gain or loss. Other awards under the Plan, including nonqualified options, stock appreciation rights and other stock-based and cash-based awards, generally will result in ordinary income to the participant at the later of the time of delivery of cash, shares, or other property, or the time that either the risk of forfeiture or restriction on transferability lapses on previously delivered cash, shares, or other property. Except as discussed below, the company generally will be entitled to a tax deduction equal to the amount recognized as ordinary income by the participant in connection with an option, stock appreciation right, or other award (subject to certain limitations under IRC Section 162(m), but will be entitled to no tax deduction relating to amounts that represent a capital gain to a participant. Thus, the company will not be entitled to any tax deduction with respect to an incentive stock option if the participant holds the shares for the applicable holding periods.

The foregoing general tax discussion is intended for the information of shareholders considering how to vote with respect to this proposal and not as tax guidance to participants in the Plan. Different tax rules may apply to specific participants and transactions under the Plan.

Registration with the SEC

We intend to file a Registration Statement on Form S-8 relating to the issuance of shares of common stock under the Plan with the SEC pursuant to the Securities Act of 1933, as amended, as soon as reasonably practicable after approval of the Plan by our shareholders.

New Plan Benefits

It is not possible to determine specific amounts and types of awards that may be awarded in the future under the Plan because the grant and actual pay-out of awards under the Plan are discretionary. The Plan does not mandate set benefits or amounts, and no awards have been granted under the Plan that are contingent upon shareholder approval. Our non-employee directors are, however, entitled to certain formulaic awards as described under “Director Compensation” above, which are subject to change.

Equity Compensation Plan Information (As of December 31, 2018)

Upon becoming effective, the Plan will replace the 2013 Plan, which permits stock and stock-based awards similar to those permitted by the Plan. At December 31, 2018, outstanding awards consisted of stock options and restricted stock units held by 446 employees and all of our non-employee directors.

 

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The following table sets forth information regarding our equity compensation plan at December 31, 2018

 

    

 

Number of shares
to be issued upon
exercise of
outstanding
options, warrants
and rights(1)

 

    

 

Weighted-average
exercise price of
outstanding
options, warrants
and rights(2)

 

    

 

Number of    

additional shares    

remaining available    

for future    
issuance(3)    

 

 

 

Equity compensation plan approved by shareholders:

        

 

2013 Long-Term Incentive Plan

  

 

 

 

1,701,470

 

 

  

 

$

 

54.63

 

 

  

 

 

 

6,067,767

 

 

 

(1)

Consists of 56,940 options to purchase shares of our common stock, all of which were granted at an exercise price equal to 100 percent of the grant date fair market value of the shares subject to the option, 1,242,169 performance-based restricted stock units (assuming performance at target) and 402,361 service-based restricted stock units (excluding dividend equivalent rights). The 1,701,470 shares also include awards granted under two previously shareholder-approved long-term incentive plans (Predecessor Plans). No new awards may be granted under these Predecessor Plans.

 

(2)

Represents only the weighted-average exercise price of the 56,940 outstanding options to purchase shares of common stock under the applicable plans.

 

(3)

The number of shares available for future issuance assumes that all outstanding stock options are exercised in full, all outstanding performance-based awards achieve maximum performance and service-based awards vest. This amount does not take into account shares issuable pursuant to dividend equivalent rights for awards that have not yet vested. The number of shares available for future issuance is increased by the number of shares to which the participant would otherwise be entitled that are withheld or surrendered to satisfy the exercise price or to satisfy tax withholding obligations relating to any plan awards, and is also increased by the number of shares subject to awards that expire or are forfeited, canceled or otherwise terminated without the issuance of shares.

We provide additional discussion of share-based compensation in Note 10 of the Notes to Consolidated Financial Statements included in our Annual Report to Shareholders.

Shareholder Approval

The Plan has been approved, subject to shareholder approval, by our Board of Directors upon the recommendation of its Compensation Committee. To be approved by shareholders, the Plan must receive votes “FOR” the Plan constituting a majority of the shares represented and voting at the Annual Shareholders Meeting at which a quorum is present, and the approving majority must represent more than 25 percent of our outstanding shares.

 

The Board of Directors recommends that you vote “FOR” Proposal 4.

 

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Shareholder Proposal

Proposal 5 was submitted for inclusion in this proxy statement at the direction of shareholder Mr. John Chevedden. The board recommends that you vote “AGAINST” Proposal 5.

Proposal 5: Shareholder Proposal Requiring an Independent Board Chairman

 

Mr. Chevedden has advised us that he intends to introduce the resolution included below at the Annual Shareholders Meeting. Sempra Energy has been advised that Mr. Chevedden is the owner of no fewer than 40 shares of Sempra Energy common stock. The company will furnish the address of Mr. Chevedden promptly upon oral or written request. In accordance with SEC rules, the proposal and supporting statement are being reprinted as they were submitted to Sempra Energy by the proponent. Sempra Energy takes no responsibility for them.

The Proposal

Proposal 5 — Independent Board Chairman

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next Chief Executive Officer transition, implemented so it does not violate any existing agreement.

If the Board determines that a Chairman, who was independent when selected is no longer independent, the Board shall select a new Chairman who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chairman. This proposal requests that all the necessary steps be taken to accomplish the above.

Caterpillar and Wells Fargo are examples of companies changing course and naming an independent board chairman. Caterpillar had even opposed a shareholder proposal for an independent board chairman at its annual meeting.

It is especially important to have an independent board chairman when there seems to be a board refreshment problem at Sempra that needs to be addressed after the annual meeting. Two Sempra directors had more than 20-years long-tenure: William Jones and William Ouchi. Long-tenure can detract from the independence of a director no matter how well qualified. Plus these two 20-year directors had greater influence with 6 seats on our most important board committees.

It is upsetting to furthermore have Mr. Rusnack, with 17-years long-tenure, in the role of Lead Director—which demands more independence than a director without this important responsibility. Plus the retired Mr. Rusnack had no other directorship to help keep his skills up -to-date and he had zero current beneficial stock holdings—just like Directors Kathleen Brown, Bethany Mayer and James Yardley.

Meanwhile there are many challenges that face our company that need to be managed well and prevented from reoccurring that could be helped by having an independent chairman (as opposed to a non-independent chairman) run the Board of Directors while our CEO focuses on challenges like these:

Aliso Canyon gas leak bill now totals $1 billion and growing.

August 2018

Consumer fraud/abuse — Sempra moves to charge customers wildfire-related costs, San Diego.

August 2018

$900 million in after-tax adjustments related to the impairment of non-utility natural gas storage asset and wind power assets.

June 2018

Land Degradation — Sonora Gas Pipeline: Concerns regarding potential environmental impact.

May 2018

Indigenous Community Rights — Sonora Gas Pipeline: Yaqui people oppose alleged trespass of indigenous land.

May 2018

 

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$352 Million impairment charges for Q3 of 2017.

October 2017

Criticism on executive bonuses despite Aliso Canyon gas leak

April 2017

Please vote yes:

Independent Board Chairman — Proposal 5

 

The Board of Directors recommends that you vote “AGAINST” Proposal 5.

Board of Directors’ Statement Opposing the Shareholder Proposal Requiring an Independent Board Chairman

The Board of Directors recommends a vote AGAINST this proposal because it believes that the company is best served by retaining the board’s flexibility to determine on a case-by-case basis whether an independent director should serve as Chairman of the Board.

Oversight of board structure

Pursuant to our corporate governance guidelines, the board maintains a flexible policy with respect to board leadership structure. As discussed in this proxy statement under the caption “Board of Directors — Leadership Structure,” the board determines on a case-by-case basis whether an independent director should serve as Chairman of the Board and whether the position of Chairman and Chief Executive Officer should be combined or separated.

The board believes that its decisions related to board leadership structure should take into consideration particular circumstances, including business needs, shareholder interests and individual skills and/or experiences, that may be required in an effective Chairman of the Board at any particular time. During those periods in which the Chairman of the Board is not independent, the board appoints an independent Lead Director having broad powers and responsibilities similar to an independent Chairman. The board believes such a structure is responsive to the overall desires of our shareholders and provides sufficient safeguards to help ensure the independent functioning of the board and oversight of management. Adopting an Independent Chairman Policy, as the proponent requests, would unduly impair the board’s ability to effectively select the leadership structure best suited to meet the needs of Sempra Energy and our shareholders at any given point in time.

Lead Director provides strong independent leadership

The board made a number of changes to its corporate governance guidelines and bylaws in response to the 2012 shareholder vote favoring the appointment of an independent director as Chairman. These changes were the result of an extensive outreach program to our largest shareholders, by which we determined that the majority of our large institutional shareholders did not favor an independent Chairman over a strong Lead Director, but rather called on the company to adopt a more robust independent Lead Director structure. Since the summer of 2012, the corporate governance guidelines have prescribed certain functions and responsibilities of the Lead Director role during periods in which we do not have an independent Chairman. The functions and responsibilities are outlined below and in this proxy statement under the caption “Board of Directors — Leadership Structure”:

 

 

To lead the Board of Directors if circumstances arise in which the role of the Chairman of the Board may be, or may be perceived by the Lead Director or by the other independent board members to be, in conflict.

 

 

To act as the principal liaison between the independent directors and the Chairman of the Board and Chief Executive Officer.

 

 

To review and approve all board and committee agendas and approve information sent to the board, providing input to management on the scope and quality of such information.

 

 

To consult with the Chairman of the Board, Chief Executive Officer, and committee chairs regarding the topics and schedules of the meetings of the board and committees and approve such schedules to assure that there is sufficient time for discussion of all agenda items.

 

 

To call a special meeting of the Board of Directors or the independent directors at any time, at any place, and for any purpose.

 

 

To be available for consultation and direct communication with the company’s major shareholders.

 

 

To consult with the Corporate Governance Committee as part of the committee’s review of director nominations and recommendations of director candidates.

 

Sempra Energy 2019 Proxy Statement   41


Table of Contents

Proposals to be Voted On

 

 

 

To consult with directors regarding acceptance of memberships on other boards to assure that multiple board service does not conflict or otherwise interfere with such directors’ service to the company.

 

 

Led by the Compensation Committee and together with the Chairman of the Board, to report annually to the board on succession planning, including policies and principles for executive officer selection.

The above duties are in addition to the following duties and responsibilities previously assigned to, and continuing as the responsibility of, the Lead Director:

 

 

To preside at all meetings of the Board of Directors at which the Chairman of the Board is not available.

 

 

To organize, convene and preside over executive sessions of the independent directors and promptly communicate approved messages and directives to the Chairman of the Board and Chief Executive Officer.

 

 

To collect and communicate to the Chairman of the Board and Chief Executive Officer the views and recommendations of the independent directors, relating to his or her performance, other than with respect to the annual performance review.

 

 

To perform such other duties as may be assigned from time-to-time by the independent directors.

At the 2013 Annual Shareholders Meeting and 2015 Annual Shareholders Meeting, shareholder proposals requesting that the company adopt a policy of having an independent Chairman were voted on again. As the concerns of most of our largest holders had already been addressed by the changes we made to strengthen the role of Lead Director in 2012, those proposals were soundly defeated with 81 percent of votes cast at the 2013 Annual Shareholders Meeting voting against the proposal and 84 percent of votes cast at the 2015 Annual Shareholders Meeting voting against the proposal. The board believes that the decreased level of support received by these shareholder proposals indicates that our shareholders are widely supportive of our current Lead Director structure. In addition, based upon an extensive shareholder outreach program conducted in 2012 and again in the fall of 2015 and subsequent engagement with shareholders regarding our board leadership structure, we have determined that most of our largest institutional shareholders have no preference for an independent chair as long as the Lead Director has significant duties, as is the case at Sempra Energy.

A flexible board structure is in the best interests of Sempra Energy and our shareholders

The independent directors have historically evaluated and reconsidered the board leadership structure on an annual basis and will continue to do so. From 2012 until her retirement on December 1, 2018, the board considered and determined that it was in the best interests of Sempra Energy to elect Debra L. Reed as Chairman of the Board while she also served as Chief Executive Officer. The independent directors believed that this combined structure best served Sempra Energy, its board and its shareholders at that time, given Ms. Reed’s deep knowledge of the Sempra Energy family of companies, having served as an employee for more than 40 years, and extensive industry experience.

