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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2018

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, 2018 and 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.

The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 11 in “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 December 31, 2018 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 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 December 31, 2018 and 2017.



RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Fair value at December 31, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	407		$	4	$	—	$	411
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	43			10		—		53
Municipal bonds	—			269		—		269
Other securities	—			234		—		234
Total debt securities	43			513		—		556
Total nuclear decommissioning trusts⁽¹⁾	450			517		—		967
Interest rate and foreign exchange instruments	—			2		—		2
Commodity contracts not subject to rate recovery	—			24		—		24
Effect of netting and allocation of collateral⁽²⁾	19			—		—		19
Commodity contracts subject to rate recovery	2			9		278		289
Effect of netting and allocation of collateral⁽²⁾	28			—		5		33
Total	$	499		$	552	$	283	$	1,334

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	150	$	—	$	150
Commodity contracts not subject to rate recovery	—			34		—		34
Commodity contracts subject to rate recovery	2			5		99		106
Effect of netting and allocation of collateral⁽²⁾	(2		)	—		—		(2		)
Total	$	—		$	189	$	99	$	288

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


⁽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 – SDG&E
(Dollars in millions)
	Fair value at December 31, 2018
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	407		$	4	$	—	$	411
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	43			10		—		53
Municipal bonds	—			269		—		269
Other securities	—			234		—		234
Total debt securities	43			513		—		556
Total nuclear decommissioning trusts⁽¹⁾	450			517		—		967
Commodity contracts subject to rate recovery	1			6		278		285
Effect of netting and allocation of collateral⁽²⁾	23			—		5		28
Total	$	474		$	523	$	283	$	1,280

Liabilities:
Interest rate instruments	$	—		$	1	$	—	$	1
Commodity contracts subject to rate recovery	2			—		99		101
Effect of netting and allocation of collateral⁽²⁾	(2		)	—		—		(2		)
Total	$	—		$	1	$	99	$	100

	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 December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	1	$	3	$	—	$	4
Effect of netting and allocation of collateral⁽¹⁾	5		—		—		5
Total	$	6	$	3	$	—	$	9

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)
	Years ended December 31,
	2018			2017			2016
Balance at January 1	$	(28	)	$	(74	)	$	19
Realized and unrealized gains (losses)	209			34			(120		)
Allocated transmission instruments	10			6			8
Settlements	(12		)	6			19
Balance at December 31	$	179		$	(28	)	$	(74	)
Change in unrealized gains (losses) relating to
instruments still held at December 31	$	183		$	30		$	(101	)


⁽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
2019	$	(8.57	)	to	$	35.21	$	(2.94	)
2018		(7.25	)	to		11.99		0.09
2017		(11.88	)	to		6.93		(0.14	)

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 was as follows:



LONG-TERM, FIXED-PRICE ELECTRICITY POSITIONS PRICE INPUTS

Settlement year		Price per MWh					Weighted-average price per MWh
2018	$	22.20	to	$	76.85	$	42.69
2017		22.55	to		44.10		35.23

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 11.

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 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 Consolidated Balance Sheets at December 31, 2018 and 2017:



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	December 31, 2018
	Carrying		Fair value
	amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates	$	688	$	—	$	648	$	47	$	695
Long-term amounts due to unconsolidated affiliates	37		—		35		—		35
Total long-term debt⁽¹⁾⁽²⁾	22,067		—		21,274		351		21,625
SDG&E:
Total long-term debt⁽²⁾⁽³⁾	$	4,996	$	—	$	4,897	$	220	$	5,117
SoCalGas:
Total long-term debt⁽⁴⁾	$	3,459	$	—	$	3,505	$	—	$	3,505

	December 31, 2017
	Carrying		Fair value
	amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates	$	598	$	—	$	510	$	108	$	618
Long-term amounts due to unconsolidated affiliates	35		—		32		—		32
Total long-term debt⁽¹⁾⁽²⁾	17,138		817		17,134		458		18,409
SDG&E:
Total long-term debt⁽²⁾⁽³⁾	$	4,868	$	—	$	5,073	$	295	$	5,368
SoCalGas:
Total long-term debt⁽⁴⁾	$	3,009	$	—	$	3,192	$	—	$	3,192


⁽¹⁾	Before reductions for unamortized discount (net of premium) and debt issuance costs of $202 million and $143 million at December 31, 2018 and 2017, respectively, and excluding build-to-suit and capital lease obligations of $1,419 million and $877 million at December 31, 2018 and 2017, respectively. We discuss our long-term debt in Note 7.


⁽²⁾	Level 3 instruments include $220 million and $295 million at December 31, 2018 and 2017, respectively, related to Otay Mesa VIE.


⁽³⁾	Before reductions for unamortized discount and debt issuance costs of $49 million and $45 million at December 31, 2018 and 2017, respectively, and excluding capital lease obligations of $1,272 million and $732 million at December 31, 2018 and 2017, respectively.


⁽⁴⁾	Before reductions for unamortized discount and debt issuance costs of $32 million and $24 million at December 31, 2018 and 2017, respectively, and excluding capital lease obligations of $3 million and $1 million at December 31, 2018 and 2017, respectively.

