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FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 31, 2014
Notes to Consolidated Financial Statements [Abstract]  
Fair Value Measurements

NOTE 10. 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 as of December 31, 2014 and 2013. 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 9 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 at December 31, 2014 and 2013 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 may also manage foreign exchange rate exposures using derivatives. 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)
Fair value at December 31, 2014
Level 1Level 2Level 3Netting(1)Total
Assets:
Nuclear decommissioning trusts
Equity securities$655$―$―$―$655
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies6247――109
Municipal bonds ―129――129
Other securities ―207――207
Total debt securities62383――445
Total nuclear decommissioning trusts(2)717383――1,100
Interest rate and foreign exchange instruments―48――48
Commodity contracts not subject to rate recovery2816―(11)33
Commodity contracts subject to rate recovery―110714122
Total$745$448$107$3$1,303
Liabilities:
Interest rate and foreign exchange instruments $―$155$―$―$155
Commodity contracts not subject to rate recovery39―(4)8
Commodity contracts subject to rate recovery―52―(36)16
Total$3$216$―$(40)$179
Fair value at December 31, 2013
Level 1Level 2Level 3Netting(1)Total
Assets:
Nuclear decommissioning trusts
Equity securities$614$―$―$―$614
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies5958――117
Municipal bonds―111――111
Other securities―153――153
Total debt securities59322――381
Total nuclear decommissioning trusts(2)673322――995
Interest rate and foreign exchange instruments―56――56
Commodity contracts not subject to rate recovery15―1723
Commodity contracts subject to rate recovery219931133
Total$676$384$99$48$1,207
Liabilities:
Interest rate and foreign exchange instruments$―$117$―$―$117
Commodity contracts not subject to rate recovery48―(5)7
Commodity contracts subject to rate recovery―13――13
Total$4$138$―$(5)$137
(1)Includes the effect of the contractual ability to settle contracts under master netting agreements with cash collateral, as well as cash collateral not offset.
(2)Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES ― SDG&E
(Dollars in millions)
Fair value at December 31, 2014
Level 1Level 2Level 3Netting(1)Total
Assets:
Nuclear decommissioning trusts
Equity securities$655$―$―$―$655
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies6247――109
Municipal bonds ―129――129
Other securities ―207――207
Total debt securities62383――445
Total nuclear decommissioning trusts(2)717383――1,100
Commodity contracts subject to rate recovery――10712119
Total$717$383$107$12$1,219
Liabilities:
Interest rate instruments$―$47$―$―$47
Commodity contracts not subject to rate recovery1――(1)―
Commodity contracts subject to rate recovery―51―(36)15
Total$1$98$―$(37)$62
Fair value at December 31, 2013
Level 1Level 2Level 3Netting(1)Total
Assets:
Nuclear decommissioning trusts
Equity securities$614$―$―$―$614
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies5958――117
Municipal bonds ―111――111
Other securities ―153――153
Total debt securities59322――381
Total nuclear decommissioning trusts(2)673322――995
Commodity contracts not subject to rate recovery―――11
Commodity contracts subject to rate recovery119929130
Total$674$323$99$30$1,126
Liabilities:
Interest rate instruments$―$55$―$―$55
Commodity contracts subject to rate recovery―12――12
Total$―$67$―$―$67
(1)Includes the effect of the contractual ability to settle contracts under master netting agreements with cash collateral, as well as cash collateral not offset.
(2)Excludes cash balances and cash equivalents.

RECURRING FAIR VALUE MEASURES ― SOCALGAS
(Dollars in millions)
Fair value at December 31, 2014
Level 1Level 2Level 3Netting(1)Total
Assets:
Commodity contracts subject to rate recovery$―$1$―$2$3
Total$―$1$―$2$3
Liabilities:
Commodity contracts not subject to rate recovery$2$―$―$(2)$―
Commodity contracts subject to rate recovery―1――1
Total$2$1$―$(2)$1
Fair value at December 31, 2013
Level 1Level 2Level 3Netting(1)Total
Assets:
Commodity contracts not subject to rate recovery$―$―$―$2$2
Commodity contracts subject to rate recovery1――23
Total$1$―$―$4$5
Liabilities:
Commodity contracts subject to rate recovery$―$1$―$―$1
Total$―$1$―$―$1
(1)Includes the effect of the contractual ability to settle contracts under master netting agreements 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 congestion revenue rights (CRRs) classified as Level 3 in the fair value hierarchy for Sempra Energy Consolidated and SDG&E:

