DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTSWe use derivative instruments primarily to manage exposures arising in the normal course of business. Our principal exposures are commodity market risk, benchmark interest rate risk and foreign exchange rate exposures. Our use of derivatives for these risks is integrated into the economic management of our anticipated revenues, anticipated expenses, assets and liabilities. Derivatives may be effective in mitigating these risks (1) that could lead to declines in anticipated revenues or increases in anticipated expenses, or (2) that could cause our asset values to fall or our liabilities to increase. Accordingly, our derivative activity summarized below generally represents an impact that is intended to offset associated revenues, expenses, assets or liabilities that are not included in the tables below.

In certain cases, we apply the normal purchase or sale exception to derivative instruments and have other commodity contracts that are not derivatives. These contracts are not recorded at fair value and are therefore excluded from the disclosures below.

In all other cases, we record derivatives at fair value on the Condensed Consolidated Balance Sheets. We have derivatives that are (1) cash flow hedges, (2) fair value hedges, or (3) undesignated. Depending on the applicability of hedge accounting and, for the California Utilities and other operations subject to regulatory accounting, the requirement to pass impacts through to customers, the impact of derivative instruments may be offset in OCI (cash flow hedges), on the balance sheet (regulatory offsets), or recognized in earnings (fair value hedges and undesignated derivatives not subject to rate recovery). We classify cash flows from the principal settlements of cross-currency swaps that hedge exposure related to Mexican peso-denominated debt as financing activities and settlements of other derivative instruments as operating activities on the Condensed Consolidated Statements of Cash Flows.

HEDGE ACCOUNTING

We may designate a derivative as a cash flow hedging instrument if it effectively converts anticipated cash flows associated with revenues or expenses to a fixed dollar amount. We may utilize cash flow hedge accounting for derivative commodity instruments, foreign currency instruments and interest rate instruments. Designating cash flow hedges is dependent on the business context in which the instrument is being used, the effectiveness of the instrument in offsetting the risk that the future cash flows of a given revenue or expense item may vary, and other criteria.

ENERGY DERIVATIVES

Our market risk is primarily related to natural gas and electricity price volatility and the specific physical locations where we transact. We use energy derivatives to manage these risks. The use of energy derivatives in our various businesses depends on the particular energy market, and the operating and regulatory environments applicable to the business, as follows:

▪The California Utilities use natural gas and electricity derivatives, for the benefit of customers, with the objective of managing price risk and basis risks, and stabilizing and lowering natural gas and electricity costs. These derivatives include fixed-price natural gas and electricity positions, options, and basis risk instruments, which are either exchange-traded or over-the-counter financial instruments, or bilateral physical transactions. This activity is governed by risk management and transacting activity plans that have been filed with and approved by the CPUC. Natural gas and electricity derivative activities are recorded as commodity costs that are offset by regulatory account balances and are recovered in rates. Net commodity cost impacts on the Condensed Consolidated Statements of Operations are reflected in Cost of Electric Fuel and Purchased Power or in Cost of Natural Gas.

▪SDG&E is allocated and may purchase CRRs, which serve to reduce the regional electricity price volatility risk that may result from local transmission capacity constraints. Unrealized gains and losses do not impact earnings, as they are offset by regulatory account balances. Realized gains and losses associated with CRRs, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Condensed Consolidated Statements of Operations.

▪Sempra Mexico and Sempra LNG may use natural gas and electricity derivatives, as appropriate, to optimize the earnings of their assets which support the following businesses: LNG, natural gas transportation and storage, and power generation. Gains and losses associated with undesignated derivatives are recognized in Energy-Related Businesses Revenues or in Energy-Related Businesses Cost of Sales on the Condensed Consolidated Statements of Operations. Certain of these derivatives may also be designated as cash flow hedges. Sempra Mexico may also use natural gas energy derivatives with the objective of managing price risk and lowering natural gas prices at its distribution operations. These derivatives, which are recorded as commodity costs that are offset by regulatory account balances and recovered in rates, are recognized in Cost of Natural Gas on the Condensed Consolidated Statements of Operations.

▪From time to time, our various businesses, including the California Utilities, may use other energy derivatives to hedge exposures such as the price of vehicle fuel and greenhouse gas allowances.

The following table summarizes net energy derivative volumes.

