FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2012

Notes to Consolidated Financial Statements [Abstract]

NOTE 8. FAIR VALUE MEASUREMENTS

We discuss the valuation techniques and inputs we use to measure fair value and the definition of the three levels of the fair value hierarchy in Notes 1 and 2 of the Notes to Consolidated Financial Statements in the Annual Report. We have not changed the valuation techniques or inputs we use to measure fair value during the three months ended March 31, 2012.

Recurring Fair Value Measures

The three tables below, by level within the fair value hierarchy, set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011. We classify financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities, and their placement within the fair value hierarchy levels.

The fair value of commodity derivative assets and liabilities is determined in accordance with our netting policy, as discussed below under “Derivative Positions Net of Cash Collateral.”

The determination of fair values, shown in the tables below, incorporates various factors, including but not limited to, the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests).

Our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 in the tables below include the following:

Nuclear decommissioning trusts reflect the assets of SDG&E's nuclear decommissioning trusts, excluding cash balances. A third party trustee values the trust assets using prices from a pricing service based on a market approach. We validate these prices by comparison to prices from other independent data sources. Equity and certain debt securities are valued using quoted prices listed on nationally recognized securities exchanges or based on closing prices reported in the active market in which the identical security is traded (Level 1). Other debt securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2).
We enter into commodity contracts and interest rate derivatives primarily as a means to manage price exposures. We primarily use a market approach with market participant assumptions to value these derivatives. Market participant assumptions include those about risk, and the risk inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable. We have exchange-traded derivatives that are valued based on quoted prices in active markets for the identical instruments (Level 1). We also may have other commodity derivatives that are valued using industry standard models that consider quoted forward prices for commodities, time value, current market and contractual prices for the underlying instruments, volatility factors, and other relevant economic measures (Level 2). All Level 3 recurring items are related to CRRs at SDG&E, as discussed below under “Level 3 Information.” Commodity derivative contracts that are subject to rate recovery are recorded as commodity costs that are offset by regulatory account balances and are recovered in rates.
Investments include marketable securities that we value using a market approach based on closing prices reported in the active market in which the identical security is traded (Level 1).

There were no transfers into or out of Level 1, Level 2, or Level 3 for Sempra Energy Consolidated, SDG&E or SoCalGas during the periods presented.

RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
		At fair value as of March 31, 2012
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	515	$	―	$	―	$	―	$	515
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			91		80		―		―		171
Municipal bonds			―		70		―		―		70
Other securities			―		84		―		―		84
Total debt securities			91		234		―		―		325
Total nuclear decommissioning trusts(1)			606		234		―		―		840
Interest rate instruments			―		65		―		―		65
Commodity contracts subject to rate recovery			13		―		21		―		34
Commodity contracts not subject to rate recovery			13		30		―		―		43
Investments			1		―		―		―		1
Total		$	633	$	329	$	21	$	―	$	983
Liabilities:
Interest rate instruments		$	―	$	116	$	―	$	―	$	116
Commodity contracts subject to rate recovery			69		17		―		(69)		17
Commodity contracts not subject to rate recovery			―		45		―		(3)		42
Total		$	69	$	178	$	―	$	(72)	$	175

		At fair value as of December 31, 2011
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	468	$	―	$	―	$	―	$	468
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			92		78		―		―		170
Municipal bonds			―		77		―		―		77
Other securities			―		78		―		―		78
Total debt securities			92		233		―		―		325
Total nuclear decommissioning trusts(1)			560		233		―		―		793
Interest rate instruments			―		66		―		―		66
Commodity contracts subject to rate recovery			10		1		23		―		34
Commodity contracts not subject to rate recovery			15		35		―		(2)		48
Investments			5		―		―		―		5
Total		$	590	$	335	$	23	$	(2)	$	946
Liabilities:
Interest rate instruments		$	1	$	124	$	―	$	―	$	125
Commodity contracts subject to rate recovery			61		13		―		(61)		13
Commodity contracts not subject to rate recovery			1		52		―		(4)		49
Total		$	63	$	189	$	―	$	(65)	$	187
(1)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
		At fair value as of March 31, 2012
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	515	$	―	$	―	$	―	$	515
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			91		80		―		―		171
Municipal bonds			―		70		―		―		70
Other securities			―		84		―		―		84
Total debt securities			91		234		―		―		325
Total nuclear decommissioning trusts(1)			606		234		―		―		840
Commodity contracts subject to rate recovery			11		―		21		―		32
Commodity contracts not subject to rate recovery			1		―		―		―		1
Total		$	618	$	234	$	21	$	―	$	873

