XML 53 R29.htm IDEA: XBRL DOCUMENT

FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2023

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 June 30, 2023 and December 31, 2022. 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. We have not changed the valuation techniques or types of inputs we use to measure recurring fair value since December 31, 2022.

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 in the tables below include the following:

▪Nuclear decommissioning trusts reflect the assets of SDG&E’s NDT, excluding accounts receivable and accounts payable. 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 instruments 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 short-term investments that consist of money market and mutual funds 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).

▪As we discuss in Note 5, in July 2020, Sempra 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 Infrastructure.”


RECURRING FAIR VALUE MEASURES – SEMPRA
(Dollars in millions)
	Level 1		Level 2		Level 3		Total
	Fair value at June 30, 2023
Assets:
Nuclear decommissioning trusts:
Short-term investments, primarily cash equivalents	$	22	$	2	$	—	$	24
Equity securities	318		4		—		322
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	25		14		—		39
Municipal bonds	—		266		—		266
Other securities	—		218		—		218
Total debt securities	25		498		—		523
Total nuclear decommissioning trusts(1)	365		504		—		869
Short-term investments held in Rabbi Trust	51		—		—		51
Interest rate instruments	—		62		—		62
Commodity contracts not subject to rate recovery	—		19		—		19
Effect of netting and allocation of collateral(2)	143		—		—		143
Commodity contracts subject to rate recovery	—		1		20		21
Effect of netting and allocation of collateral(2)	65		—		5		70
Support Agreement, net of related guarantee fees	—		—		23		23
Total	$	624	$	586	$	48	$	1,258
Liabilities:
Interest rate instruments	$	—	$	2	$	—	$	2
Foreign exchange instruments	—		15		—		15
Commodity contracts not subject to rate recovery	—		11		—		11
Commodity contracts subject to rate recovery	14		51		—		65
Effect of netting and allocation of collateral(2)	(14)		—		—		(14)
Total	$	—	$	79	$	—	$	79

(1) Excludes 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 – SEMPRA (CONTINUED)
(Dollars in millions)
	Level 1		Level 2		Level 3		Total
	Fair value at December 31, 2022
Assets:
Nuclear decommissioning trusts:
Short-term investments, primarily cash equivalents	$	10	$	1	$	—	$	11
Equity securities	293		4		—		297
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	27		13		—		40
Municipal bonds	—		270		—		270
Other securities	—		227		—		227
Total debt securities	27		510		—		537
Total nuclear decommissioning trusts(1)	330		515		—		845
Short-term investments held in Rabbi Trust	55		—		—		55
Interest rate instruments	—		76		—		76
Commodity contracts not subject to rate recovery	—		273		—		273
Effect of netting and allocation of collateral(2)	451		—		—		451
Commodity contracts subject to rate recovery	82		19		35		136
Effect of netting and allocation of collateral(2)	12		—		6		18
Support Agreement, net of related guarantee fees	—		—		17		17
Total	$	930	$	883	$	58	$	1,871
Liabilities:
Foreign exchange instruments	$	—	$	8	$	—	$	8
Interest rate and foreign exchange instruments	—		105		—		105
Commodity contracts not subject to rate recovery	—		191		—		191
Commodity contracts subject to rate recovery	—		70		—		70
Total	$	—	$	374	$	—	$	374

1) Excludes 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)
	Level 1		Level 2		Level 3		Total
	Fair value at June 30, 2023
Assets:
Nuclear decommissioning trusts:
Short-term investments, primarily cash equivalents	$	22	$	2	$	—	$	24
Equity securities	318		4		—		322
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	25		14		—		39
Municipal bonds	—		266		—		266
Other securities	—		218		—		218
Total debt securities	25		498		—		523
Total nuclear decommissioning trusts(1)	365		504		—		869
Commodity contracts subject to rate recovery	—		—		20		20
Effect of netting and allocation of collateral(2)	64		—		5		69
Total	$	429	$	504	$	25	$	958
Liabilities:
Commodity contracts subject to rate recovery	$	14	$	5	$	—	$	19
Effect of netting and allocation of collateral(2)	(14)		—		—		(14)
Total	$	—	$	5	$	—	$	5

	Fair value at December 31, 2022
Assets:
Nuclear decommissioning trusts:
Short-term investments, primarily cash equivalents	$	10	$	1	$	—	$	11
Equity securities	293		4		—		297
Debt securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	27		13		—		40
Municipal bonds	—		270		—		270
Other securities	—		227		—		227
Total debt securities	27		510		—		537
Total nuclear decommissioning trusts(1)	330		515		—		845
Commodity contracts subject to rate recovery	82		3		35		120
Effect of netting and allocation of collateral(2)	11		—		6		17
Total	$	423	$	518	$	41	$	982
Liabilities:
Commodity contracts subject to rate recovery	$	—	$	1	$	—	$	1
Total	$	—	$	1	$	—	$	1

(1) Excludes 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)
	Level 1		Level 2		Level 3		Total
	Fair value at June 30, 2023
Assets:
Commodity contracts subject to rate recovery	$	—	$	1	$	—	$	1
Effect of netting and allocation of collateral(1)	1		—		—		1
Total	$	1	$	1	$	—	$	2
Liabilities:
Commodity contracts subject to rate recovery	$	—	$	46	$	—	$	46
Total	$	—	$	46	$	—	$	46

	Fair value at December 31, 2022
Assets:
Commodity contracts subject to rate recovery	$	—	$	16	$	—	$	16
Effect of netting and allocation of collateral(1)	1		—		—		1
Total	$	1	$	16	$	—	$	17
Liabilities:
Commodity contracts subject to rate recovery	$	—	$	69	$	—	$	69
Total	$	—	$	69	$	—	$	69

(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 and SDG&E.