After Ms. Reed announced her retirement as President and Chief Executive Officer, effective May 1, 2018, and Chairman, effective December 1, 2018, the board, following an extended period of deliberation, appointed Jeffrey W. Martin as Sempra Energy’s Chief Executive Officer effective May 1, 2018 and as Chairman effective December 1, 2018. The independent directors determined that Mr. Martin is exceptionally qualified to serve as Chairman of the Board and believe that continuing to combine the Chief Executive Officer and Chairman of the Board roles is in the best interests of Sempra Energy and its shareholders. The independent directors also believe that Mr. Martin’s experience in the energy industry and as a 14-year employee of the Sempra Energy family of companies with an outstanding career of achievement, make him well-positioned to lead Sempra Energy as Chief Executive Officer and to serve as the Chairman of the Board at this time.

As it did in the appointment of Mr. Martin to Chairman, the Board of Directors believes that it is in the best interests of shareholders for the board to retain the flexibility to determine on a case-by-case basis whether the Chairman of the Board should be an independent director. The permanent structure envisioned by the shareholder proposal deprives the company of the flexibility to restructure its board from time to time in a manner that most effectively serves shareholder interests.

Independent directors and standing board committee chairs

Except for Mr. Martin, all members of our board are independent directors, and the Audit Committee, Corporate Governance Committee and the Compensation Committee consist solely of independent directors. Our independent directors meet in executive sessions, which the Lead Director chairs, at every regular board meeting and any director may call for an executive session at any board meeting. Our independent directors sitting on the Audit Committee, Corporate Governance Committee and Compensation Committee also routinely meet in executive sessions. Further, our Chairman and Chief Executive Officer’s performance is evaluated annually by the Corporate Governance Committee and the Compensation Committee, respectively, which, as previously stated, are composed entirely of independent directors.

 

42   Sempra Energy 2019 Proxy Statement


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Proposals to be Voted On

 

We have a strong track record of board refreshment

In support of his position, the proponent of the shareholder proposal suggests that the company has a board refreshment problem, citing two directors that have more than “20-years long-tenure” and also referencing Mr. Rusnack’s tenure in the role of Lead Director. The proponent claims that Mr. Jones and Dr. Ouchi have a potential independence deficit and have greater influence with six seats on our most important board committees. We do not believe there is an “independence deficit” with these or any of our other directors. Moreover, we previously disclosed in September 2018 that Dr. Ouchi will not be nominated to stand for re-election as a director at the 2019 Annual Shareholders Meeting, which is in accordance with our policy that directors should not be nominated to stand for re-election after having attained age 75. Also, during Mr. Rusnack’s nine-year tenure as Lead Director, he has shown the board that he has the independent judgment, leadership skills, qualifications and experience, and devotes the time necessary, to successfully perform his duties as Lead Director. Most recently, Mr. Rusnack’s significant knowledge of Sempra Energy has been invaluable in helping the board manage the transformational change associated with the acquisition of our indirect 80.25 percent interest in Oncor Electric Delivery Company LLC, senior management transitions and shareholder engagement.

Our board routinely reviews board and committee composition to help ensure that the committees have the right balance of experience, competencies and backgrounds to fulfill their oversight obligations for shareholders. As part of that process, the Corporate Governance Committee and the board consider current board and committee tenure. Over the last several years our board added a significant number of new independent directors. Eight of our independent directors have been added since 2013: two of whom were added in 2017 and two of whom were added in 2018. Also, rather than focusing simply on the longest tenured directors, we believe that average tenure of the entire board and the range of the directors’ tenures are more relevant. The average tenure of our independent directors being nominated to stand for re-election is 7.1 years, which is well below the 2018 average tenure of S&P 500 boards of 8.1 years. In our view, it would be counterproductive to consider directors as not independent solely due to length of tenure. We believe that shareholders are best served by having a board composed, in part, of a select group of very experienced directors who can serve on particular committees where their expertise may be most valuable.

Summary

The board believes that it should retain the flexibility to select the structure of the leadership best suited to meet the needs of Sempra Energy and its shareholders on a case-by-case basis. In addition, our board believes that the adoption of an Independent Chair Policy as suggested by the proponent would unduly impair the board’s ability to elect the individual it deems best suited to serve as the Chairman of the Board at any particular time and that the adoption is unnecessary given Sempra Energy’s strong governance practices, including our robust independent Lead Director structure, independent standing board committees and recent history of board refreshment.

The Board of Directors recommends that you vote “AGAINST” Proposal 5.

 

Sempra Energy 2019 Proxy Statement   43


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Executive Compensation

Compensation Discussion and Analysis

Executive Summary

 

In this Compensation Discussion and Analysis, we:

 

 

Outline our compensation philosophy and discuss how the Compensation Committee determines executive pay.

 

 

Describe each element of executive pay, including base salaries, short-term and long-term incentives and executive benefits.

 

 

Section

 

  

        Page        

 

 

Executive Summary

 

   44

 

 

Business Overview

 

   45

 

 

Performance Highlights

 

   46

 

 

Key Leadership Changes in 2018 and Related Compensation Consideration

 

   47

 

 

Compensation Program Overview for 2018

 

   48

 

 

Shareholder Engagement and Compensation Program Changes for 2018

 

   50

 

 

 

CEO Target Compensation Summary

 

   50

 

 

Pay-for-Performance Alignment

 

   51

 

 

Rigor of Incentive Targets

 

   53

 

 

Compensation Governance

 

   54

 

 

Compensation Philosophy and Goals

 

   55

 

 

Labor Market Benchmarking

 

   55

 

 

Compensation Components

 

   58

 

 

Base Salaries

 

   58

 

 

Performance-Based Annual Bonuses

 

   58

 

 

Long-Term Equity-Based Incentives

 

   61

 

 

Benefit Plans

 

   66

 

 

Severance and Change in Control Arrangements

 

   69

 

 

Compensation Committee Roles and Responsibilities

 

   69

 

 

Management’s Role

 

   71

 

 

Managing Risk in Compensation Plans

 

   72

 

 

Share Ownership Requirements

 

   73

 

 

Impact of Regulatory Requirements

 

   74

 

Table 1

This Compensation Discussion and Analysis focuses on the compensation of our named executive officers:

 

 

Named Executive

 

    

 

Jeffrey W. Martin(1)

 

  

Chairman and Chief Executive Officer

 

 

Joseph A. Householder(2)

 

  

President and Chief Operating Officer

 

 

Trevor I. Mihalik(3)

 

  

Executive Vice President and Chief Financial Officer

 

 

Dennis V. Arriola(4)

 

  

Executive Vice President and Group President

 

 

Martha B. Wyrsch(5)

 

  

Executive Vice President and General Counsel

 

 

Debra L. Reed(6)

 

  

Former Executive Chairman, President and Chief Executive Officer

 

Table 2

 

(1)

Mr. Martin became Chief Executive Officer effective May 1, 2018 and Chairman effective December 1, 2018.

 

(2)

Mr. Householder became President and Chief Operating Officer effective May 1, 2018.

 

(3)

Mr. Mihalik became Executive Vice President and Chief Financial Officer effective May 1, 2018.

 

(4)

Mr. Arriola was appointed Executive Vice President and Group President effective October 1, 2018.

 

(5)

Ms. Wyrsch retired as Executive Vice President and General Counsel effective March 1, 2019.

 

(6)

Ms. Reed retired as President and Chief Executive Officer effective May 1, 2018 and as Executive Chairman effective December 1, 2018.

 

44   Sempra Energy 2019 Proxy Statement


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Executive Compensation

 

Business Overview and Strategy

Sempra Energy is an energy services holding company. Our management team has set a clear mission of becoming North America’s premier energy infrastructure company. In alignment with this, we:

 

 

Honed our geographic focus to the most attractive markets in North America, strengthening our leadership positions in three of the top 15 economies in the world: California, Texas and Mexico;

 

 

Narrowed our focus within the energy value chain to electric and natural gas infrastructure where we believe there is an optimal risk/reward profile for our owners; and

 

 

Positioned our business to better serve important markets. By investing in North America’s LNG infrastructure, we are poised to unlock cleaner and more reliable energy for tens of millions of consumers in Europe, Asia and the Middle East.

Our investments are focused on long-term opportunities that we believe should deliver higher returns than our utility peers with a commensurate risk profile.

Our operations extend beyond those of a typical utility and we have growing non-utility infrastructure operations. We therefore evaluate our performance against the broader market as well as against the S&P 500 Utilities Index. Our labor market for senior management talent also extends beyond the utility industry, as discussed under Labor Market Benchmarking on page 55. Some significant achievements over the past 10 years include:

 

 

Developing and investing in large infrastructure projects in the U.S., including an LNG business and renewable energy projects.

 

 

Building a strong and diverse energy infrastructure business in Mexico and completing a secondary public offering of that business at more than twice the price of the initial public offering.

 

 

Advancing major infrastructure projects at our California utilities, such as the deployment of advanced meter infrastructure and investments in grid resiliency and the reduction of climate-related vulnerabilities, like wildfires, and modernizing more than 400 miles of the largest gas distribution and transmission network in the U.S. in 2018.

 

 

Acquiring an 80.25 percent indirect interest in Oncor, a regulated electric distribution and transmission business that operates the largest distribution and transmission system in Texas.

Our mission is to become North America’s premier energy infrastructure company. We expect to deliver balanced, solid growth across our portfolio of businesses, which provides us with a broad spectrum of opportunities to deploy capital at attractive terms. Our current five-year (2019-2023) capital plan for Sempra Energy, its subsidiaries and its equity method investments includes new investment opportunities in utility operations and infrastructure projects that we believe should yield attractive returns consistent with our strategy.

 

Sempra Energy 2019 Proxy Statement   45


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Executive Compensation

 

Performance Highlights

Financial Performance

GAAP EPS for 2018 was $3.42, compared to 2017 EPS of $1.01. We achieved 2018 adjusted EPS of $5.57(4), compared to 2017 adjusted EPS of $5.42(4). Financial impacts related to the planned and completed divestitures of renewable and midstream assets as part of our announced strategic review and capital rotation accounted for $1.51 of the difference between 2018 GAAP EPS and 2018 adjusted EPS. The impact of the enactment of tax reform legislation in 2017 accounted for $0.32 of the difference between 2018 GAAP EPS and 2018 adjusted EPS and $3.45 of the difference between 2017 GAAP EPS and 2017 adjusted EPS.

Our long-term growth has been strong, with market capitalization increasing by over $19 billion over the past 10 years. Our stock has provided investors with solid long-term returns, outperforming both the S&P 500 Utilities Index and the S&P 500 Index over a 10-year period. Our GAAP EPS was $4.40 in 2008, $4.01 in 2013 and $3.42 in 2018. On an adjusted basis, EPS increased from $4.40 in 2008 to $4.18 in 2013 and to $5.57 in 2018.(4)

We also have continued to grow our common stock dividend. The compound annual growth rate (CAGR) of our common stock dividend exceeded the median CAGR for companies in the S&P 500 Utilities Index over the past one, three, five and ten years. From 2008 to 2018, we increased our dividend by 161 percent. On February 21, 2019, the Board of Directors approved an additional increase of approximately 8 percent in our dividend to $3.87 per common share on an annualized basis.

Performance Highlights

 

LOGO               LOGO
Figure 1      Figure 2

 

(1)

See footnote (4) below

 

(2)

As of December 31, 2018, December 31, 2013 and December 31, 2008

 

(3)

For periods ending December 31, 2018

 

(4)

Adjusted EPS is a non-GAAP financial measure. For a reconciliation of GAAP and adjusted earnings and EPS, please see Appendix A to this proxy statement. There were no adjustments to EPS in 2008.