Liabilities:
Interest rate instruments		$	―	$	77	$	―	$	―	$	77
Commodity contracts subject to rate recovery			69		16		―		(69)		16
Total		$	69	$	93	$	―	$	(69)	$	93

		At fair value as of December 31, 2011
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	468	$	―	$	―	$	―	$	468
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			92		78		―		―		170
Municipal bonds			―		77		―		―		77
Other securities			―		78		―		―		78
Total debt securities			92		233		―		―		325
Total nuclear decommissioning trusts(1)			560		233		―		―		793
Commodity contracts subject to rate recovery			9		―		23		―		32
Commodity contracts not subject to rate recovery			1		―		―		―		1
Total		$	570	$	233	$	23	$	―	$	826

Liabilities:
Interest rate instruments		$	―	$	81	$	―	$	―	$	81
Commodity contracts subject to rate recovery			61		12		―		(61)		12
Total		$	61	$	93	$	―	$	(61)	$	93
(1)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
	At fair value as of March 31, 2012
								Collateral
		Level 1		Level 2		Level 3		netted		Total
Assets:
Commodity contracts subject to rate recovery	$	2	$	―	$	―	$	―	$	2
Commodity contracts not subject to rate recovery		2		―		―		―		2
Total	$	4	$	―	$	―	$	―	$	4

Liabilities:
Commodity contracts subject to rate recovery	$	―	$	1	$	―	$	―	$	1
Total	$	―	$	1	$	―	$	―	$	1

	At fair value as of December 31, 2011
								Collateral
		Level 1		Level 2		Level 3		netted		Total
Assets:
Commodity contracts subject to rate recovery	$	1	$	1	$	―	$	―	$	2
Commodity contracts not subject to rate recovery		2		―		―		―		2
Total	$	3	$	1	$	―	$	―	$	4

Liabilities:
Commodity contracts subject to rate recovery	$	―	$	1	$	―	$	―	$	1
Total	$	―	$	1	$	―	$	―	$	1

Level 3 Information

The following table sets forth reconciliations of changes in the fair value of CRRs classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated and SDG&E:

	Three months ended March 31,
(Dollars in millions)	2012		2011
Balance as of January 1	$	23	$	2
Realized and unrealized gains		2		6
Allocated transmission instruments		1		1
Settlements		(5)		(6)
Balance as of March 31	$	21	$	3
Change in unrealized gains or losses relating to
instruments still held at March 31	$	―	$	―

CRRs are recorded at fair value based almost entirely on the most current auction prices published by the California Independent System Operator (ISO), an objective source. The impact associated with discounting is negligible. Because auction prices are a less observable input, these instruments are classified as Level 3. Auction prices range from ($3)/MWh to $5/MWh at a given location, and the fair value of these instruments is derived from auction price differences between two locations. Positive values between two locations represent expected future reductions in congestion costs, whereas negative values between two locations represent expected future charges. Valuation of our CRRs is sensitive to a change in auction price. If auction prices at one location increase (decrease) relative to another location, this could result in a higher (lower) fair value measurement. We summarize CRR volumes in Note 7. The earnings impacts of CRRs are deferred and recorded in regulatory accounts to the extent they are recoverable or refundable through rates. Upon settlement, CRRs are included in Cost of Electric Fuel and Purchased Power on the Condensed Consolidated Statements of Operations.

Derivative Positions Net of Cash Collateral

Each Condensed Consolidated Balance Sheet reflects the offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when management believes a legal right of offset exists.

