FAIR VALUE MEASUREMENTS

3 Months Ended

Sep. 30, 2014

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 Note 1 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 nine months ended September 30, 2014.

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 at September 30, 2014 and December 31, 2013. 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 presented in accordance with our netting policy, as we discuss in Note 7 under “Financial Statement Presentation.”

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 at September 30, 2014 and December 31, 2013 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 may also manage foreign exchange rate exposures using derivatives. 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 we discuss below under “Level 3 Information.” We record commodity derivative contracts that are subject to rate recovery 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, nor any changes in valuation techniques used in recurring fair value measurements.

RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
		Fair value at September 30, 2014
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	637	$	―	$	―	$	―	$	637
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			56		47		―		―		103
Municipal bonds			―		121		―		―		121
Other securities			―		200		―		―		200
Total debt securities			56		368		―		―		424
Total nuclear decommissioning trusts(2)			693		368		―		―		1,061
Interest rate and foreign exchange instruments			―		51		―		―		51
Commodity contracts not subject to rate recovery			7		4		―		15		26
Commodity contracts subject to rate recovery			―		3		87		30		120
Total		$	700	$	426	$	87	$	45	$	1,258
Liabilities:
Interest rate and foreign exchange instruments		$	―	$	121	$	―	$	―	$	121
Commodity contracts not subject to rate recovery			2		3		―		(2)		3
Commodity contracts subject to rate recovery			3		10		―		(3)		10
Total		$	5	$	134	$	―	$	(5)	$	134

		Fair value at December 31, 2013
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	614	$	―	$	―	$	―	$	614
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			59		58		―		―		117
Municipal bonds			―		111		―		―		111
Other securities			―		153		―		―		153
Total debt securities			59		322		―		―		381
Total nuclear decommissioning trusts(2)			673		322		―		―		995
Interest rate and foreign exchange instruments			―		56		―		―		56
Commodity contracts not subject to rate recovery			1		5		―		17		23
Commodity contracts subject to rate recovery			2		1		99		31		133
Total		$	676	$	384	$	99	$	48	$	1,207
Liabilities:
Interest rate and foreign exchange instruments		$	―	$	117	$	―	$	―	$	117
Commodity contracts not subject to rate recovery			4		8		―		(5)		7
Commodity contracts subject to rate recovery			―		13		―		―		13
Total		$	4	$	138	$	―	$	(5)	$	137
(1)	Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
(2)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
		Fair value at September 30, 2014
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	637	$	―	$	―	$	―	$	637
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			56		47		―		―		103
Municipal bonds			―		121		―		―		121
Other securities			―		200		―		―		200
Total debt securities			56		368		―		―		424
Total nuclear decommissioning trusts(2)			693		368		―		―		1,061
Commodity contracts not subject to rate recovery			―		―		―		1		1
Commodity contracts subject to rate recovery			―		2		87		28		117
Total		$	693	$	370	$	87	$	29	$	1,179
Liabilities:
Interest rate instruments		$	―	$	48	$	―	$	―	$	48
Commodity contracts subject to rate recovery			3		10		―		(3)		10
Total		$	3	$	58	$	―	$	(3)	$	58

		Fair value at December 31, 2013
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	614	$	―	$	―	$	―	$	614
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			59		58		―		―		117
Municipal bonds			―		111		―		―		111
Other securities			―		153		―		―		153
Total debt securities			59		322		―		―		381
Total nuclear decommissioning trusts(2)			673		322		―		―		995
Commodity contracts not subject to rate recovery			―		―		―		1		1
Commodity contracts subject to rate recovery			1		1		99		29		130
Total		$	674	$	323	$	99	$	30	$	1,126
Liabilities:
Interest rate instruments		$	―	$	55	$	―	$	―	$	55
Commodity contracts subject to rate recovery			―		12		―		―		12
Total		$	―	$	67	$	―	$	―	$	67
(1)	Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.
(2)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
		Fair value at September 30, 2014
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Commodity contracts not subject to rate recovery		$	―	$	―	$	―	$	2	$	2
Commodity contracts subject to rate recovery			―		1		―		2		3
Total		$	―	$	1	$	―	$	4	$	5
Liabilities:
Commodity contracts subject to rate recovery		$	―	$	―	$	―	$	―	$	―
Total		$	―	$	―	$	―	$	―	$	―

		Fair value at December 31, 2013
			Level 1		Level 2		Level 3		Netting(1)		Total
Assets:
Commodity contracts not subject to rate recovery		$	―	$	―	$	―	$	2	$	2
Commodity contracts subject to rate recovery			1		―		―		2		3
Total		$	1	$	―	$	―	$	4	$	5
Liabilities:
Commodity contracts subject to rate recovery		$	―	$	1	$	―	$	―	$	1
Total		$	―	$	1	$	―	$	―	$	1
(1)	Includes the effect of the contractual ability to settle contracts under master netting agreements and with cash collateral, as well as cash collateral not offset.