 

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Executive Compensation

 

 

 

2018 and Recent Accomplishments and Highlights

 

 

Business Portfolio Developments

 

  Closed the acquisition of 80.25% indirect interest in Oncor in March 2018

 

  Together with Oncor, announced agreements in October 2018 for Oncor’s planned acquisition of 100% of InfraREIT, Inc. and its subsidiary, InfraREIT Partners, LP, and our planned acquisition of 50% of Sharyland Utilities, LP(1)

 

  Intend to use proceeds from asset sales discussed below to fund InfraREIT and Sharyland acquisitions and pay down debt

 

  Initiated portfolio optimization and continuous cost savings as part of ongoing strategic review

 

  Announced planned sale of U.S. renewables and non-utility U.S. natural gas storage assets in June 2018

 

  Completed sale of U.S. solar assets in December 2018 and received approximately $1.6 billion in proceeds

 

  Completed sale of midstream storage assets in February 2019 for approximately $328 million

 

  Announced sale agreement for remaining U.S. renewable assets in February 2019 for approximately $550 million(1)

 

  Announced in January 2019 the planned sale of South American businesses

 

  

 

Sempra Utilities

 

  SDG&E received the Edison Electric Institute’s 2018 Edison Award, the electric power industry’s most prestigious honor, in recognition of its investments to enhance grid resiliency and reduce climate-related and weather-related vulnerabilities

 

  SDG&E achieved a successful regulatory outcome regarding departing load, further helping to secure fair and equitable rates across its entire customer base

 

  SDG&E and SoCalGas completed all required filings for their General Rate Cases, which include requests for significant capital spending programs to continue to enhance safety and reliability

 

  SDG&E and SoCalGas received approval from the CPUC’s Safety Enforcement Division to begin constructing the $671 million Line1600 pipeline replacement project

 

  SoCalGas announced a plan to replace 20 percent of its traditional natural gas supply with renewable natural gas by 2030

 

  SDG&E worked with California legislature and regulators to pass SB 901, which requires wildfire mitigation plans that are largely modeled after SDG&E’s existing programs

 

  SDG&E submitted a request to increase its FERC ROE from 10.05% to 11.2%, with settlement negotiations expected to begin in the second quarter of 2019

 

  

 

Sempra North American Infrastructure

 

  Progress made on development projects with the goal of building up to 45 Mtpa of LNG export capacity to serve global markets

 

  Cameron: Cameron LNG JV continued construction of Trains 1-3; based on a number of factors, we believe it is reasonable to expect that Cameron LNG JV will start generating earnings in the middle of 2019

 

  Sempra LNG signed an MOU with Total S.A. in November 2018 for up to 9 Mtpa of capacity on Cameron Phase 2 and ECA(2)

 

  ECA Midscale: Sempra LNG signed Heads of Agreements with affiliates of Mitsui & Co., Ltd., Tokyo Gas Co., Ltd. and Total S.A. in November 2018 for the entire expected approximately 2.4 Mtpa of capacity of ECA Phase 1 (midscale)(2)

 

  Port Arthur: Sempra LNG signed a 20-year SPA with PGNiG in December 2018 for 2 Mtpa of capacity from Port Arthur LNG, subject to certain conditions(3)

 

  IEnova announced three new liquids terminal projects (Topolobampo, Baja Refinados, and Manzanillo) totaling approximately $400 million in capital expenditures, as well as an expansion of the Valero terminals

 

(1)

The planned purchase by Oncor of InfraREIT, our planned acquisition of Sharyland and planned sale of our remaining U.S. renewable assets are subject to customary closing conditions and consents, including obtaining certain regulatory approvals.

 

(2)

These arrangements provide a framework for cooperation, but do not obligate the parties to enter into a definitive agreement or participate in the applicable project.

 

(3)

The SPA is subject to conditions precedent, including reaching a final investment decision.

Key Leadership Changes in 2018 and Related Compensation Considerations

On March 11, 2018, Ms. Reed announced that she would retire as President and Chief Executive Officer effective May 1, 2018. In order to ensure a smooth leadership transition, Ms. Reed agreed to stay on as Executive Chairman until her retirement from the company effective December 1, 2018. Continuity of leadership was particularly critical, as the company had closed the acquisition of its interest in Oncor on March 9, 2018.

On May 1, 2018, Mr. Martin, who previously was the company’s Executive Vice President and Chief Financial Officer, became Chief Executive Officer and a member of our board of directors. Mr. Householder, who previously was Corporate Group President – Infrastructure Businesses, became President and Chief Operating Officer and Mr. Mihalik, who was previously Senior Vice President, Controller and Chief Accounting Officer, became Executive Vice President and Chief Financial Officer.

 

Sempra Energy 2019 Proxy Statement   47


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Executive Compensation

 

The availability and readiness of these highly sought after, talented internal candidates illustrates our commitment to management development and effective succession planning. Our succession planning process has allowed us to develop and retain key executive talent while avoiding many of the costs associated with high-level executive acquisitions, such as search fees, interview expenses, relocation reimbursements, sign-on bonuses, and “make whole” compensation to replace compensation opportunities forfeited by an executive who leaves another employer.

These executives received compensation adjustments commensurate with their new responsibilities, as described below. The Compensation Committee considered relevant market data and set pay levels consistent with our compensation philosophy, which generally favors setting initial compensation opportunities conservatively with the intent to align with the market median over time. In connection with their promotions, these executives also received promotional restricted stock unit awards, as described below.

Compensation Program Overview for 2018

Our executive compensation program is designed to attract, motivate and retain key executive talent and promote strong, sustainable long-term performance. The three components of total direct compensation delivered in our program are 1) Base Salary; 2) Performance-Based Annual Bonus; and 3) Long-Term Equity-Based Incentives. We place an emphasis on variable performance-based pay, with each component designed to promote value creation and alignment of our management team’s compensation with our long-term strategic objectives.

 

     
    

 

Component

 

 

Form

 

 

Key Characteristics

 

   
 Fixed   Base Salary   Cash  

  Base salary is benchmarked to the median of comparably-sized general industry peers (excluding financial services companies)

 

   
 Variable   Performance-Based Annual Bonus   Cash  

  Based on earnings (weighted at 85%), and safety and customer service measures (weighted at 15%)

 

  No bonus payment unless company exceeds threshold performance level for year

 

  Long-Term Equity-Based Incentives   Equity  

  Performance-Based Restricted Stock Units (weighted at 70%)

 

  Relative Total Shareholder Return (TSR) Performance-Based Restricted Stock Units (50%): 3-year Relative TSR

 

  1a (35%): Relative TSR measured vs. S&P 500 Utilities Index (excluding water companies); maximum payout requires performance at 90th percentile of S&P 500 Utilities Index peers

 

  1b (15%): Relative TSR measured vs. S&P 500 Index; maximum payout requires performance at 90th percentile of S&P 500 Index peers; includes absolute TSR modifier

 

  EPS Growth Performance-Based Restricted Stock Units (20%): 3-year EPS CAGR, with payout scale set based on forward consensus estimates of EPS CAGR of S&P 500 Utilities Index peers; maximum payout requires performance at the 90th percentile of estimates for S&P 500 Utilities Index peers

 

  3-year performance period for each performance measure

 

  For each measure, performance at threshold results in zero payout

 

  Service-Based Restricted Stock Units (weighted at 30%): 3-year service period promotes retention

 

  Promotional Restricted Stock Units: Granted as appropriate to individuals promoted to new positions generally with a two-year service period to promote retention

 

Table 3

Note: The weightings of the performance measures in our performance-based annual bonus plan are based on performance at target. The weightings of the long-term equity-based incentive award components are based on the target grant date value.

 

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Executive Compensation

 

The relative value of Mr. Martin’s 2018 total pay opportunity as of December 31, 2018 for each of the three components of total direct compensation at target company performance is shown below in Figure 3.

 

 

LOGO

CEO Pay Mix at Target

Figure 3

Note: Base salary is the base salary as of December 31, 2018. Performance-based annual incentive bonus is the target performance-based annual bonus calculated using the base salary of $1,100,000 and performance-based annual bonus target of 115 percent as of December 31, 2018. Long-Term Incentive Plan (LTIP) amounts are based on the target annual LTIP award percentage of 425 percent as of December 31, 2018 multiplied by the December 31, 2018 base salary. The annual performance-based bonus target and LTIP target reflected in Figure 3 above are the targets established by the Compensation Committee when Mr. Martin became CEO. These targets were not fully implemented in 2018.

Our pay mix is designed to align our executives’ interests with our shareholders’ interests by providing a much greater proportion of target annual compensation through performance-based annual and long-term incentives rather than base salary. This means that most pay is variable and will increase or decrease based on company performance. As shown in Figure 3, approximately two-thirds of Mr. Martin’s total target pay opportunity as of December 31, 2018 was in the form of performance-based incentives and over 80 percent was in variable incentive pay.

Actual pay mix may vary substantially from target pay mix. This may occur as a result of company performance, which greatly affects annual bonuses, and stock performance, which significantly impacts the ultimate value realized for stock-based awards. Figure 4 shows the percentage of each component of the total pay opportunity at target company performance for each of our named executive officers as of December 31, 2018.

 

LOGO

Components of Total Target Compensation

Figure 4

Note: Base salary is the base salary as of December 31, 2018. Performance-based annual incentive bonus is the target performance-based annual bonus calculated using the base salary and performance-based annual bonus target as of December 31, 2018. LTIP amounts are based on the target annual LTIP award percentage as of December 31, 2018 multiplied by the December 31, 2018 base salary. The annual performance-based bonus targets and LTIP targets reflected in Figure 4 above for Mr. Martin, Mr. Householder, Mr. Arriola and Mr. Mihalik are the targets established by the Compensation Committee in connection with their 2018 promotions. These targets were not fully implemented in 2018.

 

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Executive Compensation

 

Shareholder Engagement and Compensation Program Changes for 2018

Incorporating shareholder feedback into the decision-making process is a critical component of our corporate governance philosophy. Our board and management have a long-standing commitment to engaging our shareholders and soliciting their perspectives on key performance, governance, and compensation matters.

During our shareholder engagement campaign in 2018, we contacted shareholders representing 62 percent of our total outstanding shares and held telephonic meetings with shareholders representing 55 percent of our total outstanding shares (approximately 59 percent of our institutional share ownership). These engagement efforts were in addition to our normal investor relations outreach conducted on an ongoing basis. During these meetings, we reviewed executive our compensation program along with other topics.

We conduct extensive shareholder engagement to gather feedback on our compensation program and potential changes the Compensation Committee is considering. Our Lead Director participates in many of these meetings to strengthen the communication of feedback directly to the board.

Based on an evaluation of our business strategy, consultation with our independent compensation consultant, the result of our annual “say-on-pay” vote, and input received during our shareholder engagement process, the Compensation Committee has made a number of key refinements to our compensation program over the past two years. These changes are summarized in the table below. Our 2018 Annual Meeting “say-on-pay” vote received over 96 percent approval.

 

 

2017 – 2018 Compensation Program Changes

 

 

 For the relative TSR portion of the annual LTIP awards, performance against the S&P 500 Utilities Index and S&P 500 Index is now measured separately. Consistent with our business mix, we created two measures of performance:

 

  70% of the relative TSR LTIP awards (or 35% of total LTIP awards) is earned based on performance against the S&P 500 Utilities Index (excluding water companies)

 

  30% of such awards (or 15% of total LTIP awards) is earned based on performance against the S&P 500 Index

 

 

 Performance results for LTIP awards based on EPS growth (20% of total LTIP awards) exclude the impact of stock buybacks not contemplated in the financial plans publicly communicated prior to the grant date

 

 

 Rebalanced our LTIP equity mix by introducing a modest component of service-based restricted stock units (30% of total LTIP awards) with the remainder in performance-based restricted stock units to respond to shareholder feedback about balancing performance-based equity with promoting retention and to provide a more balanced risk-reward profile

 

 

 We include tables in our proxy statement summarizing:

 

  Key metrics in our compensation program and their alignment to our long-term strategy

 

  Compensation Committee’s target-setting process

 

  CEO target compensation

 

CEO Target Compensation Summary

Mr. Martin became our CEO on May 1, 2018. Ms. Reed was our CEO from June 27, 2011 through April 30, 2018. The table below summarizes CEO target total compensation over the past four years. For Mr. Martin, the annual performance-based bonus target and LTIP target reflected in Table 4 are those that apply to him in his role as CEO and will not be fully implemented until 2019. Mr. Martin’s 2018 annual bonus was calculated by prorating the annual performance-based bonus target for the amount of time he spent in the CEO role in 2018 and the amount of time in his prior role as Executive Vice President and Chief Financial Officer (CFO). Mr. Martin’s 2018 annual LTIP award was made while he was still CFO and was not adjusted upon his promotion to CEO. Mr. Martin did receive a promotional grant upon his promotion to the CEO role, but the combined value of his 2018 annual LTIP grant and promotional grant was less than the LTIP target shown below.

