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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2020

FAIR VALUE MEASUREMENTS

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 December 31, 2020 and 2019. 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-valued assets and liabilities, and their placement within the fair value hierarchy.

The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 11 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 $5 million investment at December 31, 2019 measured at NAV):

▪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 or income 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 – SDG&E.”

▪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 December 31, 2020, and 2019.

▪As we discuss in Note 6, in July 2020, Sempra Energy entered into a Support Agreement for the benefit of CFIN. We measure the Support Agreement, which includes a guarantee obligation, a put option and a call option, net of related guarantee fees, at fair value on a recurring basis. We use a discounted cash flow model to value the Support Agreement, net of related guarantee fees. Because some of the inputs that are significant to the valuation are less observable, the Support Agreement is classified as Level 3, as we describe below in “Level 3 Information – Sempra LNG.”


RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Fair value at December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	358	$	6	$	—	$	364
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	41		24		—		65
Municipal bonds	—		326		—		326
Other securities	—		270		—		270
Total debt securities	41		620		—		661
Total nuclear decommissioning trusts(1)	399		626		—		1,025
Interest rate and foreign exchange instruments	—		25		—		25
Commodity contracts not subject to rate recovery	—		4		—		4
Effect of netting and allocation of collateral(2)	21		—		—		21
Commodity contracts subject to rate recovery	6		1		121		128
Effect of netting and allocation of collateral(2)	19		5		6		30
Support Agreement, net of related guarantee fees	—		—		7		7
Total	$	445	$	661	$	134	$	1,240

Liabilities:
Interest rate and foreign exchange instruments	$	—	$	186	$	—	$	186
Commodity contracts not subject to rate recovery	—		16		—		16
Commodity contracts subject to rate recovery	—		6		52		58

Support Agreement, net of related guarantee fees	—		—		4		4
Total	$	—	$	208	$	56	$	264

	Fair value at December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	503	$	6	$	—	$	509
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	46		11		—		57
Municipal bonds	—		282		—		282
Other securities	—		226		—		226
Total debt securities	46		519		—		565
Total nuclear decommissioning trusts(1)	549		525		—		1,074
Interest rate and foreign exchange instruments	—		24		—		24
Commodity contracts not subject to rate recovery	—		11		—		11
Effect of netting and allocation of collateral(2)	43		—		—		43
Commodity contracts subject to rate recovery	5		8		95		108
Effect of netting and allocation of collateral(2)	11		8		6		25
Total	$	608	$	576	$	101	$	1,285

Liabilities:
Interest rate and foreign exchange instruments	$	—	$	157	$	—	$	157
Commodity contracts not subject to rate recovery	—		17		—		17

Commodity contracts subject to rate recovery	14		4		67		85
Effect of netting and allocation of collateral(2)	(14)		—		—		(14)
Total	$	—	$	178	$	67	$	245

(1) Excludes cash, cash equivalents and receivables (payables), net.

(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 December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	358	$	6	$	—	$	364
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	41		24		—		65
Municipal bonds	—		326		—		326
Other securities	—		270		—		270
Total debt securities	41		620		—		661
Total nuclear decommissioning trusts(1)	399		626		—		1,025
Commodity contracts subject to rate recovery	5		—		121		126
Effect of netting and allocation of collateral(2)	18		—		6		24
Total	$	422	$	626	$	127	$	1,175

Liabilities:


Commodity contracts subject to rate recovery	$	—	$	—	$	52	$	52

Total	$	—	$	—	$	52	$	52

	Fair value at December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	503	$	6	$	—	$	509
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	46		11		—		57
Municipal bonds	—		282		—		282
Other securities	—		226		—		226
Total debt securities	46		519		—		565
Total nuclear decommissioning trusts(1)	549		525		—		1,074


Commodity contracts subject to rate recovery	1		3		95		99
Effect of netting and allocation of collateral(2)	10		—		6		16
Total	$	560	$	528	$	101	$	1,189

Liabilities:
Commodity contracts subject to rate recovery	$	14	$	—	$	67	$	81
Effect of netting and allocation of collateral(2)	(14)		—		—		(14)
Total	$	—	$	—	$	67	$	67

(1) Excludes cash, cash equivalents and receivables (payables), net.