NET ENERGY DERIVATIVE VOLUMES
(Quantities in millions)
Commodity	Unit of measure	September 30, 2020	December 31, 2019
Sempra Energy Consolidated:
Natural gas	MMBtu	19	32
Electricity	MWh	2	2
Congestion revenue rights	MWh	43	48
SDG&E:
Natural gas	MMBtu	23	37
Electricity	MWh	1	2
Congestion revenue rights	MWh	43	48
SoCalGas:
Natural gas	MMBtu	—	2

In addition to the amounts noted above, we use commodity derivatives to manage risks associated with the physical locations of contractual obligations and assets, such as natural gas purchases and sales.

INTEREST RATE DERIVATIVES

We are exposed to interest rates primarily as a result of our current and expected use of financing. The California Utilities, as well as Sempra Energy and its other subsidiaries and JVs, periodically enter into interest rate derivative agreements intended to moderate our exposure to interest rates and to lower our overall costs of borrowing. In addition, we may utilize interest rate swaps, typically designated as cash flow hedges, to lock in interest rates on outstanding debt or in anticipation of future financings.

The following table presents the net notional amounts of our interest rate derivatives, excluding JVs.

INTEREST RATE DERIVATIVES
(Dollars in millions)
	September 30, 2020			December 31, 2019
	Notional debt		Maturities	Notional debt		Maturities
Sempra Energy Consolidated:
Cash flow hedges	$	1,500	2020-2034	$	1,445	2020-2034

FOREIGN CURRENCY DERIVATIVES

We utilize cross-currency swaps to hedge exposure related to Mexican peso-denominated debt at our Mexican subsidiaries and JVs. These cash flow hedges exchange our Mexican peso-denominated principal and interest payments into the U.S. dollar and swap Mexican variable interest rates for U.S. fixed interest rates. From time to time, Sempra Mexico and its JVs may use other foreign currency derivatives to hedge exposures related to cash flows associated with revenues from contracts denominated in Mexican pesos that are indexed to the U.S. dollar.

We are also exposed to exchange rate movements at our Mexican subsidiaries and JVs, which have U.S. dollar-denominated cash balances, receivables, payables and debt (monetary assets and liabilities) that give rise to Mexican currency exchange rate movements for Mexican income tax purposes. They also have deferred income tax assets and liabilities denominated in the Mexican peso, which must be translated to U.S. dollars for financial reporting purposes. In addition, monetary assets and liabilities and certain nonmonetary assets and liabilities are adjusted for Mexican inflation for Mexican income tax purposes. We utilize foreign currency derivatives as a means to manage the risk of exposure to significant fluctuations in our income tax expense and equity earnings from these impacts; however, we generally do not hedge our deferred income tax assets and liabilities or for inflation.

We also utilized foreign currency derivatives to hedge exposure to fluctuations in the Peruvian sol and Chilean peso related to the sales of our operations in Peru and Chile, respectively.

The following table presents the net notional amounts of our foreign currency derivatives, excluding JVs.

FOREIGN CURRENCY DERIVATIVES
(Dollars in millions)
	September 30, 2020			December 31, 2019
	Notional amount		Maturities	Notional amount		Maturities
Sempra Energy Consolidated:
Cross-currency swaps	$	306	2020-2023	$	306	2020-2023
Other foreign currency derivatives	1,341		2020-2022	1,796		2020-2021

FINANCIAL STATEMENT PRESENTATION

The Condensed Consolidated Balance Sheets reflect the offsetting of net derivative positions and cash collateral with the same counterparty when a legal right of offset exists. The following tables provide the fair values of derivative instruments on the Condensed Consolidated Balance Sheets, including the amount of cash collateral receivables that were not offset because the cash collateral was in excess of liability positions.