 

CEO Salary and

Incentive Targets as of
December 31

 

  

Base Salary

 

 

 

Annual Performance-Based
Bonus Target as a Percentage
of Base Salary

 

  

LTIP Target as a
  Percentage of Base Salary  

 

 

2015 (Ms. Reed)

   $1,350,000

 

  125%

 

   475%

 

 

2016 (Ms. Reed)

 

   $1,391,900

(3.1% increase)

 

  125%

 

   475%

 

 

2017 (Ms. Reed)

 

   $1,391,900

(no increase)

 

  125%

 

   475%

 

   2018 (Mr. Martin)

 

   $1,100,000

 

  115%

 

   425%

 

Table 4

 

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Pay-for-Performance Alignment

The Compensation Committee believes that pay should be structured to align executive compensation with company performance and with the interests of our shareholders. Our incentive plans deliver payouts that are aligned with company performance. This is demonstrated by comparing the performance outcomes of our recent LTIP payouts for our relative TSR-based awards, which comprised 80 percent of our LTIP grant date award value of the 2014-2017, 2015-2017, and 2016-2018 awards and 100 percent of our LTIP grant date value for our 2012-2015 and 2013-2016 awards. Such awards directly tie payouts to our stock price performance.

 

    TSR-Based LTIP Awards

   TSR Performance Result vs.
S&P 500 Utilities Index
        Payout    

    2012 – 2015

  

96th Percentile

 

   LOGO    150% of Target  

    2013 – 2016

  

40th Percentile

 

   LOGO    38% of Target  

    2014 – 2017

  

27th Percentile

 

   LOGO    No Payout  

    2015 – 2017

  

24th Percentile

 

   LOGO    No Payout  

    2016 – 2018

  

23rd Percentile

 

  

LOGO

 

   No Payout    

Table 5

Note: The 2012-2015 TSR-based award vested in January 2016, the 2013-2016 TSR-based award vested in January 2017, the 2014-2017 and 2015-2017 awards did not vest and were forfeited in January 2018, and the 2016-2018 awards did not vest and were forfeited in January 2019. For additional information, see “Executive Compensation – Compensation Tables – Option Exercises and Stock Vested” following this Compensation Discussion and Analysis.

 

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LOGO

Pay-for-Performance AlignmentCEO Total Direct Compensation Value 2014, 2015 and 2016 Realized Pay and 2017 and 2018 Realizable Pay as of December 31, 2018 Components Base Salary Actual Performance-Based Annual Bonus Relative TSR-Based Restricted Stock Units Reported: Valued based on grant date closing stock price Realized (2014, 2015 and 2016): Actual value Realizable value as of 12/31/18 (2017 and 2018): Based on relative TSR performance through 12/31/18 and closing stock price on 12/31/18 EPS Growth-Based Restricted Stock Units Reported: Valued based on grant date closing stock price Realized (2014, 2015 and 2016): Actual value Realizable value as of 12/31/18 (2017 and 2018): Based on target(1) performance through 12/31/18 and closing stock price on 12/31/18 Service-Based Restricted Stock Units (2018 only) Reported: Value based on grant date closing stock price Realizable value as of 12/31/18: Based on 12/31/18 closing stock price TSR-Based Awards Detail Chart TSR-based restricted stock unit awards are the largest component of target total direct compensation for the CEO (excluding Mr. Martins 2018 promotional award). There was no payout for the 2014, 2015 or 2016 TSR-based awards. Based on relative TSR performance through 12/31/18, the value of the 2017 and 2018 TSR-based awards is below target. Tight alignment exists between the CEOs compensation and the companys relative TSR performance. There are opportunities and significant incentive to improve TSR performance, which directly aligns management with the interests of shareholders.

Figure 5

 

(1)

The EPS-based restricted stock unit awards are reported based on target performance, as the Compensation Committee may exercise downward discretion in determining the performance result.

Note: 2014 – 2017 are based on Ms. Reed’s compensation and 2018 is based on Mr. Martin’s compensation, including his 2018 base salary and performance-based annual bonus, both of which were prorated for the levels in effect prior to and following his promotion based on the time served in each position during 2018, his January 2018 LTIP grant as CFO, and his promotional LTIP award upon becoming CEO.

 

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Executive Compensation

 

Rigor of Incentive Targets

At the start of each year, our Compensation Committee sets challenging yet achievable incentive targets, with a focus on motivating our team to drive strong performance and sustained value creation.

Performance-Based Annual Bonus Plan

For 2018, the Compensation Committee selected earnings (85 percent weighting) and employee and public safety and customer service (15 percent weighting) for the measurement of annual corporate performance under the performance-based annual bonus plan. The committee utilizes earnings as the basis of the primary annual bonus metric because it believes the measure provides an accurate and comprehensive picture of annual company financial performance that plan participants, shareholders, analysts and other parties clearly understand. The committee makes certain pre-established adjustments to earnings as described in Appendix D to this proxy statement to calculate earnings for annual bonus plan purposes. For 2018, the committee set a challenging earnings target of $1,487 million for the performance-based annual bonus plan based on the company’s financial plan. The 2018 target reflected an increase of $205 million, or 16 percent, over our 2017 target earnings for annual bonus plan purposes of $1,282 million, and an increase of $110 million, or 8 percent, over our 2017 actual earnings for annual bonus plan purposes.

Our 2018 GAAP earnings were $924 million. Actual 2018 earnings adjusted for annual bonus plan purposes were $1,576 million. The most significant differences between GAAP earnings and earnings adjusted for annual bonus plan purposes were the exclusion of items related to the divestiture of renewable and midstream assets as part of the company’s announced strategic review and capital rotation. Adjustments were pre-established at the time the Compensation Committee determined the 2018 annual bonus plan goals. For a reconciliation of GAAP earnings to earnings adjusted for annual bonus plan purposes, see “Adjustments to 2018 GAAP Earnings for Annual Bonus Plan Purposes” on page 60.

Long-Term Equity-Based Incentives

Based on shareholder feedback received during our shareholder outreach over the past two years, beginning with the 2017 LTIP awards the Compensation Committee moved from an integrated award design that measured performance against both the S&P 500 Utilities Index and the S&P 500 Index within one award to a bifurcated award design that measures relative total shareholder return performance against these two indices independently under separate award components.

Shareholders also provided feedback about the incorporation of a service-based restricted stock unit component into our LTIP design. Some shareholders expressed concern about retention given the low payouts of our LTIP in recent years. The 2018 LTIP program aligns with the feedback we received from our shareholders in that it maintains a strong performance focus, with 50 percent of the target award value based on relative TSR and 20 percent based on EPS growth, and also includes service-based restricted stock units to promote retention (30 percent of the target award value). The 2018 performance measures and weightings for the long-term incentive plan awards are:

 

 

 

LOGO

2018 LTIP Metrics

Figure 6

 

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The 2018 long-term incentive plan awards included two performance measures — relative total shareholder return (50 percent total weighting with 35 percent based on performance against the S&P 500 Utilities Index (excluding water companies) and 15 percent based on performance against the S&P 500 Index) and EPS growth (20 percent weighting). The Compensation Committee measures performance against challenging targets in order to drive long-term growth and closely align executives’ interests with those of our shareholders.

In the event that Sempra Energy’s total shareholder return does not exceed the 25th percentile of the relevant index (S&P 500 Utilities Index or S&P 500 Index), participants will receive zero shares for that portion of the award. In addition, to achieve the maximum payout, performance at or above the 90th percentile of the relevant index (S&P 500 Utilities Index or S&P 500 Index) is required. For the EPS CAGR portion of the LTIP, zero payout is made if our EPS CAGR is at or below the 25th percentile of consensus expectations for our S&P 500 Utilities Index peers. To achieve maximum payout, performance at or above the 90th percentile of consensus expectations for utility peers is required. We believe that the structure of our payouts is particularly rigorous relative to the LTIP designs of many of our S&P 500 Utilities Index peers, where in many cases:

 

(1)

peer company payouts at threshold performance are often either 25 percent or 50 percent of the award’s target value, versus a zero payout at threshold performance for Sempra Energy; and

 

(2)

peer company maximum payout often requires 75th percentile performance, versus performance at the 90th percentile for Sempra Energy.

Compensation Governance

We actively solicit shareholder feedback with respect to compensation governance and seek to conform to best practices:

 

 

LOGO

What We Do Incorporate shareholder feedback in our compensation program design Multiple LTIP and annual incentive plan performance measures LTIP includes double trigger equity vesting on a change in control (1) Clawback policy Share ownership requirements (8x base salary for CEO, 5x retainer for Directors) Employ independent advisors to conduct risk assessment of compensation programs Independent compensation consultant What We Dont Do No excise tax gross-ups for named executive officers No employment contracts for named executive officers No stock-option repricing (2) No hedging or pledging of shares No guaranteed bonuses / uncapped incentives No single-trigger cash severance payments upon a change in control

 

(1)

See “Compensation Tables–Severance and Change in Control Benefits” for additional information.

 

(2)

Long-term incentive plan grants are made from a shareholder-approved plan that prohibits stock option repricing and cash buyouts without shareholder approval. We are asking shareholders to approve a new long-term incentive plan which also prohibits stock option repricing and cash buyouts without shareholder approval.

 

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Executive Compensation

 

Compensation Philosophy and Goals

 

Compensation Philosophy

The Compensation Committee of our Board of Directors sets the company’s executive pay philosophy, which emphasizes four key areas:

 

 

LOGO

Sempra Energy Compensation PhilosophyPerformance-based incentives aligned with shareholder value creationBalance between short-term and long-term incentivesAlignment of pay with short-term and long-term company performanceMore pay tied to performance at higher levels of responsibility

We believe this compensation philosophy enables us to attract, motivate and retain key executive talent and promote strong, sustainable long-term performance.

Compensation Program Goals

Our compensation program goals include:

 

 

Aligning compensation with company performance and shareholders’ interests.

 

 

Strongly linking executive compensation to both annual and long-term corporate, business and individual performance.

 

 

Motivating executives to achieve superior performance.

 

 

Attracting and retaining executives of outstanding ability and proven experience who demonstrate high standards of integrity and ethics.

Labor Market Benchmarking

 

Labor Market

The Compensation Committee uses external pay data to help align executive compensation levels, in total and by component, with the labor market. The committee views the labor market for our most senior positions as a nationwide, broad cross-section of companies in various industries. The committee’s use of both general industry and utilities benchmarking data reflects the competitive labor market from which we recruit executives. This labor market varies by position and extends beyond our industry.

 

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Executive Compensation

 

Approximately 89 percent (16 officers) of Sempra Energy’s 18 corporate officers were hired from a broad range of industries, including renewable energy, accounting, consulting, banking, oil and gas, law and government. The remaining 11 percent (two officers) were hired early in their careers and developed within Sempra Energy and its subsidiary companies. No officers were recruited from the utility industry.

 

 

LOGO

Sempra Energy Officers(1)

Figure 7

 

(1)

Sempra Energy officers as of December 31, 2018.

Target Market Alignment

The Compensation Committee targets alignment of compensation with the 50th percentile of the general industry benchmarking data. This applies to target compensation in total and by component (base salaries, target annual performance-based bonuses and target long-term incentives). Positioning relative to the 50th percentile may vary based on factors such as time in position, performance, and the comparability of market benchmark positions to the scope and structure of our positions. This is particularly significant for roles such as Mr. Householder’s and Mr. Arriola’s, which vary in scope and structure from the market benchmark positions.

Total target compensation for Mr. Martin and Mr. Mihalik, who were new in their roles in 2018, was significantly below the 50th percentile of general industry benchmarking data. Our compensation philosophy generally favors setting initial compensation opportunities conservatively with the intent to align with the market median over time. Total target compensation for Ms. Wyrsch approximated the 50th percentile of the general industry benchmarking data. Total target compensation for Mr. Householder and Mr. Arriola was above the 50th percentile, which, as discussed above, is related to how we have structured their roles compared to the market benchmark roles.