LEVEL 3 RECONCILIATIONS
(Dollars in millions)
Years ended December 31,
201420132012
Balance at January 1$99$61$23
Realized and unrealized gains151131
Allocated transmission instruments195158
Settlements(26)(24)(51)
Balance at December 31$107$99$61
Change in unrealized gains or losses relating to
instruments still held at December 31$8$11$17

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. SDG&E expects all costs related to CRRs 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. The impact associated with discounting is negligible. Because auction prices are a less observable input, these instruments are classified as Level 3. At December 31, 2014, the auction prices ranged from $(16) 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. At December 31, 2013, the auction prices ranged from $(6) per MWh to $12 per MWh. 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 9. Realized gains and losses associated with CRRs are recorded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities and therefore also do not affect earnings.

Derivative Positions Net of Cash Collateral

Each Consolidated Balance Sheet reflects the offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when management believes a legal right of offset exists.

The following table provides the amount of fair value of cash collateral receivables that were not offset in the Consolidated Balance Sheets at December 31, 2014 and 2013:

December 31,
(Dollars in millions)20142013
Sempra Energy Consolidated$14$48
SDG&E1230
SoCalGas24

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 December 31:

FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
December 31, 2014
CarryingFair Value
amountLevel 1Level 2Level 3Total
Sempra Energy Consolidated:
Total long-term debt(1)(2)$12,347$―$12,782$917$13,699
Preferred stock of subsidiary20―23―23
SDG&E:
Total long-term debt(2)(3)$4,461$―$4,563$425$4,988
SoCalGas:
Total long-term debt(4)$1,913$―$2,124$―$2,124
Preferred stock22―25―25
December 31, 2013
CarryingFair Value
amountLevel 1Level 2Level 3Total
Sempra Energy Consolidated:
Total long-term debt(1)(2)$12,022$―$11,925$751$12,676
Preferred stock of subsidiary20―20―20
SDG&E:
Total long-term debt(2)(3)$4,386$―$4,226$335$4,561
SoCalGas:
Total long-term debt(4)$1,413$―$1,469$―$1,469
Preferred stock22―22―22
(1)Before reductions for unamortized discount (net of premium) of $21 million and $17 million at December 31, 2014 and 2013, respectively, and excluding build-to-suit and capital leases of $310 million and $195 million at December 31, 2014 and 2013, respectively, and commercial paper classified as long-term debt of $200 million at December 31, 2013. We discuss our long-term debt in Note 5.
(2)Level 3 instruments include $325 million and $335 million at December 31, 2014 and 2013, respectively, related to Otay Mesa VIE.
(3)Before reductions for unamortized discount of $11 million at December 31, 2014 and 2013, and excluding capital leases of $234 million and $179 million at December 31, 2014 and 2013, respectively.
(4)Before reductions for unamortized discount of $8 million and $4 million at December 31, 2014 and 2013, respectively, and excluding capital leases of $1 million and $2 million at December 31, 2014 and 2013, respectively.

We base the fair value of certain 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 provide the fair values for the securities held in the nuclear decommissioning trust funds related to SONGS in Note 13 below.

Non-Recurring Fair Value Measures – Sempra Energy Consolidated

Energía Sierra Juárez

In July 2014, Sempra Mexico completed the sale of a 50-percent interest in the 155-MW first phase of its Energía Sierra Juárez wind project to a wholly owned subsidiary of InterGen N.V. for cash proceeds of $24 million, net of $2 million cash sold, as discussed in Note 3. Sempra Mexico recognized a pretax gain on the sale of $19 million ($14 million after-tax). Upon deconsolidation, our equity method investment in Energía Sierra Juárez was measured at fair value, which resulted in a $7 million after-tax gain attributable to a remeasurement of the retained investment to fair value. The fair value measurement was based on the cash sales price of $26 million paid by InterGen N.V., a nonrelated party and market participant. Use of this market participant input as the indicator of fair value is a Level 2 measurement in the fair value hierarchy.

Rockies Express

We discuss non-recurring fair value measures and the associated accounting impact on our investment in Rockies Express in Note 4.

