FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2018

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.

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 March 31, 2018 and December 31, 2017. 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. We have not changed the valuation techniques or types of inputs we use to measure recurring fair value during the three months ended March 31, 2018.

The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 8 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 March 31, 2018 and December 31, 2017 in the tables below include, other than a $9 million investment at March 31, 2018 measured at net asset value, the following:

▪

Nuclear decommissioning trusts reflect the assets of SDG&E’s NDT, 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. 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 securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2).

▪

For commodity contracts, interest rate derivatives and foreign exchange instruments, 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). Level 3 recurring items relate to CRRs and long-term, fixed-price electricity positions at SDG&E, as we discuss below in “Level 3 Information.”


▪	Rabbi Trust 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). These investments in marketable securities were negligible at both March 31, 2018 and December 31, 2017.

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)
	Fair value at March 31, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	486		$	5	$	—	$	491
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	35			9		—		44
Municipal bonds	—			247		—		247
Other securities	—			216		—		216
Total debt securities	35			472		—		507
Total nuclear decommissioning trusts⁽¹⁾	521			477		—		998
Interest rate and foreign exchange instruments	—			46		—		46
Commodity contracts not subject to rate recovery	4			8		—		12
Effect of netting and allocation of collateral⁽²⁾	21			—		—		21
Commodity contracts subject to rate recovery	—			2		118		120
Effect of netting and allocation of collateral⁽²⁾	9			—		5		14
Total	$	555		$	533	$	123	$	1,211

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	134	$	—	$	134
Commodity contracts not subject to rate recovery	7			3		—		10
Commodity contracts subject to rate recovery	23			3		157		183
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	7		$	140	$	157	$	304

	Fair value at December 31, 2017
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	491		$	5	$	—	$	496
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	45			9		—		54
Municipal bonds	—			250		—		250
Other securities	—			217		—		217
Total debt securities	45			476		—		521
Total nuclear decommissioning trusts⁽¹⁾	536			481		—		1,017
Interest rate and foreign exchange instruments	—			7		—		7
Commodity contracts not subject to rate recovery	5			12		—		17
Effect of netting and allocation of collateral⁽²⁾	2			—		—		2
Commodity contracts subject to rate recovery	—			2		126		128
Effect of netting and allocation of collateral⁽²⁾	12			—		5		17
Total	$	555		$	502	$	131	$	1,188

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	217	$	—	$	217
Commodity contracts not subject to rate recovery	—			6		—		6
Commodity contracts subject to rate recovery	23			7		154		184
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	—		$	230	$	154	$	384


⁽¹⁾	Excludes cash balances and cash equivalents.


⁽²⁾	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.



RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
	Fair value at March 31, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	486		$	5	$	—	$	491
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	35			9		—		44
Municipal bonds	—			247		—		247
Other securities	—			216		—		216
Total debt securities	35			472		—		507
Total nuclear decommissioning trusts⁽¹⁾	521			477		—		998
Commodity contracts subject to rate recovery	—			—		118		118
Effect of netting and allocation of collateral⁽²⁾	7			—		5		12
Total	$	528		$	477	$	123	$	1,128

Liabilities:
Interest rate instruments	$	—		$	9	$	—	$	9
Commodity contracts subject to rate recovery	23			2		157		182
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	—		$	11	$	157	$	168

	Fair value at December 31, 2017
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	491		$	5	$	—	$	496
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	45			9		—		54
Municipal bonds	—			250		—		250
Other securities	—			217		—		217
Total debt securities	45			476		—		521
Total nuclear decommissioning trusts⁽¹⁾	536			481		—		1,017
Commodity contracts subject to rate recovery	—			—		126		126
Effect of netting and allocation of collateral⁽²⁾	11			—		5		16
Total	$	547		$	481	$	131	$	1,159

Liabilities:
Interest rate instruments	$	—		$	13	$	—	$	13
Commodity contracts subject to rate recovery	23			5		154		182
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	—		$	18	$	154	$	172


⁽¹⁾	Excludes cash balances and cash equivalents.


⁽²⁾	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.



RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
	Fair value at March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	—	$	2	$	—	$	2
Effect of netting and allocation of collateral⁽¹⁾	2		—		—		2
Total	$	2	$	2	$	—	$	4

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

	Fair value at December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	—	$	2	$	—	$	2
Effect of netting and allocation of collateral⁽¹⁾	1		—		—		1
Total	$	1	$	2	$	—	$	3

Liabilities:
Commodity contracts subject to rate recovery	$	—	$	2	$	—	$	2
Total	$	—	$	2	$	—	$	2


⁽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 CRRs and long-term, fixed-price electricity positions classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated and SDG&E:



LEVEL 3 RECONCILIATIONS⁽¹⁾
(Dollars in millions)
	Three months ended March 31,
	2018			2017
Balance at January 1	$	(28	)	$	(74	)
Realized and unrealized gains (losses)	4			(13		)
Allocated transmission instruments	3			—
Settlements	(19		)	(9		)
Balance at March 31	$	(40	)	$	(96	)
Change in unrealized losses relating to instruments still held at March 31	$	(8	)	$	(16	)

⁽¹⁾ Excludes the effect of contractual ability to settle contracts under master netting agreements.