Actual compensation may be higher or lower than target compensation, as it reflects actual performance and payouts under our performance-based annual bonus plan and our long-term incentive plan.

General Industry Benchmarking

When benchmarking executive pay, the Compensation Committee first reviews general industry market pay data from the Aon Hewitt Total Compensation Management (TCM) Database for non-financial Fortune 500 companies with revenues between $5.75 billion and $23.25 billion. Our 2018 revenues were $11.7 billion. The median 2018 revenue for the general industry peer group (as described below) was $10.6 billion.

 

 

A total of 126 companies were included in the Fall 2017 review that the committee considered when determining 2018 compensation. These companies are listed in Appendix B to this proxy statement and are referred to in this Compensation Discussion and Analysis as our “general industry peer group.”

 

 

The committee reviews summary statistics of the companies included in this database (but not company-specific information) with the goal of generally managing total target pay opportunities to the median of this summary data. Actual pay levels will rise above or fall below these standards as a result of actual company and individual performance.

The Compensation Committee uses the general industry peer group as the primary benchmarking data source because it best represents the market from which we recruit executive talent. This peer group is not constrained by industry affiliation, but companies in the utilities and energy sector make up approximately 13 percent of the general industry peer group. The peer group focuses on companies comparable in size to Sempra Energy.

Table 6 summarizes the general industry peer group market capitalization and revenue compared to Sempra Energy.

 

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SUMMARY OF GENERAL INDUSTRY COMPANIES INCLUDED IN NOVEMBER 2017 REVIEW OF COMPANIES IN AON HEWITT’S TCM DATABASE WITH REVENUES OF $5.75 BILLION TO $23.25 BILLION

 

(Dollars in Millions)

  

Market

Capitalization
(on 12/31/18)

    

2018

Revenue(1)

 

 

Sempra Energy

 

    

 

$29,619

 

 

 

    

 

$11,687

 

 

 

 

Sempra Percentile Rank

 

     72 nd       53 rd 

 

75th Percentile

 

     $35,026        $16,241  

 

Median

 

     $16,782        $11,261  

 

25th Percentile

 

     $  7,884        $  8,590  

Table 6

 

(1)

Revenue for the general industry peer group companies is for fiscal year 2018 unless otherwise noted in Appendix B to this proxy statement.

Utilities Industry Benchmarking

The Compensation Committee also reviews pay and performance data in proxy statements and other public filings of energy and utility companies.

 

 

This peer group is composed of the 26 companies that make up the S&P 500 Utilities Index, excluding water companies. These companies are listed in Appendix C to this proxy statement and are referred to in this Compensation Discussion and Analysis as our “utilities peer group.”

 

 

This group is consistent with the peer group used in connection with our performance-based long-term incentive awards.

 

 

The utilities peer group review provides an additional basis for assessing executive compensation and corporate performance.

 

 

This review gives us a better understanding of the effectiveness of our emphasis on “pay-for-performance” in relation to the performance of our utilities peer group.

Table 7 summarizes the utilities peer group market capitalization and revenue compared to Sempra Energy.

SUMMARY OF S&P 500 UTILITIES INDEX COMPANIES

 

(Dollars in Millions)

   Market
Capitalization
(on 12/31/18)
    

2018

Revenue(1)

 

 

Sempra Energy

 

     $29,619        $11,687  

 

Sempra Percentile Rank

 

     77 th       61 st 

 

75th Percentile

 

     $26,063        $14,001  

 

Median

 

     $19,636        $10,873  

 

25th Percentile

 

     $14,087        $  7,706  

Table 7

 

(1)

Revenue for the utilities peer group companies is for fiscal year 2018.

Compensation Committee Review of Internal Equity in Determining Pay

The Compensation Committee uses internal equity to determine the compensation for positions that are unique or difficult to benchmark against market data. Internal equity is also considered in establishing compensation for positions considered to be equivalent in responsibilities and importance, especially where precise external data is not available.

 

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Executive Compensation

 

Compensation Components

 

Primary Components of Executive Compensation Program

The primary components of our executive compensation program are:

 

 

Base salaries

 

 

Performance-based annual bonuses

 

 

Long-term equity incentive awards

Additional benefits include health and welfare programs, retirement and savings plans, personal benefits and severance pay.

All of our executive officers generally participate in the same compensation programs. However, compensation levels for named executive officers vary substantially based on the roles and responsibilities of the individual officers.

 

1.   Base Salaries

Our executive compensation programs emphasize performance-based pay. This includes annual bonuses and equity-based long-term incentive awards. However, base salaries remain a necessary and typical part of compensation for attracting and retaining outstanding employees at all levels.

The Compensation Committee annually reviews base salaries for executive officers. The committee considers the following factors in its review:

 

 

LOGO

Factors Considered in Determining Base Salaries Peer group salary data Individual contributions and performance Labor market conditions Complexity of roles and responsibilities Succession planning Retention needs Reporting relationships Internal equity Experience

2018 Adjustments to Base Salaries

Ms. Wyrsch and Ms. Reed received 2018 annual salary planning increases of 3.8 percent and 4.0 percent, respectively. Mr. Martin, Mr. Householder, Mr. Mihalik and Mr. Arriola received 2018 annual salary planning increases of 16.7 percent, 7.1 percent, 6.0 percent and 3.2 percent respectively. At the beginning of 2017, Mr. Martin was promoted to Executive Vice President and Chief Financial Officer and Mr. Householder was promoted to Corporate Group President – Infrastructure Businesses. The 2018 annual salary planning increases for Mr. Martin and Mr. Householder reflect the Compensation Committee’s philosophy of generally setting initial compensation conservatively when an executive is promoted into a new role and increasing compensation over time. For additional information, see “Target Market Alignment” above.

Mr. Martin, Mr. Householder, Mr. Mihalik and Mr. Arriola were promoted to new roles following the annual salary adjustments described above. Mr. Martin, Mr. Householder and Mr. Mihalik received promotional increases on May 1, 2018. Mr. Martin’s salary increased from $700,000 to $1,100,000 when he became CEO. Mr. Householder’s salary increased from $750,000 to $1,000,000 when he was promoted to President and Chief Operating Officer. Mr. Mihalik’s salary increased from $400,000 to $600,000 when he became Executive Vice President and Chief Financial Officer. Mr. Arriola’s salary increased from $572,800 to $622,800 effective March 1, 2018 when he assumed responsibility for overseeing our South American businesses.

 

2.   Performance-Based Annual Bonuses

Performance Guidelines

Each year the Compensation Committee establishes performance measures and dollar guidelines for bonus payments. The committee uses financial and operational performance measures that are linked to both our business strategy and shareholder interests.

Consistent with our pay-for-performance philosophy, the performance measures do not provide for any bonus payment unless the company surpasses the threshold (minimum) performance level for the year. Bonus opportunities increase from zero for performance at the threshold level to 200 percent of target for performance at maximum.

 

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Bonus Opportunities for Named Executive Officers

Potential bonus opportunities at threshold, target and maximum company performance are expressed as a percentage of each named executive officer’s base salary below.

BONUS THRESHOLDS, TARGETS AND MAXIMUMS AS OF DECEMBER 31, 2018, AS A PERCENTAGE OF BASE SALARY

 

       

Named Executive Officer

  

Threshold

    

Target

    

Maximum

 

Jeffrey W. Martin(1)

     0%        115%        230%  

Joseph A. Householder(1)

     0%        100%        200%  

Trevor I. Mihalik(1)

     0%        80%        160%  

Dennis V. Arriola(1)

     0%        80%        160%  

Martha B. Wyrsch

     0%        80%        160%  

Debra L. Reed

     0%        140%        280%  

Table 8

 

(1)

2018 bonuses for Mr. Martin, Mr. Householder, Mr. Mihalik and Mr. Arriola were prorated between their pre-promotion targets and the targets shown above. The pre-promotion targets were 85 percent for Mr. Martin, 90 percent for Mr. Householder, 60 percent for Mr. Mihalik, and 75 percent for Mr. Arriola.

Annual Bonus Performance Goals

 

For 2018, the Compensation Committee selected earnings, employee and public safety, and customer service for the measurement of annual corporate performance. The earnings performance measure was weighted at 85 percent and the safety and customer service measures were weighted at 15 percent. For annual bonus plan purposes, “earnings” means Sempra Energy Net Income, excluding earnings attributable to noncontrolling interests and preferred stock dividends and subject to the pre-established adjustments set forth in Appendix D to this proxy statement. Earnings for annual bonus plan purposes may be higher or lower than earnings reported in our financial statements due to the pre-established adjustments. These adjustments are described under the section titled “Earnings Goal Determination.”    

LOGO

85% Adjusted Earnings 15% Safety and Customer Service Performance

Rationale for Selection of Performance Measures

The Compensation Committee selected earnings as the basis for 2018 annual bonus financial performance because it believes this measure provides an accurate and comprehensive picture of annual company financial performance that plan participants, shareholders, analysts and other parties clearly understand.

The committee included employee and public safety and customer service measures in the 2018 annual bonus plan because it believes that strong safety and customer service performance are critical in an infrastructure-intensive company with a large customer base.

The committee may apply discretion in determining the results of the performance measures or in consideration of the contributions of each named executive officer.

During our shareholder engagement meetings, we solicit shareholders’ input on the performance measures and other aspects of our incentive plans. Some shareholders expressed a preference for the use of multiple performance measures in annual bonus plans, including a financial performance measure (there was not a clear preference for earnings vs. EPS), and for the use of different performance measures in the annual and long-term incentive plans. Shareholder feedback related to our annual bonus plan performance measures and structure generally has been positive.

Earnings Goal Determination

Table 9 shows the earnings criteria for 2018 annual bonuses:

2018 EARNINGS GOALS FOR ANNUAL BONUS PLAN PURPOSES

 

Financial Performance Measure (Dollars in Millions)

   Threshold      Target      Maximum  

Sempra Energy Earnings (Attributable to Common Shares)

   $ 1,428      $ 1,487      $ 1,546  

Table 9

The Compensation Committee set 2018 earnings goals, with the target of $1,487 million in earnings, based on the company’s financial plan with certain adjustments for annual bonus plan purposes. The financial plan takes into account anticipated earnings for each of our businesses, planned purchases or sales of assets, major capital projects and other significant issues impacting the company’s earnings. The financial plan also is used to develop the company’s public earnings guidance. The 2018 earnings target of $1,487 represents an increase of $110 million, or 8 percent, over our 2017 actual earnings for annual bonus plan purposes.

 

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Consistent with the approach taken in prior years, the Compensation Committee also determined at the beginning of the year that the earnings calculation for bonus purposes would be adjusted by excluding the impact of major changes in accounting rules, certain items related to acquisitions and divestitures and other adjustments as described in Appendix D to this proxy statement.

Adjustments to 2018 GAAP Earnings for Annual Bonus Plan Purposes

A reconciliation of 2018 GAAP earnings to earnings adjusted for annual bonus plan purposes is provided in Table 10.

2018 EARNINGS ADJUSTMENTS FOR ANNUAL BONUS PLAN PURPOSES

 

(Dollars in Millions)

   Reconciliation  

GAAP Earnings

   $ 924  

Pre-Defined Adjustments:

  

Exclude gains and losses on divestitures and related impairments

     407  

Exclude impact of the enactment of tax reform legislation

     100  

Exclude impairment of investment in RBS Sempra Commodities LLP, which was sold in 2010

     67  

Exclude variance to plan of foreign exchange gains or losses at Mexico

     47  

Exclude litigation settlement and certain unplanned items related to nonqualified pension and deferred compensation

     39  

Exclude earnings (including depreciation benefits) from assets held for sale, variance to plan for Oncor acquisition closing earlier than planned, unplanned costs related to pending InfraREIT acquisition and unplanned mandatory preferred dividends and capital rotation costs, net of interest

     (8

Earnings for Annual Bonus Plan Purposes

   $ 1,576  

Table 10

Annual Bonus Performance Results

Overall company performance for 2018 was at 196 percent of target performance. A summary of the plan metrics and results is provided in Table 11 below, with additional detail in Appendix D to this proxy statement:

 

2018 Performance Measures

          Goals             Percent of  
   Target Weight      Minimum      Target      Maximum     

Actual

Performance

     Target
Achieved(1)
 

Financial:

                 

Sempra Energy Earnings (Dollars in Millions)

     85%      $ 1,428      $ 1,487      $ 1,546      $ 1,576        170

Safety:

                 

Employee and Public Safety

     12%        See Appendix D for Detail                 21.4

Customer Service & Stakeholders:

          

SDG&E and SoCalGas Customer Service/Stakeholders

     3%                                            4.6

TOTAL

     100%                                            196.0

Table 11

 

(1)

Earnings for annual bonus plan purposes exceeded the maximum goal, resulting in achievement of 200 percent of target performance that corresponds to a weighted percent of target achieved of 170 percent. Overall performance for the safety and customer service measures resulted in achievement of 174 percent of target performance that corresponds to a weighted percent of target achieved of 26.0 percent.