DERIVATIVE INSTRUMENTS ON THE CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
	September 30, 2020
	Other current assets(1)		Other long-term assets		Other current liabilities		Deferred credits and other
Sempra Energy Consolidated:
Derivatives designated as hedging instruments:
Interest rate and foreign exchange instruments	$	6	$	2	$	(22)	$	(188)
Derivatives not designated as hedging instruments:
Foreign exchange instruments	13		—		(22)		—
Associated offsetting foreign exchange instruments	(13)		—		13		—
Commodity contracts not subject to rate recovery	102		7		(114)		(7)
Associated offsetting commodity contracts	(100)		(4)		100		4
Commodity contracts subject to rate recovery	17		84		(32)		(29)
Associated offsetting commodity contracts	(2)		—		2		—
Net amounts presented on the balance sheet	23		89		(75)		(220)
Additional cash collateral for commodity contracts not subject to rate recovery	41		—		—		—
Additional cash collateral for commodity contracts subject to rate recovery	24		—		—		—
Total(2)	$	88	$	89	$	(75)	$	(220)
SDG&E:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	14	$	84	$	(26)	$	(29)
Associated offsetting commodity contracts	(2)		—		2		—
Net amounts presented on the balance sheet	12		84		(24)		(29)
Additional cash collateral for commodity contracts subject to rate recovery	22		—		—		—
Total(2)	$	34	$	84	$	(24)	$	(29)
SoCalGas:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	3	$	—	$	(6)	$	—
Net amounts presented on the balance sheet	3		—		(6)		—
Additional cash collateral for commodity contracts subject to rate recovery	2		—		—		—
Total	$	5	$	—	$	(6)	$	—

(1)    Included in Current Assets: Fixed-Price Contracts and Other Derivatives for SDG&E.

(2)    Normal purchase contracts previously measured at fair value are excluded.

DERIVATIVE INSTRUMENTS ON THE CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
	December 31, 2019
	Other current assets(1)		Other long-term assets		Other current liabilities		Deferred credits and other
Sempra Energy Consolidated:
Derivatives designated as hedging instruments:
Interest rate and foreign exchange instruments	$	—	$	3	$	(17)	$	(140)
Derivatives not designated as hedging instruments:
Foreign exchange instruments	41		—		(20)		—
Associated offsetting foreign exchange instruments	(20)		—		20		—
Commodity contracts not subject to rate recovery	34		11		(41)		(10)
Associated offsetting commodity contracts	(32)		(2)		32		2
Commodity contracts subject to rate recovery	41		76		(47)		(47)
Associated offsetting commodity contracts	(6)		(3)		6		3
Associated offsetting cash collateral	—		—		14		—
Net amounts presented on the balance sheet	58		85		(53)		(192)
Additional cash collateral for commodity contracts not subject to rate recovery	43		—		—		—
Additional cash collateral for commodity contracts subject to rate recovery	25		—		—		—
Total(2)	$	126	$	85	$	(53)	$	(192)
SDG&E:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	30	$	76	$	(41)	$	(47)
Associated offsetting commodity contracts	(4)		(3)		4		3
Associated offsetting cash collateral	—		—		14		—
Net amounts presented on the balance sheet	26		73		(23)		(44)
Additional cash collateral for commodity contracts subject to rate recovery	16		—		—		—
Total(2)	$	42	$	73	$	(23)	$	(44)
SoCalGas:
Derivatives not designated as hedging instruments:
Commodity contracts subject to rate recovery	$	11	$	—	$	(6)	$	—
Associated offsetting commodity contracts	(2)		—		2		—
Net amounts presented on the balance sheet	9		—		(4)		—
Additional cash collateral for commodity contracts subject to rate recovery	9		—		—		—
Total	$	18	$	—	$	(4)	$	—

(1)    Included in Current Assets: Fixed-Price Contracts and Other Derivatives for SDG&E.

(2)    Normal purchase contracts previously measured at fair value are excluded.

The table below includes the effects of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations and in OCI and AOCI:

