ASU 2014-09, “Revenue from Contracts with Customers,” ASU 2015-14, “Deferral of the Effective Date,” ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”: ASU 2014-09 adds ASC 606 to provide accounting guidance for the recognition of revenue from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. Amending ASU 2014-09, ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10 clarifies the determination of whether a good or service is separately identifiable from other promises and revenue recognition related to licenses of intellectual property, and ASU 2016-12 provides guidance on transition, collectability, noncash consideration, and the presentation of sales and other similar taxes. The ASUs are codified in ASC 606.

We adopted ASC 606 on January 1, 2018, applying the modified retrospective transition method to all contracts as of January 1, 2018 and elected to use certain practical expedients available under the transition guidance. The impact from adoption was not material to our financial statements, and the timing of our revenue recognition has remained materially consistent before and after the adoption of ASC 606. The new revenue standard provides specific guidance for combining contracts, which resulted in a prospective reclassification between cost of sales and revenues within our Sempra LNG & Midstream segment. This reclassification had no impact on Sempra Energy’s consolidated revenues or cost of sales. Our additional disclosures about the nature, amount, timing and uncertainty of revenues arising from contracts with customers are included in Note 3.

ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall”: In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using NAV per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. ASU 2018-03 clarifies that the prospective transition approach for equity investments without readily determinable fair values is meant only for instances in which the measurement alternative is elected. Entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively.

ASU 2016-02, “Leases,” ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases,” ASU 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU 2018-20, “Narrow-Scope Improvements for Lessors” (collectively referred to as the “lease standard”): ASU 2016-02 requires entities to recognize substantially all of their leases on the balance sheet as ROU assets and lease liabilities. Entities may elect to exclude from the balance sheet those leases with a term of 12 months or less. For lessees, a lease is classified as finance or operating, and initially the asset and liability for each lease type is generally measured at the present value of the fixed lease payments. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. ASU 2018-10 makes technical corrections and clarifications to the accounting guidance in ASC 842.

For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to the lease identification criteria and aligning the principles of the lessor model with those introduced in ASC 606. ASU 2018-20 addresses the following issues that lessors encounter when applying ASU 2016-02: (a) sales taxes and other similar taxes collected from lessees, (b) certain lessor costs paid directly by the lessee and (c) recognition of variable payments for contracts with lease and nonlease components.

For public entities, the lease standard is effective for fiscal years beginning after December 15, 2018, including interim periods therein, with early adoption permitted. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2018-11 provides entities an optional transition method to apply the new guidance as of the adoption date, rather than as of the earliest period presented. In transition, entities may elect certain practical expedients when applying ASU 2016-02. These include a package of practical expedients that must be applied in its entirety to all leases that had commenced before the effective date and would allow an entity to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. ASU 2016-02 also includes a practical expedient to use hindsight in making judgments when determining the lease term and any long-lived asset impairment. ASU 2018-01 allows entities to elect a practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP. In addition, ASU 2016-02 and ASU 2018-11 provide practical expedients to the lessee and lessor, respectively, for separating lease and non-lease components. These ASUs are codified in ASC 842.

We will adopt the lease standard on January 1, 2019 using the optional transition method to apply the new guidance prospectively as of January 1, 2019, rather than as of the earliest period presented. We plan to elect the package of practical expedients and the land easement practical expedient described above. We do not plan to elect the practical expedient to use hindsight.

The adoption of the lease standards will not change our previously reported financial statements. However, on a prospective basis, a significant portion of finance lease costs for PPAs that have historically been classified in Cost of Electric Fuel and Purchased Power will be classified in Depreciation and Amortization Expense and Interest Expense on Sempra Energy’s and SDG&E’s statements of operations. In 2018, we recorded $117 million in purchased-power costs from capital leases in Cost of Electric Fuel

and Purchased Power at SDG&E and Sempra Energy. Further, the adoption of the lease standard will have a material impact on our balance sheets at January 1, 2019 due to the initial recognition of ROU assets and lease liabilities for operating leases. Our finance leases were already included on our balance sheets prior to adoption of the lease standard, consistent with previous U.S. GAAP for capital leases. We will include additional disclosures about our leases in our Notes to Consolidated Financial Statements beginning in the first quarter of 2019.



EXPECTED IMPACT FROM ADOPTION OF THE LEASE STANDARD
(Dollars in millions)
	Sempra Energy Consolidated			SDG&E		SoCalGas
Other current assets	$	(68	)	$	—	$	—
Property, plant and equipment, net	(147		)	—		—
Right-of-use assets – operating leases	623			130		116
Deferred income taxes	(3		)	—		—
Other current liabilities	81			20		23
Long-term debt	(138		)	—		—
Deferred credits and other	445			110		93
Retained earnings	17			—		—

As a result of the adoption of the lease standard, we will derecognize our corporate headquarters building lease in accordance with the transition provisions for build-to-suit arrangements. On a prospective basis, we will account for the corporate headquarters building lease as an operating lease. The expected impact is included in the above table.

ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”: ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments. The standard introduces an “expected credit loss” impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the credit losses.

For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods therein, with early adoption permitted for fiscal years beginning after December 15, 2018. The amendments are to be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings at the beginning of the first reporting period in the year of adoption. We are currently evaluating the effect of the standard on our ongoing financial reporting and plan to adopt the standard on January 1, 2020.

ASU 2017-04, “Simplifying the Test for Goodwill Impairment”: ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will be required to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. For public entities, ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments are to be applied on a prospective basis. We plan to adopt the standard on January 1, 2020.

ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”: ASU 2017-05 clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. We adopted the standard in conjunction with our adoption of ASC 606 on January 1, 2018 using the modified retrospective transition method and it did not materially affect our financial condition, results of operations or cash flows.

ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”: ASU 2017-07 requires the service cost component of net periodic benefit costs to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and the other components of net periodic benefit costs to be presented separately outside of operating income. The guidance also allows only the service cost component to be eligible for capitalization. Amendments are to be applied retrospectively for presentation of costs and prospectively for capitalization of service costs. The guidance allows a practical expedient that permits use of previously disclosed service costs

and other costs from the pension and other postretirement benefit plan disclosure in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the statements of operations. We adopted the standard on January 1, 2018 and elected the practical expedient available under the transition guidance.



IMPACT FROM ADOPTION OF ASU 2017-07
(Dollars in millions)
	Years ended December 31,
	2017							2016
	As previously reported		Effect of adoption			As adjusted		As previously reported		Effect of adoption			As adjusted
Sempra Energy:
Operation and maintenance	$	3,117	$	(21	)	$	3,096	$	2,970	$	6		$	2,976
Other income, net	254		(21		)	233		132		6			138
SDG&E:
Operation and maintenance	$	1,020	$	4		$	1,024	$	1,048	$	14		$	1,062
Total operating expenses	3,763		4			3,767		3,263		14			3,277
Operating income	713		(4		)	709		990		(14		)	976
Other income, net	66		4			70		50		14			64
SoCalGas:
Operation and maintenance	$	1,479	$	(5	)	$	1,474	$	1,385	$	6		$	1,391
Total operating expenses	3,163		(5		)	3,158		2,914		6			2,920
Operating income	622		5			627		557		(6		)	551
Other income, net	36		(5		)	31		32		6			38

ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”: ASU 2017-12 changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge accounting results. More specifically, the guidance expands the exposures that can be hedged to align with an entity’s risk management strategies, alleviates documentation requirements, eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges and requires entities to present the entire change in the fair value of a hedging instrument in the same income statement line item as the earnings effect of the hedged item. Transition elections are available for all hedges that exist at the date of adoption. We early adopted ASU 2017-12 on January 1, 2018 by applying the modified retrospective approach to the accounting for existing hedging relationships. Upon adoption of ASU 2017-12, Sempra Energy recognized a cumulative-effect adjustment to increase Retained Earnings and Accumulated Other Comprehensive Loss as of January 1, 2018 by $3 million.

ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”: ASU 2018-02 contains amendments that allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the TCJA. Under ASU 2018-02, an entity will be required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from AOCI. The amendments in this update can be applied either as of the beginning of the period of adoption or retrospectively as of the date of enactment of the TCJA and to each period in which the effect of the TCJA is recognized. For public entities, ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted. We will adopt ASU 2018-02 on January 1, 2019 and will reclassify the income tax effects of the TCJA from AOCI to retained earnings.

ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”: As a result of the TCJA, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the TCJA’s impact. Under SAB 118, an entity may apply an approach similar to the measurement period in a business combination. That is, an entity would record those impacts for which the accounting is complete. For matters that are not certain, the entity would either

(a) recognize provisional amounts to the extent that they are reasonably estimable and adjust them over time as more information becomes available, or (b) for any specific income tax effects of the TCJA for which a reasonable estimate cannot be determined, continue to apply ASC 740, Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the TCJA was signed into law; the entity would not adjust current or deferred income taxes for those tax effects of the TCJA until a reasonable estimate can be determined. ASU 2018-05 amends ASC 740 by incorporating SAB 118 and was effective upon issuance. We applied SAB 118 and ASU 2018-05 in 2018. The income tax effects of the TCJA that we recorded in 2017 were provisional. We adjusted our provisional estimates and completed our accounting for the income tax effects of the TCJA in 2018, as we discuss in Note 8.

We describe below and in Note 2 of the Notes to Consolidated Financial Statements recent pronouncements that have had a significant effect on Sempra Energy’s financial condition, results of operations, cash flows or disclosures. Additional information on ASU 2018-05 and ASU 2018-14, which may also have a significant effect on Sempra Energy’s financial condition, results of operation, cash flows or disclosures, is provided in Note 2 of the Notes to Consolidated Financial Statements.

ASU 2016-02, “Leases,” ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (collectively referred to as the “lease standard”): We will adopt the lease standard on January 1, 2019 using the optional transition method to apply the new guidance prospectively as of January 1, 2019, rather than as of the earliest period presented. The adoption of the lease standard will have a material impact on our balance sheet at January 1, 2019 due to the initial recognition of ROU assets and lease liabilities for operating leases.



EXPECTED IMPACT FROM ADOPTION OF THE LEASE STANDARD
(Dollars in millions)
Right-of-use assets – operating leases	$	191
Deferred income taxes	(3		)
Property, plant and equipment, net⁽¹⁾	(147		)
Other current liabilities	3
Long-term debt	(138		)
Other long-term liabilities	159
Retained earnings⁽²⁾	17

ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”: We adopted the standard on January 1, 2018 and elected the practical expedient available under the transition guidance. Upon adoption of ASU 2017-07, our Condensed Statements of Operations were impacted as follows:



IMPACT FROM ADOPTION OF ASU 2017-07
(Dollars in millions)
	Years ended December 31,
	2017									2016
	As previously reported			Effect of adoption			As adjusted			As previously reported			Effect of adoption			As adjusted
Sempra Energy:
Operation and maintenance	$	(87	)	$	7		$	(80	)	$	(81	)	$	5		$	(76	)
Other income (expense), net	107			(7		)	100			(2		)	(5		)	(7		)