FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2017

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, 2017 and December 31, 2016. 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. We have not changed the valuation techniques or types of inputs we use to measure recurring fair value during the nine months ended September 30, 2017.

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 at September 30, 2017 and December 31, 2016 in the tables below include the following:

▪

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 September 30, 2017 and December 31, 2016.

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.



RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
	Fair value at September 30, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	503	$	5	$	—	$	—		$	508
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	44		7		—		—			51
Municipal bonds	—		245		—		—			245
Other securities	—		210		—		—			210
Total debt securities	44		462		—		—			506
Total nuclear decommissioning trusts(2)	547		467		—		—			1,014
Interest rate and foreign exchange instruments	—		135		—		—			135
Commodity contracts not subject to rate recovery	6		12		—		2			20
Commodity contracts subject to rate recovery	—		2		122		16			140
Total	$	553	$	616	$	122	$	18		$	1,309

Liabilities:
Interest rate and foreign exchange instruments	$	—	$	194	$	—	$	—		$	194
Commodity contracts not subject to rate recovery	—		4		—		—			4
Commodity contracts subject to rate recovery	23		7		159		(23		)	166
Total	$	23	$	205	$	159	$	(23	)	$	364

	Fair value at December 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	508	$	—	$	—	$	—		$	508
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	36		16		—		—			52
Municipal bonds	—		206		—		—			206
Other securities	—		141		—		—			141
Total debt securities	36		363		—		—			399
Total nuclear decommissioning trusts(2)	544		363		—		—			907
Interest rate and foreign exchange instruments	—		9		—		—			9
Commodity contracts not subject to rate recovery	—		15		—		9			24
Commodity contracts subject to rate recovery	1		3		96		32			132
Total	$	545	$	390	$	96	$	41		$	1,072

Liabilities:
Interest rate and foreign exchange instruments	$	—	$	252	$	—	$	—		$	252
Commodity contracts not subject to rate recovery	16		11		—		(17		)	10
Commodity contracts subject to rate recovery	19		8		170		(18		)	179
Total	$	35	$	271	$	170	$	(35	)	$	441


(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.


(2)	Excludes cash balances and cash equivalents.



RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
	Fair value at September 30, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	503	$	5	$	—	$	—		$	508
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	44		7		—		—			51
Municipal bonds	—		245		—		—			245
Other securities	—		210		—		—			210
Total debt securities	44		462		—		—			506
Total nuclear decommissioning trusts(2)	547		467		—		—			1,014
Commodity contracts subject to rate recovery	—		—		122		15			137
Total	$	547	$	467	$	122	$	15		$	1,151

Liabilities:
Interest rate instruments	$	—	$	17	$	—	$	—		$	17
Commodity contracts subject to rate recovery	23		5		159		(23		)	164
Total	$	23	$	22	$	159	$	(23	)	$	181

	Fair value at December 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	508	$	—	$	—	$	—		$	508
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	36		16		—		—			52
Municipal bonds	—		206		—		—			206
Other securities	—		141		—		—			141
Total debt securities	36		363		—		—			399
Total nuclear decommissioning trusts(2)	544		363		—		—			907
Commodity contracts not subject to rate recovery	—		—		—		1			1
Commodity contracts subject to rate recovery	1		2		96		30			129
Total	$	545	$	365	$	96	$	31		$	1,037

Liabilities:
Interest rate instruments	$	—	$	25	$	—	$	—		$	25
Commodity contracts subject to rate recovery	17		7		170		(16		)	178
Total	$	17	$	32	$	170	$	(16	)	$	203


(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.


(2)	Excludes cash balances and cash equivalents.



RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
	Fair value at September 30, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Commodity contracts subject to rate recovery	$	—	$	2	$	—	$	1		$	3
Total	$	—	$	2	$	—	$	1		$	3

Liabilities:
Commodity contracts subject to rate recovery	$	—	$	2	$	—	$	—		$	2
Total	$	—	$	2	$	—	$	—		$	2

	Fair value at December 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
Assets:
Commodity contracts not subject to rate recovery	$	—	$	—	$	—	$	1		$	1
Commodity contracts subject to rate recovery	—		1		—		2			3
Total	$	—	$	1	$	—	$	3		$	4

Liabilities:
Commodity contracts subject to rate recovery	$	2	$	1	$	—	$	(2	)	$	1
Total	$	2	$	1	$	—	$	(2	)	$	1


(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
(Dollars in millions)
	Three months ended September 30,
	2017			2016
Balance at July 1	$	(90	)	$	24
Realized and unrealized gains (losses)	30			(145		)
Settlements	23			34
Balance at September 30	$	(37	)	$	(87	)
Change in unrealized gains (losses) relating to
instruments still held at September 30	$	38		$	(114	)