CASH FLOW HEDGE IMPACTS
(Dollars in millions)
	Pretax gain (loss) recognized in OCI					Pretax (loss) gain reclassified from AOCI into earnings
	Three months ended September 30,					Three months ended September 30,
	2020		2019		Location	2020		2019
Sempra Energy Consolidated:
Interest rate and foreign exchange instruments(1)	$	14	$	(7)	Interest Expense(1)	$	(3)	$	(1)
					Other Income (Expense), Net	4		(5)
Interest rate and foreign exchange instruments	24		(62)		Equity Earnings	(5)		(2)
Foreign exchange instruments	(2)		1
Total	$	36	$	(68)		$	(4)	$	(8)
SDG&E:
Interest rate instruments(1)	$	—	$	—	Interest Expense(1)	$	—	$	(1)
SoCalGas:
Interest rate instruments	$	—	$	—	Interest Expense	$	—	$	(1)
	Nine months ended September 30,					Nine months ended September 30,
	2020		2019		Location	2020		2019
Sempra Energy Consolidated:
Interest rate and foreign exchange instruments(1)	$	(73)	$	(25)	Interest Expense(1)	$	(7)	$	(2)
					Other Income (Expense), Net	(33)		—
Interest rate instruments	—		—		(Loss) Gain on Sale of Assets	—		(10)
Interest rate and foreign exchange instruments	(166)		(222)		Equity Earnings	(6)		(3)
Foreign exchange instruments	14		(3)		Revenues: Energy- Related Businesses	2		(1)
					Other Income (Expense), Net	1		—
Total	$	(225)	$	(250)		$	(43)	$	(16)
SDG&E:
Interest rate instruments(1)	$	—	$	(1)	Interest Expense(1)	$	—	$	(3)
SoCalGas:
Interest rate instruments	$	—	$	—	Interest Expense	$	—	$	(1)

(1)    Amounts in 2019 include Otay Mesa VIE. All of SDG&E’s interest rate derivative activity relates to Otay Mesa VIE. On August 14, 2019, Otay Mesa Energy Center LLC paid in full its variable-rate loan and terminated its interest rate swaps.

For Sempra Energy Consolidated, we expect that net losses of $72 million, which are net of income tax benefit, that are currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. SoCalGas expects that $1 million of losses, net of income tax benefit, that are currently recorded in AOCI related to cash flow hedges will be reclassified into earnings during the next 12 months as the hedged items affect earnings. Actual amounts ultimately reclassified into earnings depend on the interest rates in effect when derivative contracts mature.

For all forecasted transactions, the maximum remaining term over which we are hedging exposure to the variability of cash flows at September 30, 2020 is approximately 14 years for Sempra Energy Consolidated. The maximum remaining term for which we are hedging exposure to the variability of cash flows at our equity method investees is 19 years.

The following table summarizes the effects of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Operations.

UNDESIGNATED DERIVATIVE IMPACTS
(Dollars in millions)
		Pretax gain (loss) on derivatives recognized in earnings
		Three months ended September 30,				Nine months ended September 30,
	Location	2020		2019		2020		2019
Sempra Energy Consolidated:
Foreign exchange instruments	Other Income (Expense), Net	$	15	$	(12)	$	(97)	$	7
Commodity contracts not subject to rate recovery	Revenues: Energy-Related Businesses	(39)		(8)		25		9
Commodity contracts subject to rate recovery	Cost of Electric Fuel and Purchased Power	41		18		41		(7)
Commodity contracts subject to rate recovery	Cost of Natural Gas	—		(3)		(6)		(1)
Total		$	17	$	(5)	$	(37)	$	8
SDG&E:
Commodity contracts subject to rate recovery	Cost of Electric Fuel and Purchased Power	$	41	$	18	$	41	$	(7)
SoCalGas:
Commodity contracts subject to rate recovery	Cost of Natural Gas	$	—	$	(3)	$	(6)	$	(1)

CONTINGENT FEATURES

For Sempra Energy Consolidated, SDG&E and SoCalGas, certain of our derivative instruments contain credit limits which vary depending on our credit ratings. Generally, these provisions, if applicable, may reduce our credit limit if a specified credit rating agency reduces our ratings. In certain cases, if our credit ratings were to fall below investment grade, the counterparty to these derivative liability instruments could request immediate payment or demand immediate and ongoing full collateralization. 

For Sempra Energy Consolidated, the total fair value of this group of derivative instruments in a net liability position at September 30, 2020 and December 31, 2019 was $8 million and $21 million, respectively. For SoCalGas, the total fair value of this group of derivative instruments in a net liability position at September 30, 2020 and December 31, 2019 was $7 million and $4 million, respectively. At September 30, 2020, if the credit ratings of Sempra Energy or SoCalGas were reduced below investment grade, $8 million and $7 million, respectively, of additional assets could be required to be posted as collateral for these derivative contracts.

For Sempra Energy Consolidated, SDG&E and SoCalGas, some of our derivative contracts contain a provision that would permit the counterparty, in certain circumstances, to request adequate assurance of our performance under the contracts. Such additional assurance, if needed, is not material and is not included in the amounts above.