 

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2018 Bonus Payouts

Based on overall performance and its consideration of the contributions of each named executive officer, the Compensation Committee approved the payment of the annual bonuses shown in Table 12.

BONUSES PAID TO NAMED EXECUTIVE OFFICERS FOR 2018 PERFORMANCE

 

Named Executive Officer

  

Base Salary at

Year-End 2018

    x      Bonus
Target
     x      Performance
Score(2)
     =      Bonus(3)  

Jeffrey W. Martin(1)

   $ 1,100,000          105%           196%         $ 2,267,300  

Joseph A. Householder(1)

   $ 1,000,000          97%           196%         $ 1,896,000  

Trevor I. Mihalik(1)

   $ 600,000          73%           196%         $ 863,700  

Dennis V. Arriola(1)

   $ 622,800          79%           196%         $ 966,900  

Martha B. Wyrsch

   $ 600,000          80%           196%         $ 941,000  

Debra L. Reed

   $ 1,447,600 (4)                140%                 196%               $ 3,973,100  

Table 12

 

(1)

Bonus targets for Mr. Martin, Mr. Householder, Mr. Mihalik and Mr. Arriola are prorated between their pre- and post-promotion targets.

 

(2)

The actual performance score of 196.04 percent is rounded in Table 12.

 

(3)

Bonus amounts are rounded up to the nearest hundred.

 

(4)

Represents Ms. Reed’s base salary in effect at the time of her retirement in December 2018.

 

3.   Long-Term Equity-Based Incentives

Long-term equity-based incentives are the largest single component of each named executive officer’s total target compensation package. (See Figure 4 for these percentages.) In accordance with our pay-for-performance philosophy, 70 percent of the 2018 annual long-term incentive plan award for each of our named executive officers was in the form of performance-based restricted stock units. The key features of our awards and their alignment with shareholder interests are summarized below.

 

 

LOGO

Key Features of 2018 Equity Awards Alignment with Shareholder Interests 70% performance-based restricted stock units Two performance measures: Relative total shareholder return (50%) Earnings per share growth (20%) No payout at threshold, or minimum, performance 30% service-based restricted stock units Performance measures are aligned with long-term value creation. Payouts are linked to relative total shareholder returnand EPS performance. Payout scale begins at zero for threshold performance. Three-year vesting to promote retention

 

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Rationale for LTIP Program Design

 

The Compensation Committee believes a balanced award design that is based 50 percent on relative total shareholder return, 20 percent on EPS growth and 30 percent on service-based restricted stock units creates a strong alignment with shareholder interests and with our growth strategy. The committee approved this equity award structure after considering many variables, including alignment with shareholder interests, retention, plan expense, share usage, market trends and feedback from our shareholder outreach.

 

In determining the design of the performance-based components of our LTIP awards, the Compensation Committee sought a direct link to long-term performance in comparison to indices and peers. To achieve this result, the committee uses performance-based restricted stock units based on relative total shareholder return (constituting 50 percent of the target grant date award value, with 35 percent based on performance relative to the S&P 500 Utilities Index (excluding water companies) and 15 percent based on performance relative to the S&P 500 Index). The link between pay and long-term earnings performance is further strengthened by the use of a second performance measure based on long-term EPS growth (constituting 20 percent of the target grant date award value). Service-based restricted stock units that vest over three years make up the remaining 30 percent of the target grant date award value.

 

 

    

 

 

LOGO

Relative performance determines the number of shares earned and absolute performance determines the value of each share earned

 

 

 

LOGO

Figure 8

Determining Individual Equity Award Grants

In making the annual grants, the Compensation Committee:

 

 

Specified a target dollar value (based on a percentage of base salary) and other terms for each executive officer’s award.

 

 

Based the number of shares underlying the awards granted on the specified target dollar value, as opposed to a fixed number of shares for each executive officer. This approach allows maintenance of the pay mix described previously.

On the grant date, we calculated the precise number of shares to be granted to each executive officer by dividing the total target value of each executive officer’s award by the applicable Monte Carlo value for the awards based on relative total shareholder return and by the grant date closing stock price of Sempra Energy common stock for the awards based on EPS growth and for the service-based restricted stock units.

Promotional and Recognition Awards Granted to Named Executive Officers in 2018

Special equity awards also may be granted with the Compensation Committee’s approval upon the hiring or promotion of named executive officers or, in limited instances, to reward extraordinary performance or promote retention. In connection with their promotions, Mr. Martin, Mr. Householder and Mr. Mihalik received May 1, 2018 grants of service-based restricted stock units with grant date values of $2.7 million for Mr. Martin, $2.5 million for Mr. Householder and $414 thousand for Mr. Mihalik. Other than the promotional grant, Mr. Martin did not receive an adjustment to his 2018 long-term incentive award that was granted while he was serving as CFO, as shown in the table below, despite being promoted to CEO on May 1, 2018. In his prior role, Mr. Mihalik was recognized for his contributions to the Oncor acquisition with service-based restricted stock unit awards, $500 thousand of which were granted on January 2, 2018 and $250 thousand of which were granted on March 9, 2018. He also received a February 21, 2018 service-based restricted stock unit award valued at $76 thousand. Ms. Wyrsch received a $500 thousand service-based restricted stock unit award in recognition of exemplary performance on January 2, 2018.

 

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Target Value of Equity Grants

Table 13 illustrates the target value of 2018 annual long-term incentive awards granted to our named executive officers.

The target grant values for the 2018 annual long-term incentive plan awards are summarized below. The values of these awards, as well as any promotional or special awards, also are provided in the Grants of Plan-Based Awards table on page 79.

TARGET GRANT VALUES FOR 2018

 

     Performance-Based and Service-Based Restricted  Stock Units  
     Base Salary        Target Value(1)        Total  

Jeffrey W. Martin

   $ 700,000          250%        $ 1,750,000  

Joseph A. Householder

   $ 750,000          250%        $ 1,875,000  

Trevor I. Mihalik

   $ 400,000          160%        $ 640,000  

Dennis V. Arriola

   $ 572,800          200%        $ 1,145,600  

Martha B. Wyrsch

   $ 600,000          210%        $ 1,260,000  

Debra L. Reed

   $ 1,447,600          550%        $ 7,961,800  

 

Table

13

 

(1)

The targets shown above are the targets that were used to calculate the 2018 annual long-term incentive plan grants in January 2018. Targets for Mr. Martin, Mr. Householder, Mr. Mihalik and Mr. Arriola were increased in connection with their promotions to 425 percent for Mr. Martin, 325 percent for Mr. Householder, and 210 percent for Mr. Mihalik and Mr. Arriola. These changes were prospective and were not applied retroactively to the January 2018 grants.

The actual amounts realized by equity award recipients will depend on future stock price performance and our EPS performance and the degree to which these performance measures are achieved. The amounts ultimately realized will not necessarily track with the target grant values.

Performance Goals for the 2018 Performance-based Restricted Stock Units

The 2018 long-term incentive plan awards included two performance measures—relative total shareholder return and EPS growth. Based on feedback from our shareholders, beginning in 2017 we moved from an award design that integrated total shareholder return performance against both S&P indices within one award to a simpler design with performance against each index measured in separate award components. Fifty percent of the total target award value is linked to relative total shareholder return, with 35 percent based on total shareholder return relative to the S&P 500 Utilities Index (excluding water companies) and 15 percent based on total shareholder return relative to the S&P 500 Index. Twenty percent is linked to EPS growth.

 

1.

Relative Total Shareholder Return

Each performance-based restricted stock unit represents the right to receive between zero and two shares of Sempra Energy common stock based on the company’s three-year cumulative total shareholder return compared with the S&P 500 Utilities Index or the S&P 500 Index, as applicable. We measure our total shareholder return against both the S&P 500 Utilities Index and the S&P 500 Index because our operations extend beyond those of a typical utility and we have significant international and non-utility infrastructure operations. Our stock can be influenced by factors that may not affect many companies in the S&P 500 Utilities Index.

If the company’s performance is at target (the 50th percentile of the applicable index), participants will earn one share for each restricted stock unit. If our performance exceeds the 50th percentile of the applicable index, participants have the opportunity to earn up to two shares for each restricted stock unit. Participants may earn a partial share for performance between the 25th and 50th percentiles of the applicable index.

 

Cumulative Total Shareholder Return Percentile Rank vs.

S&P 500 Utilities Index or S&P 500 Index

(Measured Independently in Separate Award Components)

   Sempra Energy Common Stock Shares
Received for Each
Restricted Stock Unit(1)

90th Percentile or higher

   2.0

70th Percentile

   1.5

50th Percentile

   1.0

40th Percentile

   0.7

30th Percentile

   0.4

25th Percentile or below

   0.0

Table 14

 

(1)

Participants also receive additional shares for dividend equivalents, which are reinvested to purchase additional units that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.

 

Note:

If performance falls between the tiers shown in Table 14, the payout is calculated using linear interpolation.

 

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The award component based on total shareholder return relative to the S&P 500 Index also includes a modifier based on absolute total shareholder return. While relative total shareholder return continues to be the primary performance measure, the inclusion of a modifier strengthens the focus on achieving both strong relative and absolute total shareholder return performance. In an instance in which both relative and absolute total shareholder return are high, the modifier may increase award payouts but cannot cause the total award payout to exceed 200 percent (2.0 shares earned for each restricted stock unit).

The modifier was developed based on the approximate 25th and 75th percentiles of Sempra Energy’s historical total shareholder return and historical estimated cost of equity. The modifier adds 20 percent to the award’s payout (as initially calculated based on relative total shareholder return) for absolute total shareholder return performance in the top quartile of the distribution of the historical benchmark data. It reduces the award’s payout by 20 percent for performance in the bottom quartile of the distribution of the historical benchmark data. For the 2018 award, the modifier is triggered if our total shareholder return is at or above 35 percent or if our total shareholder return is at or below -10 percent. If performance falls within the second or third quartiles, the modifier is not triggered and the payout is based solely on the relative total shareholder return performance result. The modifier cannot cause the total award payout to exceed 200 percent.

 

2.

Earnings Per Share Growth

The 2018 long-term incentive plan awards also included a performance-based restricted stock unit award linked to relative EPS growth(2). The award measures the CAGR of our EPS for the three-year period ending on December 31, 2020. The payout scale is based on the December 31, 2017 analyst consensus three-year EPS growth estimates for the S&P 500 Utilities Index peer companies. The threshold payout level is based on the 25th percentile of the analyst consensus estimates and the maximum payout level is based on the 90th percentile.

During our shareholder engagement meetings, some shareholders expressed concern about the potential effect of stock buybacks on incentive plans with performance measures based on EPS. The Compensation Committee took this feedback into consideration by including a provision that excludes the impact of stock buybacks not contemplated in the financial plans publicly communicated prior to the grant date of such awards.

The Compensation Committee bases the payout scale for our EPS growth-based awards on analyst consensus estimates for the S&P 500 Utilities Index peer companies because:

 

 

Our strategic goal is to deliver higher growth than our utility peers while maintaining a commensurate risk profile.

 

 

Our LTIP award design aligns with this strategic goal by measuring our three-year EPS CAGR against a payout scale that is based on analyst consensus estimates, compiled by an independent third party, for our S&P 500 Utilities Index peer companies.