(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 December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	1	$	1	$	—	$	2
Effect of netting and allocation of collateral(1)	1		5		—		6
Total	$	2	$	6	$	—	$	8

Liabilities:

Commodity contracts subject to rate recovery	$	—	$	6	$	—	$	6
Total	$	—	$	6	$	—	$	6

	Fair value at December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:


Commodity contracts subject to rate recovery	$	4	$	5	$	—	$	9
Effect of netting and allocation of collateral(1)	1		8		—		9
Total	$	5	$	13	$	—	$	18

Liabilities:
Commodity contracts subject to rate recovery	$	—	$	4	$	—	$	4

Total	$	—	$	4	$	—	$	4

(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

SDG&E

The table below 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)
	Years ended December 31,
	2020		2019		2018
Balance at January 1	$	28	$	179	$	(28)
Realized and unrealized gains (losses)	19		(184)		209
Allocated transmission instruments	6		6		10
Settlements	16		27		(12)
Balance at December 31	$	69	$	28	$	179
Change in unrealized gains (losses) relating to instruments still held at December 31	$	34	$	(139)	$	183

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

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					Median price per MWh
2021	$	(1.81)	to	$	14.11	$	(0.12)
2020		(3.77)	to		6.03		(1.58)
2019		(8.57)	to		35.21		(2.94)

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 11.

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. The range and weighted-average price of these inputs at December 31 were as follows:


LONG-TERM, FIXED-PRICE ELECTRICITY POSITIONS PRICE INPUTS

Settlement year		Price per MWh					Weighted-average price per MWh
2020	$	19.60	to	$	78.10	$	39.71
2019		21.00	to		61.15		37.92

A significant increase (decrease) in market electricity forward prices would result in a significantly higher (lower) fair value. We summarize long-term, fixed-price electricity position volumes in Note 11.

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

Sempra LNG

The table below sets forth a reconciliation of changes in the fair value of Sempra Energy’s Support Agreement for the benefit of CFIN classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated.


LEVEL 3 RECONCILIATION
(Dollars in millions)
	Year ended December 31, 2020

Balance at January 1	$	—
Realized and unrealized gains(1)	6
Settlements	(3)
Balance at December 31(2)	$	3
Change in unrealized gains (losses) relating to instruments still held at December 31	$	3

(1) Net gains are included in Interest Income and net losses are included in Interest Expense on the Sempra Energy Consolidated Statement of Operations.

(2) Includes $7 million in Other Current Assets offset by $4 million in Deferred Credits and Other on the Sempra Energy Consolidated Balance Sheet.

The fair value of the Support Agreement, net of related guarantee fees, is based on a discounted cash flow model using a probability of default and survival methodology. Our estimate of fair value considers inputs such as third-party default rates, credit ratings, recovery rates, and risk-adjusted discount rates, which may be readily observable, market corroborated or generally unobservable inputs. Because CFIN’s credit rating and related default and survival rates are unobservable inputs that are significant to the valuation, the Support Agreement, net of related guarantee fees, is classified as Level 3. We assigned CFIN an internally developed credit rating of A3 and relied on default rate data published by Moody’s to assign a probability of default. A hypothetical change in the credit rating up or down one notch would not result in a significant change in the fair value of the Support Agreement.

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 Consolidated Balance Sheets.


FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	December 31, 2020
	Carrying		Fair value
	amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates(1)	$	786	$	—	$	817	$	—	$	817
Long-term amounts due to unconsolidated affiliates	275		—		266		—		266
Total long-term debt(2)	22,259		—		25,478		—		25,478
SDG&E:
Total long-term debt(3)	$	6,253	$	—	$	7,384	$	—	$	7,384
SoCalGas:
Total long-term debt(4)	$	4,759	$	—	$	5,655	$	—	$	5,655

	December 31, 2019
	Carrying		Fair value
	amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates	$	742	$	—	$	759	$	—	$	759
Long-term amounts due to unconsolidated affiliates	195		—		184		—		184
Total long-term debt(2)	21,247		—		22,638		26		22,664
SDG&E:
Total long-term debt(3)	$	5,140	$	—	$	5,662	$	—	$	5,662
SoCalGas:
Total long-term debt(4)	$	3,809	$	—	$	4,189	$	—	$	4,189

(1) Before allowances for credit losses of $3 million. Includes $3 million of accrued interest receivable in Due From Unconsolidated Affiliate – Current.

(2) Before reductions of unamortized discount and debt issuance costs of $268 million and $225 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $1,330 million and $1,289 million at December 31, 2020 and 2019, respectively.

(3) Before reductions of unamortized discount and debt issuance costs of $52 million and $48 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $1,276 million and $1,270 million at December 31, 2020 and 2019, respectively.

(4) Before reductions of unamortized discount and debt issuance costs of $40 million and $34 million at December 31, 2020 and 2019, respectively, and excluding finance lease obligations of $54 million and $19 million at December 31, 2020 and 2019, respectively.

We provide the fair values for the securities held in the NDT related to SONGS in Note 15.

NON-RECURRING FAIR VALUE MEASURES

Sempra LNG

Non-Utility Natural Gas Storage Assets

As we discuss in Note 5, in June 2018, our board of directors approved a plan to sell Mississippi Hub, our 90.9% ownership interest in Bay Gas and other non-utility assets (the non-utility natural gas storage assets). In June 2018, we also owned a 75.4% interest in LA Storage, a salt cavern development project in Cameron Parish in 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 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, on June 25, 2018, we recorded an impairment of $1.3 billion ($755 million after tax and NCI) in Impairment Losses on Sempra Energy’s Consolidated Statement of Operations.

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.

On January 1, 2019, Sempra LNG entered into an agreement to sell Mississippi Hub and Bay Gas for $332 million, subject to working capital adjustments and $20 million representing Sempra LNG’s purchase of the 9.1% minority interest in Bay Gas immediately prior to and included as part of the sale. On February 7, 2019, Sempra LNG completed this sale. Additionally, in December 2018, Sempra LNG entered into an agreement to sell other non-utility assets for $5 million; such sale was completed in January 2019. We considered the assets’ sales prices negotiated with active market participants to be a relevant and material data input. Accordingly, we updated our fair value analysis to reflect the Level 2 market participant input as the primary indicator of fair value. As a result, on December 31, 2018, we reduced the impairment of $1.3 billion recorded on June 25, 2018 by $183 million ($126 million after tax and NCI), resulting in a total impairment of $1.1 billion ($629 million after tax and NCI) for the year ended December 31, 2018, based on a fair value of $337 million for these non-utility natural gas storage assets.

Sempra Renewables

U.S. Wind Investments

As we discuss in Notes 5 and 6, in June 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 was 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 Consolidated Statement of Operations for the year ended December 31, 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 Renewables completed the sale of its interests in these wind equity method investments in April 2019.

The table below summarizes significant inputs impacting our non-recurring fair value measures. Additional discussions about the related transactions are provided in Note 5, and as applicable, in Note 6.


NON-RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED

	Measurement date		Estimated fair value (in millions)	Valuation technique	Fair value hierarchy	% of fair value measurement	Inputs used to develop measurement	Range of inputs (weighted average)
Non-utility natural gas storage assets	December 31, 2018	$	337	Market approach	Level 2	100%	Assets’ sales prices	100%
Non-utility natural gas storage assets	June 25, 2018	$	190	Discounted cash flows	Level 3	100%	Storage rates per dekatherm per month	$0.06 - $0.22 $(0.10)	(1)
							Discount rate	10%	(2)
Certain of our U.S. wind equity method investments	June 25, 2018	$	145	Discounted cash flows	Level 3	100%	Contracted and observable merchant prices per MWh	$29 - $92	(1)
							Discount rate	8% - 10% (8.7%)	(2)

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

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

- 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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