XML 40 R18.htm IDEA: XBRL DOCUMENT

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 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 September 30, 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 nine months ended September 30, 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 in the tables below include the following (other than a $10 million investment at September 30, 2018 measured at net asset value):

▪

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 September 30, 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 September 30, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	482		$	4	$	—	$	486
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	40			10		—		50
Municipal bonds	—			258		—		258
Other securities	—			231		—		231
Total debt securities	40			499		—		539
Total nuclear decommissioning trusts⁽¹⁾	522			503		—		1,025
Interest rate and foreign exchange instruments⁽²⁾	—			45		—		45
Commodity contracts not subject to rate recovery	4			7		—		11
Effect of netting and allocation of collateral⁽³⁾	11			—		—		11
Commodity contracts subject to rate recovery	—			5		101		106
Effect of netting and allocation of collateral⁽³⁾	24			—		5		29
Total	$	561		$	560	$	106	$	1,227

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	132	$	—	$	132
Commodity contracts not subject to rate recovery	—			12		—		12
Commodity contracts subject to rate recovery	3			5		113		121
Effect of netting and allocation of collateral⁽³⁾	(3		)	—		—		(3		)
Total	$	—		$	149	$	113	$	262

	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⁽³⁾	2			—		—		2
Commodity contracts subject to rate recovery	—			2		126		128
Effect of netting and allocation of collateral⁽³⁾	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⁽³⁾	(23		)	—		—		(23		)
Total	$	—		$	230	$	154	$	384


⁽¹⁾	Excludes cash balances and cash equivalents.


⁽²⁾	Includes $3 million of interest rate instruments classified as Assets Held for Sale, as we discuss in Note 5.


⁽³⁾	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 September 30, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	482		$	4	$	—	$	486
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	40			10		—		50
Municipal bonds	—			258		—		258
Other securities	—			231		—		231
Total debt securities	40			499		—		539
Total nuclear decommissioning trusts⁽¹⁾	522			503		—		1,025
Commodity contracts subject to rate recovery	—			2		101		103
Effect of netting and allocation of collateral⁽²⁾	21			—		5		26
Total	$	543		$	505	$	106	$	1,154

Liabilities:
Interest rate instruments	$	—		$	4	$	—	$	4
Commodity contracts subject to rate recovery	3			—		113		116
Effect of netting and allocation of collateral⁽²⁾	(3		)	—		—		(3		)
Total	$	—		$	4	$	113	$	117

	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 September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	—	$	3	$	—	$	3
Effect of netting and allocation of collateral⁽¹⁾	3		—		—		3
Total	$	3	$	3	$	—	$	6

Liabilities:
Commodity contracts subject to rate recovery	$	—	$	5	$	—	$	5
Total	$	—	$	5	$	—	$	5

	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 September 30,
	2018			2017
Balance at July 1	$	(31	)	$	(90	)
Realized and unrealized gains	6			30
Settlements	13			23
Balance at September 30	$	(12	)	$	(37	)
Change in unrealized gains (losses) relating to instruments still held at September 30	$	6		$	38
	Nine months ended September 30,
	2018			2017
Balance at January 1	$	(28	)	$	(74	)
Realized and unrealized gains	21			14
Allocated transmission instruments	3			—
Settlements	(8		)	23
Balance at September 30	$	(12	)	$	(37	)
Change in unrealized gains (losses) relating to instruments still held at September 30	$	—		$	26


⁽¹⁾	Excludes the effect of the 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, were 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 $20.40 per MWh to $59.85 per MWh at September 30, 2018, and $21.35 per MWh to $48.97 per MWh at September 30, 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:



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	September 30, 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⁾	$	626	$	—	$	599	$	40	$	639
Long-term amounts due to unconsolidated affiliates⁽²⁾	35		—		32		—		32
Total long-term debt^(3)(4)(5)	22,207		738		20,791		487		22,016
SDG&E:
Total long-term debt⁽⁵⁾⁽⁶⁾	$	5,064	$	—	$	4,902	$	287	$	5,189
SoCalGas:
Total long-term debt⁽⁷⁾	$	3,459	$	—	$	3,474	$	—	$	3,474

	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⁽⁴⁾⁽⁵⁾	17,138		817		17,134		458		18,409
SDG&E:
Total long-term debt⁽⁵⁾⁽⁶⁾	$	4,868	$	—	$	5,073	$	295	$	5,368
SoCalGas:
Total long-term debt⁽⁷⁾	$	3,009	$	—	$	3,192	$	—	$	3,192


⁽¹⁾	Excludes accumulated interest outstanding of $66 million and $29 million at September 30, 2018 and December 31, 2017, respectively, and excludes foreign currency translation losses of $10 million and $35 million on a Mexican peso-denominated loan at September 30, 2018 and December 31, 2017, respectively.


⁽²⁾	Excludes accumulated interest of $1 million outstanding at September 30, 2018 and negligible interest outstanding at December 31, 2017.


⁽³⁾	Includes $70 million of long-term debt classified as Liabilities Held for Sale, as we discuss in Notes 5 and 7.