Level 3 Information

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

LEVEL 3 RECONCILIATIONS
(Dollars in millions)
	Three months ended September 30,
	2014		2013
Balance at July 1	$	85	$	47
Realized and unrealized gains		3		1
Allocated transmission instruments		9		15
Settlements		(10)		(6)
Balance at September 30	$	87	$	57
Change in unrealized gains or losses relating to
instruments still held at September 30	$	―	$	2

	Nine months ended September 30,
	2014		2013
Balance as of January 1	$	99	$	61
Realized and unrealized gains (losses)		9		(2)
Allocated transmission instruments		10		15
Settlements		(31)		(17)
Balance as of September 30	$	87	$	57
Change in unrealized gains or losses relating to
instruments still held at September 30	$	―	$	1

SDG&E’s Energy and Fuel Procurement department, in conjunction with SDG&E’s finance group, is responsible for determining the appropriate fair value methodologies used to value and classify CRRs on an ongoing basis. Inputs used to determine the fair value of CRRs are reviewed and compared with market conditions to determine reasonableness. SDG&E expects all costs related to CRRs to be recoverable through customer rates. As such, there is no impact to earnings from changes in the fair value of these instruments.

CRRs are recorded at fair value based almost entirely on the most current auction prices published by the California Independent System Operator (CAISO), 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. At September 30, 2014 the auction prices ranged from $(6) per MWh to $12 per MWh at a given location, and the fair value of these instruments is derived from auction price differences between two locations. At September 30, 2013 the auction prices ranged from $(8) per MWh to $8 per MWh. 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. Realized gains and losses associated with CRRs are recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Condensed Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities and therefore also do not affect earnings.

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. Investments in life insurance contracts that we hold in support of our Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans are carried at cash surrender values, which represent the amount of cash that could be realized under the contracts. The following table provides the carrying amounts and fair values of certain other financial instruments at September 30, 2014 and December 31, 2013:

FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
		September 30, 2014
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Total long-term debt(1)		$	12,346	$	―	$	12,626	$	873	$	13,499
Preferred stock of subsidiary			20		―		23		―		23
SDG&E:
Total long-term debt(2)		$	4,463	$	―	$	4,463	$	427	$	4,890
SoCalGas:
Total long-term debt(3)		$	1,913	$	―	$	2,053	$	―	$	2,053
Preferred stock			22		―		24		―		24

		December 31, 2013
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Total long-term debt(1)		$	12,022	$	―	$	11,925	$	751	$	12,676
Preferred stock of subsidiary			20		―		20		―		20
SDG&E:
Total long-term debt(2)		$	4,386	$	―	$	4,226	$	335	$	4,561
SoCalGas:
Total long-term debt(3)		$	1,413	$	―	$	1,469	$	―	$	1,469
Preferred stock			22		―		22		―		22
(1)	Before reductions for unamortized discount (net of premium) of $21 million and $17 million at September 30, 2014 and December 31, 2013, respectively, and excluding build-to-suit and capital leases of $300 million and $195 million at September 30, 2014 and December 31, 2013, respectively, and commercial paper classified as long-term debt of $200 million at December 31, 2013. 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.
(2)	Before reductions for unamortized discount of $10 million and $11 million at September 30, 2014 and December 31, 2013, respectively, and excluding capital leases of $235 million and $179 million at September 30, 2014 and December 31, 2013, respectively.
(3)	Before reductions for unamortized discount of $7 million and $4 million at September 30, 2014 and December 31, 2013, respectively, and excluding capital leases of $2 million at December 31, 2013.

We base the fair value of certain 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).

We provide the fair values for the securities held in the nuclear decommissioning trust funds related to SONGS in Note 9 below.

Non-Recurring Fair Value Measures – Sempra Energy Consolidated

Energía Sierra Juárez

In July 2014, Sempra Mexico completed the sale of a 50-percent interest in the 155-MW first phase of its Energía Sierra Juárez wind project to a wholly owned subsidiary of InterGen N.V. for cash proceeds of $24 million, net of $2 million cash sold, as discussed in Note 3 above. Sempra Mexico recognized a pretax gain on the sale of $19 million ($14 million after-tax). Upon deconsolidation, our equity method investment in Energía Sierra Juárez was measured at fair value, which resulted in a $7 million after-tax gain attributable to a remeasurement of the retained investment to fair value. The fair value measurement was based on the cash sales price of $26 million paid by InterGen N.V., a nonrelated party and market participant. Use of this market participant input as the indicator of fair value is a Level 2 measurement in the fair value hierarchy.

NON-RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
			Estimated		Fair
			Fair		Value	% of Fair Value		Range of
			Value	Valuation Technique	Hierarchy	Measurement	Inputs Used to Develop Measurement	Inputs
Investment in
Energía Sierra
Juárez		$	26(1)	Market approach	Level 2	100%	Equity sale offer price	100%
(1)	At measurement date of July 16, 2014.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial 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 entity 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 risks 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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