FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2019

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 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 September 30, 2019 and December 31, 2018. 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, 2018.

The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 8 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 $6 million investment at September 30, 2019 measured at net asset value):

▪

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.”


▪	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 September 30, 2019 and December 31, 2018.



RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Fair value at September 30, 2019
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	465		$	5	$	—	$	470
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	39			12		—		51
Municipal bonds	—			291		—		291
Other securities	—			236		—		236
Total debt securities	39			539		—		578
Total nuclear decommissioning trusts⁽¹⁾	504			544		—		1,048
Interest rate and foreign exchange instruments	—			9		—		9
Commodity contracts not subject to rate recovery	—			12		—		12
Effect of netting and allocation of collateral⁽²⁾	18			—		—		18
Commodity contracts subject to rate recovery	1			6		253		260
Effect of netting and allocation of collateral⁽²⁾	11			—		6		17
Total	$	534		$	571	$	259	$	1,364

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	169	$	—	$	169
Commodity contracts not subject to rate recovery	—			18		—		18
Commodity contracts subject to rate recovery	15			5		74		94
Effect of netting and allocation of collateral⁽²⁾	(15		)	—		—		(15		)
Total	$	—		$	192	$	74	$	266

	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


⁽¹⁾	Excludes cash 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 September 30, 2019
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	465		$	5	$	—	$	470
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	39			12		—		51
Municipal bonds	—			291		—		291
Other securities	—			236		—		236
Total debt securities	39			539		—		578
Total nuclear decommissioning trusts⁽¹⁾	504			544		—		1,048
Commodity contracts subject to rate recovery	—			1		253		254
Effect of netting and allocation of collateral⁽²⁾	8			—		6		14
Total	$	512		$	545	$	259	$	1,316

Liabilities:
Commodity contracts subject to rate recovery	$	15		$	1	$	74	$	90
Effect of netting and allocation of collateral⁽²⁾	(15		)	—		—		(15		)
Total	$	—		$	1	$	74	$	75

	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


⁽¹⁾	Excludes cash 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 September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts subject to rate recovery	$	1	$	5	$	—	$	6
Effect of netting and allocation of collateral⁽¹⁾	3		—		—		3
Total	$	4	$	5	$	—	$	9

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

	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


⁽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 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)
	Three months ended September 30,
	2019			2018
Balance at July 1	$	176		$	(31	)
Realized and unrealized (losses) gains	(24		)	6
Settlements	27			13
Balance at September 30	$	179		$	(12	)
Change in unrealized gains (losses) relating to instruments still held at September 30	$	1		$	6
	Nine months ended September 30,
	2019			2018
Balance at January 1	$	179		$	(28	)
Realized and unrealized (losses) gains	(32		)	21
Allocated transmission instruments	—			3
Settlements	32			(8		)
Balance at September 30	$	179		$	(12	)
Change in unrealized gains (losses) relating to instruments still held at September 30	$	12		$	—


⁽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

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 8.

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 September 30 were as follows:



LONG-TERM, FIXED-PRICE ELECTRICITY POSITIONS PRICE INPUTS

Settlement year		Price per MWh					Weighted-average price per MWh
2019	$	21.60	to	$	57.20	$	38.29
2018		20.40	to		57.70		38.87

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 8.

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

Fair Value of Financial Instruments

The fair values of certain of our financial instruments (cash, accounts and notes receivable, dividends receivable from discontinued operations, 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 Condensed Consolidated Balance Sheets.



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	September 30, 2019
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates	$	712	$	—	$	735	$	—	$	735
Long-term amounts due to unconsolidated affiliates	39		—		38		—		38
Total long-term debt⁽¹⁾	21,554		—		23,142		26		23,168
SDG&E:
Total long-term debt⁽²⁾	$	5,141	$	—	$	5,780	$	—	$	5,780
SoCalGas:
Total long-term debt⁽³⁾	$	3,809	$	—	$	4,290	$	—	$	4,290

	December 31, 2018
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates	$	644	$	—	$	648	$	4	$	652
Long-term amounts due to unconsolidated affiliates	37		—		35		—		35
Total long-term debt⁽⁴⁾⁽⁵⁾	21,340		—		20,616		247		20,863
SDG&E:
Total long-term debt⁽⁴⁾⁽⁶⁾	$	4,996	$	—	$	4,897	$	220	$	5,117
SoCalGas:
Total long-term debt⁽⁷⁾	$	3,459	$	—	$	3,505	$	—	$	3,505


⁽¹⁾	Before reductions of unamortized discount and debt issuance costs of $221 million and excluding finance lease obligations of $1,285 million.


⁽²⁾	Before reductions of unamortized discount and debt issuance costs of $49 million and excluding finance lease obligations of $1,270 million.


⁽³⁾	Before reductions of unamortized discount and debt issuance costs of $35 million and excluding finance lease obligations of $15 million.


⁽⁴⁾	Level 3 instruments include $220 million related to Otay Mesa VIE.


⁽⁵⁾	Before reductions of unamortized discount and debt issuance costs of $206 million and excluding build-to-suit and capital lease obligations of $1,413 million.


⁽⁶⁾	Before reductions of unamortized discount and debt issuance costs of $49 million and excluding capital lease obligations of $1,272 million.


⁽⁷⁾	Before reductions of unamortized discount and debt issuance costs of $32 million and excluding capital lease obligations of $3 million.

We provide the fair values for the securities held in the NDT related to SONGS in Note 10.

- 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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