⁽⁴⁾

Before reductions for unamortized discount (net of premium) and debt issuance costs of $211 million and $143 million at September 30, 2018 and December 31, 2017, respectively, and excludes build-to-suit and capital lease obligations of $873 million and $877 million at September 30, 2018 and December 31, 2017, respectively. 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.


⁽⁵⁾	Level 3 instruments include $287 million and $295 million at September 30, 2018 and December 31, 2017, respectively, related to Otay Mesa VIE.


⁽⁶⁾	Before reductions for unamortized discount and debt issuance costs of $49 million and $45 million at September 30, 2018 and December 31, 2017, respectively, and excludes capital lease obligations of $725 million and $732 million at September 30, 2018 and December 31, 2017, respectively.


⁽⁷⁾	Before reductions for unamortized discount and debt issuance costs of $33 million and $24 million at September 30, 2018 and December 31, 2017, respectively, and excludes capital lease obligations of $4 million and $1 million at September 30, 2018 and December 31, 2017, respectively.

We provide the fair values for the securities held in the NDT related to SONGS in Note 10.NON-RECURRING FAIR VALUE MEASURES

Sempra Renewables

U.S. Wind Investments

As we discuss in Notes 5 and 6, on June 25, 2018, our board of directors approved a plan to sell all our wind and solar equity method investments at Sempra Renewables. Because of our expectation of a shorter holding period as a result of this plan of sale, we evaluated the recoverability of the carrying amounts of each of these investments and concluded there is an other-than-temporary impairment on certain of our wind equity method investments totaling $200 million ($145 million after tax), which we recorded in Equity Earnings on Sempra Energy’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018. We measured the estimated fair value of $145 million at June 25, 2018 using a discounted cash flow model including significant unobservable inputs, adjusted for our applicable ownership percentages, which is a Level 3 measurement in the fair value hierarchy. The key inputs to the methodology were contracted and merchant pricing, and the discount rate.

Sempra LNG & Midstream

Non-Utility Natural Gas Storage Assets

As we discuss in Note 5, on June 25, 2018, our board of directors approved a plan to sell Mississippi Hub and our 90.9-percent ownership interest in Bay Gas (the non-utility natural gas storage assets). We also own other U.S. midstream assets that are not included in the plan of sale and primarily include our 75.4-percent interest in LA Storage, a salt cavern development project in Cameron Parish, Louisiana. The LA Storage project also includes an existing 23.3-mile pipeline header system that is not currently contracted.

Because of the plan of sale, we considered a market participant’s view of the total value of the non-utility natural gas storage assets and determined that their fair value, less costs to sell, may be less than their carrying value. Additionally, our inability to secure customer contracts that would support further investment in LA Storage has led us to assess and conclude that the full carrying value of these other U.S. midstream assets may not be recoverable. As a result, we recorded an impairment of $1.3 billion ($755 million after tax and noncontrolling interest) in Impairment Losses on Sempra Energy’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018.

We measured the estimated fair value of $190 million at June 25, 2018 using a discounted cash flow approach. This approach included unobservable inputs, resulting in a Level 3 measurement in the fair value hierarchy. We considered a market participant’s view of the values of the non-utility natural gas storage assets based on an estimation of future net cash flows. To estimate future net cash flows, we considered the non-utility natural gas storage assets’ prospects for generating revenues and cash flows beyond their existing contracted capacity and tenors, including natural gas price volatility and seasonality factors, as well as discount rates commensurate with the risks inherent in the cash flows.

The following table summarizes significant inputs that impacted our non-recurring fair value measures.

NON-RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED

Estimated

fair

value (in millions)

Valuation technique

Fair

value

hierarchy

% of

fair value

measurement

Inputs used to
develop
measurement

Range of
inputs

Certain of our U.S. wind equity method investments

145

⁽¹⁾

Discounted cash flows

Level 3

100%

Contracted and observable merchant prices per MWh

$29 - $92

⁽²⁾

Discount rate

8% - 10%

⁽³⁾

Non-utility natural gas storage assets

190

⁽⁴⁾

Discounted cash flows

Level 3

100%

Storage rates
per Dth/month

$0.06 - $0.22

⁽²⁾

Discount rate

10%

⁽³⁾


⁽¹⁾	At measurement date of June 25, 2018. At September 30, 2018, these U.S. wind equity method investments had a carrying value of $136 million reflecting subsequent business activity.


⁽²⁾	Generally, significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.


⁽³⁾	An increase in the discount rate would result in a decrease in fair value.

⁽⁴⁾

At measurement date of June 25, 2018. At September 30, 2018, Mississippi Hub and Bay Gas were classified as held for sale and had a net carrying value of $141 million, reflecting subsequent business activity and estimated costs to sell, as we discuss in Note 5. Our other U.S. midstream assets that were measured at fair value, including LA Storage, continue to be classified as property, plant and equipment and had a net carrying value of $32 million at September 30, 2018.

- 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.

+ References + Details