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 and long-term, fixed-price electricity positions on an ongoing basis. Inputs used to determine the fair value of CRRs and fixed-price electricity positions are reviewed and compared with market conditions to determine reasonableness. SDG&E expects all costs related to these instruments 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 ISO, an objective source. Annual auction prices are published once a year, typically in the middle of November, and are the basis for valuing CRRs settling in the following year. For the CRRs settling from January 1 to December 31, the auction price inputs, at a given location, are in the following ranges for the years indicated below:



CONGESTION REVENUE RIGHTS AUCTION PRICE INPUTS

Settlement year	Price per MWh
2018	$	(7.25	)	to	$	11.99
2017	(11.88		)	to	6.93

The impact associated with discounting is negligible. Because these auction prices are a less observable input, these instruments are classified as Level 3. 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 8.

Long-term, fixed-price electricity positions that are valued using significant unobservable data are classified as Level 3 because the contract terms relate to a delivery location or tenor for which observable market rate information is not available. The fair value of the net electricity positions classified as Level 3 is derived from a discounted cash flow model using market electricity forward price inputs. These inputs range from $20.00 per MWh to $51.30 per MWh at March 31, 2018, and $14.50 per MWh to $43.25 per MWh at March 31, 2017. A significant increase or decrease in market electricity forward prices would result in a significantly higher or lower fair value, respectively. We summarize long-term, fixed-price electricity position volumes in Note 8.

Realized gains and losses associated with CRRs and long-term electricity positions, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Condensed Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities and therefore do not affect earnings.

Fair Value of Financial Instruments

The fair values of certain of our financial instruments (cash, accounts and notes receivable, short-term amounts due to/from unconsolidated affiliates, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts because of the short-term nature of these instruments. 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 that are not recorded at fair value on the Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017:



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	March 31, 2018
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates⁽¹⁾	$	627	$	—	$	606	$	41	$	647
Long-term amounts due to unconsolidated affiliates⁽²⁾	35		—		32		—		32
Total long-term debt⁽³⁾⁽⁴⁾	22,063		790		21,254		456		22,500
SDG&E:
Total long-term debt⁽⁴⁾⁽⁵⁾	$	4,848	$	—	$	4,892	$	292	$	5,184
SoCalGas:
Total long-term debt⁽⁶⁾	$	3,009	$	—	$	3,102	$	—	$	3,102

	December 31, 2017
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates⁽¹⁾	$	604	$	—	$	528	$	96	$	624
Long-term amounts due to unconsolidated affiliates⁽²⁾	35		—		32		—		32
Total long-term debt⁽³⁾⁽⁴⁾	17,138		817		17,134		458		18,409
SDG&E:
Total long-term debt⁽⁴⁾⁽⁵⁾	$	4,868	$	—	$	5,073	$	295	$	5,368
SoCalGas:
Total long-term debt⁽⁶⁾	$	3,009	$	—	$	3,192	$	—	$	3,192


⁽¹⁾	Excluding accumulated interest outstanding of $35 million and $29 million at March 31, 2018 and December 31, 2017, respectively, and excluding foreign currency translation of $4 million and $35 million on a Mexican peso-denominated loan at March 31, 2018 and December 31, 2017, respectively.


⁽²⁾	Excluding negligible interest outstanding at March 31, 2018 and December 31, 2017.

⁽³⁾

Before reductions for unamortized discount (net of premium) and debt issuance costs of $206 million and $143 million at March 31, 2018 and December 31, 2017, respectively, and excluding build-to-suit and capital lease obligations of $877 million at both March 31, 2018 and December 31, 2017. We discuss our long-term debt in Note 7 above and in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report.


⁽⁴⁾	Level 3 instruments include $292 million and $295 million at March 31, 2018 and December 31, 2017, respectively, related to Otay Mesa VIE.


⁽⁵⁾	Before reductions for unamortized discount and debt issuance costs of $45 million at both March 31, 2018 and December 31, 2017, and excluding capital lease obligations of $730 million and $732 million at March 31, 2018 and December 31, 2017, respectively.


⁽⁶⁾	Before reductions for unamortized discount and debt issuance costs of $24 million at both March 31, 2018 and December 31, 2017, and excluding capital lease obligations of $4 million and $1 million at March 31, 2018 and December 31, 2017, respectively.

We provide the fair values for the securities held in the NDT related to SONGS in Note 10.

- 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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