 

 

The earnings growth in the financial plan is not linear from year to year. This year-to-year variability in earnings growth is due, in part, to our investment in large-scale, capital-intensive development projects that take multiple years to construct and multiple years for earnings to be generated.

 

Percentile of Analyst Estimates for

S&P 500 Utilities EPS CAGR

   Sempra Energy Common Stock Shares Received
for Each Restricted Stock Unit(1)

90th Percentile or higher (7.3 percent or higher)

   2.0

75th Percentile (6.6 percent)

   1.5

50th Percentile (5.3 percent)

   1.0

25th Percentile (4.2 percent)

   0.0

Table 15

 

(1)

Participants also receive additional shares for dividend equivalents, which are reinvested to purchase additional units that become subject to the same vesting conditions as the restricted stock units to which the dividends relate.

Note: If performance falls between the tiers shown in Table 15, the payout is calculated using linear interpolation. As discussed below under “Managing Risk in Compensation Plans,” our payout scale begins at zero for threshold performance.

For purposes of the long-term incentive award, the calculation of EPS may, at the Compensation Committee’s discretion, include the same types of potential adjustments described on page 59 under “Earnings Goal Determination,” as well as adjustments related to, among other things, other unusual or non-operating items.

 

(2) 

The award was designed to meet the conditions necessary to preserve the deductibility of the award under Section 162(m) of the Internal Revenue Code (prior to the changes to Section 162(m) under the Tax Cuts and Jobs Act of 2017 as discussed in “Impact of Regulatory Requirements—Tax Deductibility of Pay” on page 74) while providing flexibility to the Compensation Committee in determining the payout under the award. In order for there to be any payout, the company must achieve positive cumulative net income for the performance period. The Compensation Committee may then apply negative discretion as described herein.

 

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Results for the 2016-2018 Award Cycle

The performance period of our 2016-2018 award cycle concluded on January 2, 2019 (for the TSR-based awards) and December 31, 2018 (for the EPS-based awards) and were scheduled to vest in 2019. Our 2016-2018 relative total shareholder return was at the 23rd percentile of the S&P 500 Utilities Index and below the total shareholder return of the market-capitalization-weighted S&P 500 Index. As a result, these grants, which made up 80 percent of the 2016 award of LTIP units for our named executive officers, did not vest and were forfeited. The 2016-2018 awards based on EPS growth (making up the remaining 20 percent of the 2016 LTIP award for our named executive officers) vested at 200 percent of target based on adjusted EPS growth of 9.8 percent. For additional information see “Outstanding Equity Awards at Year-End” on page 83 and “Option Exercises and Stock Vested” on page 86.

 

Earnings Per Share Growth (Diluted) for 2016-2018 Award

   2015     2018  

GAAP Earnings per Share

   $ 5.37     $ 3.42  

Pre-Defined Exclusions:

    

Acquisitions and divestitures (other than Oncor): gains and losses on sales, related impairments, and related earnings impacts

     (0.38 )     1.43  

Effect of changes in tax laws, changes in regulatory treatment of tax repairs allowance, litigation settlement, and foreign exchange gains or losses at Mexico

     (0.65 )     0.46  

Items related to RBS Sempra Commodities LLP, which was sold in 2010

     (0.05     0.25  

Certain unplanned items related to nonqualified pension and deferred compensation and 2015 LNG development costs

     0.02       0.08  

90% of the impact of the SONGS impairment and related earnings effects from purchased replacement power

     (0.05 )      

Earnings per Share for 2016-2018 LTIP Award Purposes

   $ 4.26     $ 5.64  

Earnings per Share Growth for 2016-2018 LTIP Award Purposes

             9.8

Table 16

 

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4.   Benefit Plans

Our executive officers also participate in benefit plans including: (1) health, life insurance and disability plans and other executive benefits; and (2) retirement and savings plans.

 

1.

Health, Life Insurance and Disability Plans and Other Benefits

 

 

Plan Type

   Plan    Description
 

Health &

Welfare

  

Basic Group

Plans

   Our executive officers participate in life, disability, medical, dental and vision insurance group plans that are generally available to all employees. These are common benefits essential to attracting a high-quality workforce.
  

Other Health

& Welfare

Benefits

  

Mr. Martin, Mr. Householder and Ms. Reed participate in the following plans other than the basic group health and welfare plans:

 

  A medical insurance plan that provides up to $20,000 (the annual aggregate maximum) in additional coverage for medically necessary care for the officer or covered dependents. This plan was closed to new participants in 2012.

 

  A life insurance plan providing additional life insurance death benefits (target death benefit is two times base salary and bonus for active employees and 1.5 times base salary and bonus for retired employees). The company funds the post-retirement benefit in the year following a qualified retirement (retirement at age 62 or older with five or more years of service). This plan was closed to new participants in 2012.

 

All of our named executive officers participate in a long-term disability plan providing additional protection upon disability (60 percent of base salary and average bonus) and restoring benefits otherwise capped under the company’s basic long-term disability plan.

 
Other Benefit Programs   

Ms. Wyrsch, Mr. Mihalik and Mr. Arriola receive an annual executive benefit program allowance of $30,000 that may be used to cover out of pocket costs for health and welfare benefits as well as the cost of financial planning services and excess personal liability insurance. Any unused allowance is paid out at year-end.

 

We provide certain other benefits to our executive officers. The Compensation Committee reviews the level and types of these benefits each year. The committee believes that these benefits are appropriate and important in attracting and retaining executive talent. These benefits include financial planning services, excess personal liability insurance, and a charitable contribution matching program. The CEO has an executive security specialist for personal and business driving in the context of an overall security plan.

 

None of these benefits includes a tax gross-up provision.

Table 17

 

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2.

Retirement and Savings Plans

Our executive officers participate in our broad-based, tax-qualified 401(k) Savings Plan, our Cash Balance Plan and a Supplemental Executive Retirement Plan. Officers and certain other key management employees may also elect to participate in a deferred compensation plan. These plans are described in Tables 18 and 19 below.

 

 

Plan Type

   Plan    Description
 
Pension   

Cash Balance

Plan

   The Cash Balance Plan is a tax-qualified pension plan generally available to all U.S.-based company employees.
  

Supplemental

Retirement

Plan

  

The Compensation Committee believes that retirement, savings and deferred compensation plans, in general, and the Supplemental Executive Retirement Plan, in particular, are important elements of an overall compensation package. This package is designed to recruit and retain executive talent, especially mid-career executives, and to retain longer-term executive participants.

 

Our Supplemental Executive Retirement Plan, or SERP, provides named executive officers with retirement benefits based on the executive’s:

 

  Final average pay(1)

 

  Actual years of service

 

  Age at retirement

 

SERP benefits are reduced by benefits payable under the broad-based Cash Balance Plan.

 

Both the Cash Balance Plan and the SERP use only base salary and annual incentive bonuses in calculating benefits. The value of long-term incentive awards is not included.

Table 18

 

(1)

Final average pay is the average base salary for the two consecutive years of highest base salary prior to retirement plus the average of the three highest annual bonuses during the 10 years prior to retirement.

 

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Plan Type

   Plan    Description
 

Savings

Plans

  

401(k)

Savings Plan

  

Employees may contribute a portion of their eligible pay to a tax-qualified 401(k) savings plan. Contributions to the plan may be invested on a tax-deferred or after-tax basis (including a Roth option effective January 1, 2019). The Internal Revenue Code limits the amount of compensation eligible for deferral under tax-qualified plans.

 

Employees may receive company contributions of up to four percent of eligible pay. Eligible pay generally includes base salary and annual bonus, net of any amounts contributed under the deferred compensation plan. The basic company matching contribution is equal to one-half of the first six percent of the employee’s contributions. In addition, employees receive a “stretch match” equal to one-fifth of the next five percent of the employee’s contributions.

 

All employee contributions and investment earnings in the 401(k) Savings Plan vest immediately. Employees are eligible to participate in the plan and receive company matching contributions upon hire. Company matching contributions (including related earnings) vest after one year of service.

  

Deferred Compensation

Plan

  

Our executive officers and other key management employees also may defer up to 85 percent of their base salary and bonus under a nonqualified deferred compensation plan, the Employee and Director Savings Plan. Executive officers also may defer all or a portion of certain performance-based restricted stock unit awards upon vesting.

 

Participants can direct these deferrals into:

 

  Funds that mirror the investments available under our 401(k) Savings Plan, including a Sempra Energy phantom stock account.

 

  A fund providing interest at the greater of 110 percent of the Moody’s Corporate Bond Yield or the Moody’s Corporate Bond Yield plus 1 percent.

 

Deferrals of performance-based restricted stock unit awards must be directed into the Sempra Energy phantom stock account and cannot be transferred into other investments.

 

The Internal Revenue Code places annual limits on the amounts that employees and employers can defer into a 401(k) plan. Because of these limits, the company makes matching contributions for deferred compensation plan participants through the deferred compensation plan. Deferred compensation plan participants receive company contributions equal to three percent of base salary and annual bonus deferrals plus three percent of eligible pay in excess of the 401(k) plan limits. In total, an employee who participates in both the 401(k) plan and the deferred compensation plan may receive company matching contributions of up to three percent of eligible pay under the 401(k) plan and three percent of eligible pay under the deferred compensation plan. There are no company matching contributions on deferrals of performance-based restricted stock units.

 

Effective January 1, 2019, the deferred compensation matching contribution is equal to one-half of the first six percent of the employee’s contributions plus one-fifth of the next five percent of the employee’s contributions less an offset for 401(k) matching contributions.

 

All employee contributions, matching company contributions and investment earnings in the deferred compensation plan vest immediately. Prior to January 1, 2019, eligibility to receive company matching contributions began after one year of service. Effective January 1, 2019, new participants are immediately eligible for company matching contributions and company matching contributions (including related earnings) vest after one year of service.

Table 19

 

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Severance and Change in Control Arrangements

 

Our executive officers have severance pay agreements that include change-in-control features. The agreements do not contain excise tax gross-up provisions. Equity awards include a double trigger change-in-control provision. None of our officers has an employment agreement.

Rationale for Providing Severance Agreements

The Compensation Committee believes that severance agreements, which are a prevalent market practice, are effective in:

 

 

Attracting executives who are leaving an existing employer

 

 

Mitigating legal issues upon an employment separation

 

 

Retaining talent during uncertain times

By mitigating the effect of potential job loss, severance agreements reinforce management continuity, objectivity and focus on shareholder value. This is particularly critical in actual or potential change in control situations. Payments are not required when terminations are for cause.

Severance Agreement Benefits

The severance agreements provide for cash payments and the continuation of certain other benefits for a limited period when:

 

 

The company terminates an executive’s employment for reasons other than cause; or

 

 

When the executive resigns for “good reason.”

Definition of “Good Reason”

A resignation for “good reason” may occur if there is an adverse change in scope of duties or in compensation and benefit opportunities or, following a change in control, changes in employment location.

These provisions provide safeguards against arbitrary actions that may effectively force an executive to resign. In order to receive some of the benefits in the agreement, the executive must comply with contractual confidentiality, non-solicitation and non-disparagement obligations.

Outstanding Equity Award Treatment Upon Certain Terminations or a Change in Control

Awards granted under our shareholder-approved 2013 Long-Term Incentive Plan are subject to the double trigger change in control provision in the plan. Except as described below, awards do not automatically vest upon a change in control. Rather, vesting is only accelerated upon a termination of employment that meets certain conditions following a change in control, except as described below.

Restricted stock unit awards issued to date under the 2013 Long-Term Incentive Plan provide that awards will remain outstanding following a change in control subject to the new company’s assumption of the awards or the issuance of replacement awards. Replacement awards must meet certain criteria, which are described in Section 16 of the 2013 Long-Term Incentive Plan. If awards are not assumed or replaced or are held by an employee who is eligible for retirement (age 55 or older with five or more years of service) as of the date of the change in control, such awards would vest upon a change in control. Vesting of service-based restricted stock units will also accelerate upon an executive’s death.

With respect to performance-based awards, if an executive’s employment is terminated after the executive has attained age 55 and completed five years of service, and the termination occurs after one year of the applicable performance period has been completed (or after November 30th of the year in which the grant was made if the executive has attained age 62), the executive’s award is not forfeited as a result of the termination of employment but continues to be subject to forfeiture based upon the extent to which the related performance goals have been satisfied at the end of the applicable performance period.