In 2012, we recorded a $400 million pretax impairment of our investment in Rockies Express. In the second quarter of 2012, the noncash impairment charge of $300 million ($179 million after-tax) primarily resulted from the continuing decline in basis differential associated with shale gas production zones coming on line, assumptions related to the re-contracting of the long-term transportation agreements, and the refinancing of the existing project level debt, discussed further below. The fair value measurement was significantly impacted by unobservable inputs (Level 3) as defined by the accounting guidance for fair value measurements, which we discuss in Note 1 under “Fair Value Measurements.” We considered a market participant’s view of the total value for Rockies Express, based on an estimation of the future cash distributions it would be able to generate, adjusted for our 25-percent ownership interest. To estimate future cash distributions, we considered factors impacting Rockies Express’ ability to pay future distributions including:

  • the extent to which future cash flows are hedged by capacity sales contracts and their duration (generally through 2019), as well as the creditworthiness of the various counterparties;
  • Rockies Express’ future financing needs, including the ability to secure borrowings at reasonable rates as well as potentially using operating cash to retire principal;
  • prospects for generating attractive revenues and cash flows beyond 2019, including natural gas’ future basis differentials (driven by the location and extent of future supply and demand) and alternative strategies potentially available to utilize the assets; and
  • discount rates commensurate with the risks inherent in the cash flows.

In the third quarter of 2012, KMI reached an agreement with Tallgrass, which closed in the fourth quarter of 2012, to sell its asset group as mandated by the FTC, which group included its interest in Rockies Express. Events in the third quarter of 2012 related to this agreement also provided us with additional market participant data. We therefore updated our analysis of the fair value of our investment in Rockies Express as of September 30, 2012 to reflect these additional inputs and recorded an additional impairment charge of $100 million ($60 million after-tax). This fair value measurement in the third quarter was based primarily on the Level 2 input. We believe this is useful and reliable information, but we considered that it may be impacted by the FTC’s requirement for KMI to sell its interest in Rockies Express. To reflect this uncertainty, our updated analysis included the less subjective Level 2 market participant input as the primary indicator of fair value, with less weight ascribed to value based on estimated discounted cash flows as discussed above and in the table below. The updates to the cash flow analysis used in determining fair value in the second quarter reflected discussions with Tallgrass as to the strategic direction they are planning to take with their equity partners for Rockies Express, as well as additional discussions with other market participants. Tallgrass became the operator of Rockies Express in November 2012.

We believe our analysis formed a reasonable estimate of the fair value of Rockies Express at the measurement date of September 30, 2012. This estimate included the material input described above, which was generally observable during the period most relevant to our analysis. Regarding the unobservable inputs, significant uncertainties exist with regard to REX’s ability to secure attractive revenues beyond 2019. Accordingly, our analysis suggested that the fair value of our investment in Rockies Express could be materially different from the value we estimated at that time. For example, if REX is able to sustain the level of revenues currently generated beyond 2019, the value of our investment in Rockies Express would be materially enhanced and the indicated value of our investment in Rockies Express could be significantly higher. Conversely, if REX is unable to sell its transport capacity at sufficient rates or in sufficient volumes beyond 2019, the fair value of our investment in Rockies Express could be materially lower than our carrying amount. Separately, future events involving Rockies Express equity could occur and may also provide additional information regarding the fair value of our investment in Rockies Express.

Sempra Natural Gas developed the models and scenarios used to measure the fair value of our investment in Rockies Express. This modeling used inputs from external sources as described above and in the table below, as well as internally available data, such as operating and maintenance budgets used for financial planning purposes. External experts that forecast the future price of natural gas at various physical locations were also engaged to help validate certain scenarios and modeling assumptions. The fair value measurements were reviewed in detail by Sempra Natural Gas’ financial management, as well as Sempra Energy’s financial management team.

The following table summarizes significant inputs impacting non-recurring fair value measures related to our investments in Energía Sierra Juárez and Rockies Express:

NON-RECURRING FAIR VALUE MEASURES ― SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
% of
EstimatedFairFair value
fairvaluemeasure-Range of
valueValuation techniquehierarchymentInputs used to develop measurementinputs
Investment in
Energía Sierra
Juárez$26(1)Market approachLevel 2100%Equity sale offer price100%
Investment in
Rockies Express$369(2)Market approachLevel 267%Equity sale offer price100%
Probability weightedLevel 333%Combined transportation rate assumption(3)6% - 78%
discounted cash flowCounterparty credit risk on existing contractsLow
Operation and maintenance escalation rate0% - 1%
Forecasted interest rate on debt to be refinanced5% - 10%
Discount rate8% - 10%
(1)At measurement date of July 16, 2014. At December 31, 2014, our investment in Energía Sierra Juárez had a carrying value of $25 million, reflecting subsequent equity method activity to record distributions and earnings.
(2)At measurement date of September 30, 2012. At December 31, 2014, our investment in Rockies Express had a carrying value of $340 million, reflecting subsequent equity method activity to record distributions and earnings.
(3)Transportation rate beyond existing contract terms as a percentage of current mean REX rates.