FAIR VALUE MEASUREMENTS

3 Months Ended

Jun. 30, 2013

Notes to Consolidated Financial Statements [Abstract]

Fair Value Measurements

NOTE 8. 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 theAnnual Report. We have not changed the valuation techniques or inputs we use to measure fair value during the six months ended June 30, 2013.

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 as of June 30, 2013 and December 31, 2012. 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 levels.

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 as of June 30, 2013 and December 31, 2012 in the tables below include the following:

• Nuclear decommissioning trusts reflect the assets of SDG&E's nuclear decommissioning trusts, 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. Equity and certain debt 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 debt securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2).
• We enter into commodity contracts and interest rate derivatives primarily as a means to manage price exposures. 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). All Level 3 recurring items are related to CRRs at SDG&E, as we discuss below under “Level 3 Information.” We record commodity derivative contracts that are subject to rate recovery as commodity costs that are offset by regulatory account balances and are recovered in rates.

• 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).

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, nor any changes in valuation techniques used in recurring fair value measurements.

RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
		At fair value as of June 30, 2013
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	559	$	―	$	―	$	―	$	559
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			94		70		―		―		164
Municipal bonds			―		74		―		―		74
Other securities			―		136		―		―		136
Total debt securities			94		280		―		―		374
Total nuclear decommissioning trusts(1)			653		280		―		―		933
Interest rate instruments			―		73		―		―		73
Commodity contracts subject to rate recovery			12		―		47		―		59
Commodity contracts not subject to rate recovery			29		13		(10)		―		32
Total		$	694	$	366	$	37	$	―	$	1,097
Liabilities:
Interest rate and foreign exchange instruments		$	―	$	124	$	―	$	―	$	124
Commodity contracts subject to rate recovery			17		9		―		(17)		9
Commodity contracts not subject to rate recovery			1		14		―		(1)		14
Total		$	18	$	147	$	―	$	(18)	$	147
		At fair value as of December 31, 2012
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	539	$	―	$	―	$	―	$	539
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			87		69		―		―		156
Municipal bonds			―		63		―		―		63
Other securities			―		130		―		―		130
Total debt securities			87		262		―		―		349
Total nuclear decommissioning trusts(1)			626		262		―		―		888
Interest rate instruments			―		68		―		―		68
Commodity contracts subject to rate recovery			13		―		61		―		74
Commodity contracts not subject to rate recovery			28		15		―		―		43
Investments			1		―		―		―		1
Total		$	668	$	345	$	61	$	―	$	1,074
Liabilities:
Interest rate instruments		$	―	$	126	$	―	$	―	$	126
Commodity contracts subject to rate recovery			23		9		―		(23)		9
Commodity contracts not subject to rate recovery			6		23		―		(11)		18
Total		$	29	$	158	$	―	$	(34)	$	153
(1)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
		At fair value as of June 30, 2013
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	559	$	―	$	―	$	―	$	559
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			94		70		―		―		164
Municipal bonds			―		74		―		―		74
Other securities			―		136		―		―		136
Total debt securities			94		280		―		―		374
Total nuclear decommissioning trusts(1)			653		280		―		―		933
Commodity contracts subject to rate recovery			10		―		47		―		57
Commodity contracts not subject to rate recovery			2		―		―		―		2
Total		$	665	$	280	$	47	$	―	$	992
Liabilities:
Interest rate instruments		$	―	$	60	$	―	$	―	$	60
Commodity contracts subject to rate recovery			17		8		―		(17)		8
Total		$	17	$	68	$	―	$	(17)	$	68
		At fair value as of December 31, 2012
									Collateral
			Level 1		Level 2		Level 3		netted		Total
Assets:
Nuclear decommissioning trusts:
Equity securities		$	539	$	―	$	―	$	―	$	539
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies			87		69		―		―		156
Municipal bonds			―		63		―		―		63
Other securities			―		130		―		―		130
Total debt securities			87		262		―		―		349
Total nuclear decommissioning trusts(1)			626		262		―		―		888
Commodity contracts subject to rate recovery			12		―		61		―		73
Commodity contracts not subject to rate recovery			1		―		―		―		1
Total		$	639	$	262	$	61	$	―	$	962
Liabilities:
Interest rate instruments		$	―	$	81	$	―	$	―	$	81
Commodity contracts subject to rate recovery			23		8		―		(23)		8
Total		$	23	$	89	$	―	$	(23)	$	89
(1)	Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
	At fair value as of June 30, 2013
								Collateral
		Level 1		Level 2		Level 3		netted		Total
Assets:
Commodity contracts subject to rate recovery	$	2	$	―	$	―	$	―	$	2
Commodity contracts not subject to rate recovery		3		―		―		―		3
Total	$	5	$	―	$	―	$	―	$	5
Liabilities:
Commodity contracts subject to rate recovery	$	―	$	1	$	―	$	―	$	1
Total	$	―	$	1	$	―	$	―	$	1
	At fair value as of December 31, 2012
								Collateral
		Level 1		Level 2		Level 3		netted		Total
Assets:
Commodity contracts subject to rate recovery	$	1	$	―	$	―	$	―	$	1
Commodity contracts not subject to rate recovery		3		―		―		―		3
Total	$	4	$	―	$	―	$	―	$	4
Liabilities:
Commodity contracts subject to rate recovery	$	―	$	1	$	―	$	―	$	1
Total	$	―	$	1	$	―	$	―	$	1

Level 3 Information

The following table sets forth reconciliations of changes in the fair value of congestion revenue rights (CRRs) classified as Level 3 in the fair value hierarchyfor Sempra Energy Consolidated and SDG&E:

LEVEL 3 RECONCILIATIONS
(Dollars in millions)
	Three months ended June 30,
	2013		2012
Balance as of April 1	$	58	$	21
Realized and unrealized (losses) gains		(2)		5
Settlements		(9)		(13)
Balance as of June 30	$	47	$	13
Change in unrealized gains or losses relating to
instruments still held at June 30	$	(1)	$	―

LEVEL 3 RECONCILIATIONS
(Dollars in millions)
	Six months ended June 30,
	2013		2012
Balance as of January 1	$	61	$	23
Realized and unrealized (losses) gains		(3)		7
Allocated transmission instruments		―		1
Settlements		(11)		(18)
Balance as of June 30	$	47	$	13
Change in unrealized gains or losses relating to
instruments still held at June 30	$	(1)	$	―

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 on an ongoing basis. Inputs used to determine the fair value of CRRs are reviewed and compared with market conditions to determine reasonableness. All costs related to CRRs are expected 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 Independent System Operator(ISO), an objective source. The impact associated with discounting is negligible. Because auction prices are a less observable input, these instruments are classified as Level 3. Auction prices range from $(8) per MWh to $8 per MWh at a given location, and 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 7. Realized gains and losses associated with CRRs are recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Condensed Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities and therefore also do not affect earnings.

Fair Value of Financial Instruments

The fair values of certain of our financial instruments (cash, temporary investments, accounts and notes receivable, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts. 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 at June 30, 2013 and December 31, 2012:

FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
		June 30, 2013
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Total long-term debt(1)		$	11,901	$	―	$	11,646	$	1,076	$	12,722
Preferred stock of subsidiaries			99		―		106		―		106
SDG&E:
Total long-term debt(2)		$	4,130	$	―	$	4,089	$	340	$	4,429
Contingently redeemable preferred stock			79		―		83		―		83
SoCalGas:
Total long-term debt(3)		$	1,413	$	―	$	1,515	$	―	$	1,515
Preferred stock			22		―		25		―		25
		December 31, 2012
		Carrying		Fair Value
		Amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Investments in affordable housing partnerships(4)		$	12	$	―	$	―	$	36	$	36
Total long-term debt(1)			11,873		―		12,287		956		13,243
Preferred stock of subsidiaries			99		―		107		―		107
SDG&E:
Total long-term debt(2)		$	4,135	$	―	$	4,243	$	345	$	4,588
Contingently redeemable preferred stock			79		―		85		―		85
SoCalGas:
Total long-term debt(3)		$	1,413	$	―	$	1,599	$	―	$	1,599
Preferred stock			22		―		24		―		24
(1)	Before reductions for unamortized discount (net of premium) of $16 million at both June 30, 2013 and December 31, 2012, and excluding capital leases of $185 million at June 30, 2013 and $189 million at December 31, 2012, and commercial paper classified as long-term debt of $300 million at December 31, 2012. We discuss our long-term debt in Note 6 above and in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report.
(2)	Before reductions for unamortized discount of $11 million at June 30, 2013 and $12 million at December 31, 2012, and excluding capital leases of $182 million at June 30, 2013 and $185 million at December 31, 2012.
(3)	Before reductions for unamortized discount of $4 million at both June 30, 2013 and December 31, 2012, and excluding capital leases of $2 million at June 30, 2013 and $4 million at December 31, 2012.
(4)	Investments in affordable housing partnerships at Parent and Other.

We base the fair value of certain of our long-term debt and preferred stock on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value other long-term debt using an income approach based on the present value of estimated future cash flows discounted at rates available for similar securities (Level 3).

We calculated the fair value of our investments in affordable housing partnerships using an income approach based on the present value of estimated future cash flows discounted at rates available for similar investments (Level 3).

Nuclear Decommissioning Trusts

We discuss SDG&E's investments in nuclear decommissioning trust funds in Note 6 of the Notes to Consolidated Financial Statements in theAnnual Report. The following table shows the fair values and gross unrealized gains and losses for the securities held in the trust funds:

NUCLEAR DECOMMISSIONING TRUSTS
(Dollars in millions)
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
			Cost		Gains		Losses		Value
As of June 30, 2013:
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies(1)		$	163	$	4	$	(3)	$	164
Municipal bonds(2)			72		3		(1)		74
Other securities(3)			139		2		(5)		136
Total debt securities			374		9		(9)		374
Equity securities			230		333		(4)		559
Cash and cash equivalents			5		―		―		5
Total		$	609	$	342	$	(13)	$	938
As of December 31, 2012:
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies		$	147	$	9	$	―	$	156
Municipal bonds			57		6		―		63
Other securities			121		10		(1)		130
Total debt securities			325		25		(1)		349
Equity securities			249		292		(2)		539
Cash and cash equivalents			20		―		―		20
Total		$	594	$	317	$	(3)	$	908
(1)	Maturity dates are 2013-2056.
(2)	Maturity dates are 2013-2062.
(3)	Maturity dates are 2013-2111.

The following table shows the proceeds from sales of securities in the trusts and gross realized gains and losses on those sales:

SALES OF SECURITIES
(Dollars in millions)
	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Proceeds from sales	$	192	$	191	$	326	$	320
Gross realized gains		6		5		11		9
Gross realized losses		(4)		(5)		(7)		(5)

Net unrealized gains (losses) are included in Regulatory Liabilities Arising from Removal Obligations on the Condensed Consolidated Balance Sheets. We determine the cost of securities in the trusts on the basis of specific identification.