	Nine months ended September 30,
	2017			2016
Balance at January 1	$	(74	)	$	19
Realized and unrealized gains (losses)	14			(138		)
Settlements	23			32
Balance at September 30	$	(37	)	$	(87	)
Change in unrealized gains (losses) relating to
instruments still held at September 30	$	26		$	(111	)

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 and long-term, fixed-price electricity positions on an ongoing basis. 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 CAISO, an objective source. Annual auction prices are published once a year, typically in the middle of November, and are the basis for valuation for the following year. 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. For CRRs settling from January 1, 2017 to December 31, 2017, the auction price inputs ranged from $(12) per MWh to $7 per MWh at a

given location, and for CRRs settling from January 1, 2016 to December 31, 2016, the auction price inputs ranged from $(24) per MWh to $10 per MWh at a given location. 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.

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. These inputs range from $21.35 per MWh to $48.97 per MWh at September 30, 2017. 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 7.

Realized gains and losses associated with CRRs and long-term electricity positions, which are included in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Condensed 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, temporary investments, 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 Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016:



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	September 30, 2017
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates(1)	$	476	$	—	$	346	$	92	$	438
Total long-term debt(2)(3)	15,459		—		15,930		464		16,394
SDG&E:
Total long-term debt(3)(4)	$	4,871	$	—	$	5,029	$	297	$	5,326
SoCalGas:
Total long-term debt(5)	$	3,009	$	—	$	3,169	$	—	$	3,169

	December 31, 2016
	Carrying amount		Fair value
	Carrying amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates(1)	$	184	$	—	$	91	$	84	$	175
Total long-term debt(2)(3)	15,068		—		15,455		492		15,947
SDG&E:
Total long-term debt(3)(4)	$	4,654	$	—	$	4,727	$	305	$	5,032
SoCalGas:
Total long-term debt(5)	$	3,009	$	—	$	3,131	$	—	$	3,131


(1)	Excluding accumulated interest outstanding of $31 million and $17 million at September 30, 2017 and December 31, 2016, respectively, and excluding foreign currency translation of $(1) million on a Mexican peso-denominated loan at September 30, 2017.

(2)

Before reductions for unamortized discount (net of premium) and debt issuance costs of $112 million and $109 million at September 30, 2017 and December 31, 2016, respectively, and excluding build-to-suit and capital lease obligations of $879 million and $383 million at September 30, 2017 and December 31, 2016, respectively. 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.


(3)	Level 3 instruments include $297 million and $305 million at September 30, 2017 and December 31, 2016, respectively, related to Otay Mesa VIE.


(4)	Before reductions for unamortized discount and debt issuance costs of $47 million and $45 million at September 30, 2017 and December 31, 2016, respectively, and excluding capital lease obligations of $734 million and $240 million at September 30, 2017 and December 31, 2016, respectively.


(5)	Before reductions for unamortized discount and debt issuance costs of $25 million and $27 million at September 30, 2017 and December 31, 2016, respectively, and excluding capital lease obligations of $1 million at September 30, 2017.

We determine the fair value of certain long-term amounts due from unconsolidated affiliates and long-term debt based on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value certain other long-term amounts due from unconsolidated affiliates using a perpetuity approach based on the obligation’s fixed interest rate, the absence of a stated maturity date and a discount rate reflecting local borrowing costs (Level 3). 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 NDT related to SONGS in Note 9.NON-RECURRING FAIR VALUE MEASURES

TdM

In February 2016, management approved a plan to market and sell Sempra Mexico’s TdM, a natural gas-fired power plant, and classified it as held for sale on the Sempra Energy Consolidated Balance Sheet, as we discuss in Note 3 above and in Note 3 of the Notes to Consolidated Financial Statements in the Annual Report. In connection with the sales process, Sempra Mexico received a purchase price offer resulting from negotiations with an active market participant. This 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, recorded in Other Impairment Losses on Sempra Energy’s Condensed Consolidated Statements of Operations. The purchase price offer is considered to be a Level 2 input in the fair value hierarchy, as it represents an observable pricing input.

The following table summarizes significant inputs impacting this non-recurring fair value measure:

NON-RECURRING FAIR VALUE MEASURE – SEMPRA ENERGY CONSOLIDATED

(Dollars in millions)

Estimated

fair

value

Valuation technique

Fair

value

hierarchy

% of

fair value

measurement

Inputs used to

develop

measurement

Range of

inputs

TdM

(1)

Market approach

Level 2

100%

Purchase price offer

100%

(1)

At measurement date of June 30, 2017. At September 30, 2017, TdM has a carrying value of $70 million, reflecting subsequent business activity, and is classified as held for sale.

- 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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