The following table provides the amount of fair value of cash collateral receivables that were not offset in the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011:

	March 31,		December 31,
(Dollars in millions)	2012		2011
Sempra Energy Consolidated	$	25	$	20
SDG&E		12		10
SoCalGas		3		2

Fair Value of Financial Instruments

The fair values of certain of our financial instruments (cash, temporary investments, accounts and notes receivable, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts. The following table provides the carrying amounts and fair values of certain other financial instruments at March 31, 2012 and December 31, 2011:

FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
		March 31, 2012
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Investments in affordable housing partnerships(1)		$	20	$	―	$	―	$	49	$	49
Total long-term debt(2)			10,709		―		11,288		615		11,903
Preferred stock of subsidiaries			99		―		106		―		106
SDG&E:
Total long-term debt(3)		$	4,143	$	―	$	4,103	$	352	$	4,455
Contingently redeemable preferred stock			79		―		85		―		85
SoCalGas:
Total long-term debt(4)		$	1,312	$	―	$	1,480	$	―	$	1,480
Preferred stock			22		―		23		―		23

		December 31, 2011
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Investments in affordable housing partnerships(1)		$	21	$	―	$	―	$	48	$	48
Total long-term debt(2)			9,826		―		10,447		600		11,047
Preferred stock of subsidiaries			99		―		106		―		106
SDG&E:
Total long-term debt(3)		$	3,895	$	―	$	3,933	$	355	$	4,288
Contingently redeemable preferred stock			79		―		86		―		86
SoCalGas:
Total long-term debt(4)		$	1,313	$	―	$	1,506	$	―	$	1,506
Preferred stock			22		―		23		―		23
(1)	We discuss our investments in affordable housing partnerships in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
(2)	Before reductions for unamortized discount (net of premium) of $16 million at both March 31, 2012 and December 31, 2011, and excluding capital leases of $200 million at March 31, 2012 and $204 million at December 31, 2011, and commercial paper classified as long-term debt of $400 million at December 31, 2011. We discuss our long-term debt in Note 6 above and in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report.
(3)	Before reductions for unamortized discount of $12 million at March 31, 2012 and $11 million at December 31, 2011, and excluding capital leases of $191 million at March 31, 2012 and $193 million at December 31, 2011.
(4)	Before reductions for unamortized discount of $2 million at March 31, 2012 and $3 million at December 31, 2011, and excluding capital leases of $9 million at March 31, 2012 and $11 million at December 31, 2011.

We calculate the fair value of our investments in affordable housing partnerships using an income approach based on the present value of estimated future cash flows discounted at rates available for similar investments (Level 3).

We base the fair value of certain of our long-term debt and preferred stock on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value other long-term debt using an income approach based on the present value of estimated future cash flows discounted at rates available for similar securities (Level 3).

Nuclear Decommissioning Trusts

We discuss SDG&E's investments in nuclear decommissioning trust funds in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report. The following table shows the fair values and gross unrealized gains and losses for the securities held in the trust funds:

NUCLEAR DECOMMISSIONING TRUSTS
(Dollars in millions)
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
			Cost		Gains		Losses		Value
As of March 31, 2012:
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies(1)		$	162	$	9	$	―	$	171
Municipal bonds(2)			66		5		(1)		70
Other securities(3)			80		4		―		84
Total debt securities			308		18		(1)		325
Equity securities			239		278		(2)		515
Cash and cash equivalents			25		―		―		25
Total		$	572	$	296	$	(3)	$	865
As of December 31, 2011:
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies		$	157	$	13	$	―	$	170
Municipal bonds			72		5		―		77
Other securities			76		3		(1)		78
Total debt securities			305		21		(1)		325
Equity securities			246		227		(5)		468
Cash and cash equivalents			11		―		―		11
Total		$	562	$	248	$	(6)	$	804
(1)	Maturity dates are 2013-2042
(2)	Maturity dates are 2012-2057
(3)	Maturity dates are 2012-2051

The following table shows the proceeds from sales of securities in the trusts and gross realized gains and losses on those sales:

SALES OF SECURITIES
(Dollars in millions)
	Three months ended March 31,
	2012		2011
Proceeds from sales	$	129	$	42
Gross realized gains		4		1
Gross realized losses		―		(1)

Net unrealized gains (losses) are included in Regulatory Liabilities Arising from Removal Obligations on the Condensed Consolidated Balance Sheets. We determine the cost of securities in the trusts on the basis of specific identification.

Non-Recurring Fair Value Measures – Sempra Energy Consolidated

We discuss non-recurring fair value measures and the associated accounting impact on our investments in RBS Sempra Commodities and Argentina in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report and, with regard to RBS Sempra Commodities, in Note 4 above.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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