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

NON-RECURRING FAIR VALUE MEASURES

Sempra Mexico

TdM

In February 2016, management approved a plan to market and sell Sempra Mexico’s TdM natural gas-fired power plant, and classified it as held for sale on the Sempra Energy Consolidated Balance Sheet. In September 2016, we received market information that indicated that the fair value of TdM may be less than its carrying value. As a result, after performing an analysis of the information, Sempra Mexico reduced the carrying value of TdM by recognizing a noncash impairment charge of $131 million ($111 million after tax) in the third quarter of 2016. In 2017, Sempra Mexico received a purchase price offer resulting from negotiations with an active market participant. This new market information indicated that the fair value of TdM was lower than its carrying value at June 30, 2017. As a result, in the second quarter of 2017, Sempra Mexico further reduced the carrying value of TdM by recognizing a noncash impairment charge of $71 million. Impairments recorded for TdM are included in Impairment Losses on Sempra Energy’s Consolidated Statements of Operations. Market values resulting from a third-party bidding process and a purchase price offer are considered to be Level 2 inputs in the fair value hierarchy, as they represent observable pricing inputs. TdM was reclassified to held and used in June 2018 when management terminated the sales process.

IEnova Pipelines

In September 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, increasing its ownership interest to 100 percent. As a result of IEnova obtaining control over IEnova Pipelines, in the year ended December 31, 2016, Sempra Mexico recognized a pretax gain of $617 million ($432 million after tax) for the excess of the acquisition-date fair

value of its previously held equity interest in IEnova Pipelines ($1.144 billion) over the carrying value of that interest ($520 million) and losses reclassified from AOCI ($7 million), included as Remeasurement of Equity Method Investment on Sempra Energy’s Consolidated Statement of Operations. The valuation technique used to measure the acquisition-date fair value of our equity interest in IEnova Pipelines immediately prior to the business acquisition was based on the fair value of the entire business combination ($2.288 billion) less the fair value of the consideration paid ($1.144 billion, the equity sale price). We discuss the IEnova Pipelines acquisition in Note 5.

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 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 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, our 90.9-percent ownership interest in Bay Gas and other non-utility assets (the non-utility natural gas storage assets). We also own a 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 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 & Midstream entered into an agreement to sell Mississippi Hub and Bay Gas to an affiliate of ArcLight Capital Partners for $332 million, subject to working capital adjustments and $20 million representing Sempra LNG & Midstream’s purchase of the 9.1-percent minority interest in Bay Gas immediately prior to and included as part of the sale. On February 7, 2019, Sempra LNG & Midstream completed this sale. Additionally, in December 2018, Sempra LNG & Midstream 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.

Rockies Express

In March 2016, Sempra LNG & Midstream agreed to sell its 25-percent interest in Rockies Express for cash consideration of $440 million, subject to adjustment at closing. In March 2016, we recorded a noncash impairment of our investment in Rockies Express of $44 million ($27 million after tax). The charge is included in Equity Earnings on the Sempra Energy Consolidated Statement of Operations for the year ended December 31, 2016. We considered the sale price for our equity interest in Rockies

Express to be a market participants’ view of the total value of Rockies Express and measured the fair value of our investment based on the equity sale price. The sale was completed in May 2016.

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

⁽¹⁾

Market approach

Level 2

100%

Assets’ sales prices

100%

Non-utility natural gas storage assets

June 25, 2018

190

⁽¹⁾⁽²⁾

Discounted cash flows

Level 3

100%

Storage rates
per Dth/month

$0.06 - $0.22 ($0.10)

⁽³⁾

Discount rate

10%

⁽⁴⁾

Certain of our U.S. wind equity method investments

June 25, 2018

145

⁽⁵⁾

Discounted cash flows

Level 3

100%

Contracted and observable merchant prices per MWh

$29 - $92

⁽³⁾

Discount rate

8% - 10% (8.7%)

⁽⁴⁾

TdM

June 30, 2017

Market approach

Level 2

100%

Purchase price offer

100%

TdM

September 29, 2016

145

Market approach

Level 2

100%

Purchase price offers

100%

Investment in

IEnova Pipelines

September 26, 2016

1,144

⁽⁶⁾

Market approach

Level 2

100%

Equity sale price

100%

Investment in
Rockies Express

March 29, 2016

440

Market approach

Level 2

100%

Equity sale price

100%


⁽¹⁾	Includes Mississippi Hub, Bay Gas and other non-utility assets, which are classified as held for sale at December 31, 2018 with a net carrying value of $323 million, reflecting estimated costs to sell.


⁽²⁾	Includes LA Storage, which continues to be classified as PP&E.


⁽³⁾	Generally, significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.


⁽⁴⁾	An increase in the discount rate would result in a decrease in fair value.


⁽⁵⁾	At December 31, 2018, these U.S. wind equity method investments had a carrying value of $139 million, reflecting subsequent business activity.

⁽⁶⁾

Immediately prior to acquiring a 100-percent ownership interest in IEnova Pipelines.

- 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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