LEVEL 3 RECONCILIATIONS(1)
(Dollars in millions)
	Three months ended June 30,
	2023		2022
Balance at April 1	$	30	$	58
Realized and unrealized losses	(4)		(30)
Allocated transmission instruments	(2)		(6)
Settlements	(4)		11
Balance at June 30	$	20	$	33
Change in unrealized losses relating to instruments still held at June 30	$	(7)	$	(23)

	Six months ended June 30,
	2023		2022
Balance at January 1	$	35	$	54
Realized and unrealized losses	(8)		(23)
Allocated transmission instruments	(2)		(6)
Settlements	(5)		8
Balance at June 30	$	20	$	33
Change in unrealized losses relating to instruments still held at June 30	$	(9)	$	(18)

(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.

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
2023	$	(3.09)	to	$	10.71	$	(0.56)
2022	(3.67)		to	6.96		(0.70)

The impact associated with discounting is not significant. 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 significantly higher (lower) fair value measurement. We summarize CRR volumes in Note 7.

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 June 30 were as follows:


LONG-TERM, FIXED-PRICE ELECTRICITY POSITIONS PRICE INPUTS

Settlement year						Weighted-average price per MWh
2023	$	22.75	to	$	117.50	$	74.02
2022	25.25		to	125.00		66.36

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 7.

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 Condensed Consolidated Statements of Operations. Because unrealized gains and losses are recorded as regulatory assets and liabilities, they do not affect earnings.

Sempra Infrastructure

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


LEVEL 3 RECONCILIATIONS
(Dollars in millions)
	Three months ended June 30,
	2023		2022
Balance at April 1	$	24	$	12
Realized and unrealized gains(1)	1		6
Settlements	(2)		(2)
Balance at June 30(2)	$	23	$	16
Change in unrealized gains relating to instruments still held at June 30	$	1	$	5

	Six months ended June 30,
	2023		2022
Balance at January 1	$	17	$	7
Realized and unrealized gains(1)	10		14
Settlements	(4)		(5)
Balance at June 30(2)	$	23	$	16
Change in unrealized gains relating to instruments still held at June 30	$	9	$	13

(1) Net gains are included in Interest Income and net losses are included in Interest Expense on Sempra’s Condensed Consolidated Statements of Operations.

(2) Includes $7 in Other Current Assets and $16 in Other Long-term Assets at June 30, 2023 on Sempra’s Condensed 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 could 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 receivable, amounts due to/from unconsolidated affiliates with original maturities of less than 90 days, 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)
	Carrying amount		Fair value
			Level 1		Level 2		Level 3		Total
	June 30, 2023
Sempra:

Long-term note receivable(1)	$	326	$	—	$	—	$	296	$	296
Long-term amounts due to unconsolidated affiliates	287		—		251		—		251
Total long-term debt(2)	27,419		—		24,630		—		24,630
SDG&E:
Total long-term debt(3)	$	8,600	$	—	$	7,535	$	—	$	7,535
SoCalGas:
Total long-term debt(4)	$	6,759	$	—	$	6,270	$	—	$	6,270

	December 31, 2022
Sempra:
Long-term note receivable(1)	$	318	$	—	$	—	$	286	$	286
Long-term amounts due to unconsolidated affiliates	301		—		263		—		263
Total long-term debt(2)	24,513		—		21,549		—		21,549
SDG&E:
Total long-term debt(3)	$	7,800	$	—	$	6,726	$	—	$	6,726
SoCalGas:
Total long-term debt(4)	$	6,059	$	—	$	5,538	$	—	$	5,538

(1) Before allowances for credit losses of $6 and $7 at June 30, 2023 and December 31, 2022, respectively. Excludes unamortized transaction costs of $4 and $5 at June 30, 2023 and December 31, 2022, respectively.

(2) Before reductions of unamortized discount and debt issuance costs of $325 and $289 at June 30, 2023 and December 31, 2022, respectively, and excluding finance lease obligations of $1,351 and $1,343 at June 30, 2023 and December 31, 2022, respectively.

(3) Before reductions of unamortized discount and debt issuance costs of $85 and $70 at June 30, 2023 and December 31, 2022, respectively, and excluding finance lease obligations of $1,241 and $1,256 at June 30, 2023 and December 31, 2022, respectively.

(4) Before reductions of unamortized discount and debt issuance costs of $57 and $48 at June 30, 2023 and December 31, 2022, respectively, and excluding finance lease obligations of $110 and $87 at June 30, 2023 and December 31, 2022, respectively.

We provide the fair values for the securities held in the NDT related to SONGS in Note 9.

- 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