See “Compensation Tables—Severance and Change in Control Benefits” below for additional information.

Compensation Committee Roles and Responsibilities

 

Overview

The Compensation Committee’s primary role is to determine all aspects of compensation for our executive officers. The Compensation Committee reviews all pay components for our Chief Executive Officer and other executive officers.

 

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The Compensation Committee typically holds four regularly scheduled meetings each year, with additional meetings scheduled when required. The committee’s chair approves the agenda prior to each meeting. Five directors currently sit on the committee. Each member of the committee is required to be:

 

 

An independent director under independence standards established by the New York Stock Exchange.

 

 

A non-employee director under Rule 16b-3 of the Securities Exchange Act of 1934.

 

 

An outside director under Section 162(m) of the Internal Revenue Code (for purposes of certifying results for awards granted prior to the enactment of the Tax Cuts and Jobs Act of 2017).

The Compensation Committee:

 

 

Sets its meeting dates and standing agenda items annually.

 

 

Considers standing agenda items and other topics at each meeting.

 

 

Holds an executive session without management present at each meeting.

 

 

Retains its own independent compensation advisor.

 

 

Recommends changes to its charter for approval by the board as needed.

 

 

Conducts an annual self-assessment of its effectiveness in compliance with its charter.

The Compensation Committee most recently reviewed its charter in June 2018. The charter is available on our website at www.sempra.com under the “Investors” and “Governance” tabs.

Compensation Committee Responsibilities

The Compensation Committee’s major responsibilities include:

 

LOGO

Compensation Committee Responsibilities Analyzing executive compensation market data, including base salaries, annual bonuses, long-term incentives and total pay, as well as executive compensation principles, strategies, trends, regulatory requirements and current programs Tracking and understanding the total compensation of each executive officer and reviewing, at least once a year, tally sheets that summarize the major elements of compensation Reporting annually to the board on succession planning Reviewing and recommending to the board that the Compensation Discussion and Analysis be included in our proxy statement Analyzing long-term incentive plan overall dilution and current annual dilution rates Designing our compensation programs to encourage and reward sustainable growth in our business with what the committee deems to be acceptable risk Overseeing and approving annual incentive plans, equity-based plans, severance plans, deferred compensation arrangements, retirement benefits and other programs and benefits that primarily cover executive officers Reviewing and administering corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other executive officers Leading the performance evaluation of the CEO in light of these goals and objectives. Based on individual and company performance, competitive compensation information and other considerations, approving and recommending the CEO's compensation level for ratification by our independent board members

 

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Tally Sheets

The Compensation Committee uses tally sheets to review and evaluate our total executive compensation and benefit programs. These tally sheets, along with information prepared annually for the proxy statement, are used to consider:

 

 

Information for analyzing the design, operation and effectiveness of our executive compensation programs.

 

 

The total dollar value of executives’ accumulated compensation and benefits, including holdings of our common stock and realized and unrealized gains under equity-based compensation awards.

 

 

Estimated pension benefits, life insurance benefits and deferred compensation balances.

 

 

Information on change in control scenarios.

The committee does not rely on tally sheets to establish specific pay levels. Instead, pay levels are based primarily on external market data and other considerations described under “Labor Market Benchmarking” on pages 55 and 56.

In addition, board members receive a Compensation Program Summary. The summary provides an overview of our executive compensation philosophy, information on each executive compensation plan and officer and employee demographic data.

The Compensation Committee’s Advisors

The Compensation Committee retains an independent advisor to assist it with executive compensation matters. The committee has the sole authority to select, compensate and terminate its external advisors.

In 2018, the committee retained Exequity as its independent compensation consultant. The committee has assessed Exequity’s independence pursuant to SEC rules and concluded that there are no conflicts of interest. Exequity is a nationally recognized independent provider of executive compensation advisory services. They are not affiliated with any other service provider.

An Exequity representative attended all committee meetings and met in executive session with the committee members at all four of the regular 2018 meetings.

Exequity supported the committee by:

 

 

LOGO

Exequity's Support of the Compensation Committee Providing competitive data on compensation and relative performance of peer group companies Making presentations on regulatory and legislative matters affecting executive compensation Recommending pay programs and salary increase budgets Providing opinions on the reasonableness of compensation Conducting a risk assessment of incentive programs Consulting on other related matters as needed

Exequity and its affiliates do not perform any work for the company outside of their advisory role to the Compensation Committee. The total amount paid to Exequity in 2018 was $241,356.

Management’s Role

 

Our Chief Executive Officer and/or chief human resources officer attend the non-executive session of each Compensation Committee meeting. Our human resources department assists the committee by preparing tally sheets and other compensation information and analyses for its consideration. The committee members and the independent compensation consultant receive presentation materials in advance of committee meetings.

Our accounting, finance and law departments also support the committee with respect to compensation-related matters, including issues related to broad-based benefit plans and regulatory reporting and compliance.

 

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None of our executive officers determine or approve any element or component of their own compensation, nor are they present during the committee’s deliberation regarding their own compensation. This includes base salary, annual bonus, long-term incentives and all other aspects of compensation. Our Chief Executive Officer does not meet separately with the committee’s independent compensation consultant.

The Compensation Committee seeks our Chief Executive Officer’s views on the performance of our other executive officers, and he makes pay recommendations for these officers. In addition, the committee frequently requests input from the Chief Executive Officer on what programs and goals he believes might be most appropriate given the company’s strategic direction. The committee considers this input in addition to input received from its independent compensation consultant in setting goals and program design.

Managing Risk in Compensation Plans

 

Managing Risk

The Compensation Committee manages risk in incentive compensation plans through:

 

 

LOGO

Compensation Program Risk Mitigation Balance of short-term and long-term incentives Higher proportion of total compensation linked to long-term incentives Incentive plan design and performance measure selection Independent third-party risk assessment Stock ownership requirements Anti-hedging policy Clawback policy

Risk Mitigation Features in our Incentive Plan Design and Performance Measure Selection

Our long-term incentive awards include the following risk-mitigation features:

 

 

Using a payout scale that begins at zero for threshold performance. In contrast, many of our peers pay 25 percent or 50 percent for threshold performance.

 

 

Avoiding “cliffs” in the payout scale. This eliminates the risk of pressure points. An example of a cliff is a scale that pays 50 percent for threshold performance and zero for performance immediately below threshold.

 

 

Using multiple types of awards and performance measures, including a market-based performance measure, relative total shareholder return, as the performance measure for 50 percent of the grant date value of our 2018 restricted stock unit grants, a measure based on long-term EPS growth for 20 percent and service-based restricted stock units for the remaining 30 percent.

 

 

Measuring our total shareholder return against the S&P 500 Index and the S&P 500 Utilities Index rather than against peer groups selected by the company. Using these indices ensures less subjectivity in the determination of our peer groups.

Our annual bonus plans include the following features:

 

 

Using a payout scale that begins at zero for threshold performance. In contrast, many of our peers pay 25 percent or 50 percent for threshold performance.

 

 

Using a corporate financial performance measure that is based on the earnings reported in our financial statements, with certain pre-defined adjustments. These adjustments are limited and made only after thoughtful consideration by the Compensation Committee.

 

 

Incorporating performance measures linked to our businesses, including employee and public safety and customer service, in addition to the corporate financial performance measure.

 

 

Providing the committee with downward discretion over certain incentive plan payouts.

 

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Independent Third-Party Risk Assessment

The Compensation Committee’s independent consultant, Exequity, conducted a risk assessment of our 2018 incentive compensation programs. Exequity’s findings concluded that our incentive plans do not create risks that are likely to have a material adverse impact on the company. The committee concurs with these findings. Specific examples of safeguards and risk-mitigating features found in our executive incentive programs are listed above.

Clawback Policy

Our clawback policy applies to both short-term and long-term incentive plans. It is included in both executive and non-executive award agreements.

The policy requires the forfeiture, recovery or reimbursement of awards or compensation under the applicable plans as:

 

 

Required by applicable law, or

 

 

Required under any policy implemented or maintained by the company pursuant to any applicable rules or requirements of a national securities exchange or national securities association on which any securities of the company are listed.

The company also reserves the right to recoup compensation paid if it determines that the results on which compensation was paid were not actually achieved.

In addition, the Compensation Committee may, in its sole discretion, require the recovery or reimbursement of incentive compensation awards from any employee whose fraudulent or intentional misconduct materially affects the operations or financial results of the company or its subsidiaries.

Anti-Hedging and Pledging Policy

The company maintains an anti-hedging policy, which prohibits employees and directors from trading in puts, calls, options or other future rights to purchase or sell shares of company common stock. Officers and directors also are prohibited from pledging shares of company common stock.

Share Ownership Requirements

 

Our Board of Directors has established share ownership requirements for officers to further strengthen the link between company executive and shareholder interests. The requirements set minimum levels of share ownership that our officers must achieve and maintain.

For officers, the requirements are:

 

 

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Executive Level Share Ownership Requirements Chief Executive Officer 8x base salary President, Corporate Group Presidents and Executive Vice Presidents 4x base salary Principal Subsidiary Chief Executive Officers, Presidents and Chief Operating Officers 3x base salary Senior Vice Presidents 2x base salary Vice Presidents 1x base salary

Based on Exequity’s review of competitive benchmark data, we believe our share ownership requirements are robust compared to prevalent market practices.

For purposes of the requirements, we include shares owned directly or through our 401(k) Savings Plan. We also count deferred compensation that executives invest in phantom shares of our common stock (including deferred restricted stock units that have vested), unvested service-based restricted stock units, and the vested portion of certain in-the-money stock options.

 

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Executive Compensation

 

We expect officers to meet these requirements within five years of hire or promotion to an officer-level position and within three years after promotion to a role with a higher share ownership requirement. In 2015, the Compensation Committee also enhanced executive officers’ share ownership requirements by requiring that until such time as the share ownership requirements are met, executive officers are expected to retain (and not sell) a number of shares equal to at least 50 percent of the net after-tax shares acquired through equity compensation awards.

All named executive officers are in compliance with the requirements or have additional time within which to comply with any higher level applicable to them as a result of a promotion.

Impact of Regulatory Requirements

 

Tax Deductibility of Pay

Section 162(m) of the Internal Revenue Code places a limit of $1 million on the annual amount of compensation that publicly held companies may deduct for federal income tax purposes for “covered employees.” Prior to the Tax Cuts and Jobs Act of 2017, covered employees generally consisted of our Chief Executive Officer and each of the next three highest compensated officers serving at the end of the taxable year other than our Chief Financial Officer, and compensation that qualified as “performance-based” under Section 162(m) was exempt from this $1 million deduction limitation. As part of the Tax Cuts and Jobs Act of 2017, the ability to rely on this exemption was eliminated, with limited exceptions for certain outstanding awards, incentive plans, benefits and other arrangements in place on November 2, 2017. In addition, the definition of covered employees was expanded to generally include all named executive officers.

The Compensation Committee believes that tax deductibility is one important factor in evaluating a compensation program. Although we historically maintained certain performance-based incentive plans that originally were intended to permit the payment of compensation deductible under Section 162(m), subject to the limited transition relief rules in the Tax Cuts and Jobs Act of 2017, we will no longer be able to take a deduction for any compensation in excess of $1 million that is paid to a covered employee.

Providing salary levels and other compensation that is not fully tax deductible may be required by competitive or other circumstances and may be in the best interests of our shareholders. Accordingly, the Compensation Committee may exercise judgment to provide compensation that may not be fully tax deductible by the company.

Other Tax, Accounting and Regulatory Considerations

Many other Internal Revenue Code provisions, SEC regulations and accounting rules affect the design of executive pay. They are taken into consideration to create and maintain plans that are effective and are intended to comply with these requirements.

 

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Executive Compensation

 

Compensation Committee Report

The Compensation Committee of Sempra Energy’s Board of Directors has reviewed and discussed with the company’s management the Compensation Discussion and Analysis included in this proxy statement and, based upon that review and discussion, recommended to the board that it be so included.

Compensation Committee

William C. Rusnack, Chair

Alan L. Boeckmann

William D. Jones

William G. Ouchi

Jack T. Taylor