NEW ACCOUNTING STANDARDS

We describe below recent pronouncements that have had or may have a significant effect on our financial condition, results of operations, cash flows or disclosures.

ASU 2014-09, “Revenue from Contracts with Customers,” ASU 2015-14, “Deferral of the Effective Date,” ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”: ASU 2014-09 adds ASC 606 to provide accounting guidance for the recognition of revenue from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. Amending ASU 2014-09, ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10 clarifies the determination of whether a good or service is separately identifiable from other promises and revenue recognition related to licenses of intellectual property, and ASU 2016-12 provides guidance on transition, collectability, noncash consideration, and the presentation of sales and other similar taxes. The ASUs are codified in ASC 606.

ASU 2015-14 defers the effective date of ASC 606 by one year for all entities and permits early adoption on a limited basis. For public entities, ASC 606 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016, and is effective for interim periods in the year of adoption. We adopted ASC 606 on January 1, 2018, applying the modified retrospective transition method to all contracts as of January 1, 2018 and elected to use certain practical expedients available under the transition guidance. The impact from adoption was not material to our financial statements, and the timing of our revenue recognition has remained materially consistent before and after the adoption of ASC 606. The new revenue standard provides specific guidance for combining contracts, which will result in a prospective reclassification between cost of sales and revenues within our Sempra LNG & Midstream segment. This reclassification has no impact on Sempra Energy’s consolidated revenues or cost of sales. Our additional disclosures about the nature, amount, timing and uncertainty of revenues arising from contracts with customers will be included in our Notes to Consolidated Financial Statements beginning in the first quarter of 2018.

ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”: In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using net asset value per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively. There is an outstanding FASB exposure draft which clarifies that the prospective transition approach for equity investments without readily determinable fair values is meant only for instances in which the measurement alternative is elected.

For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. We adopted ASU 2016-01 on January 1, 2018 and it will not materially affect our financial condition, results of operations or cash flows.

ASU 2016-02, “Leases” and ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”: ASU 2016-02 requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating, and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting and ASC 606. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. ASU 2018-01 allows entities to elect a transition practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP.

For public entities, these ASUs are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes practical expedients that may be elected, which would allow entities to continue to account for leases that commence before the effective date of the standard in accordance with previous U.S. GAAP unless the lease is modified, except for the lessee requirement to begin recognizing right-of-use assets and lease liabilities for all operating leases on the balance sheet at the reporting date. We are currently evaluating the effect of the standards on our ongoing financial reporting and plan to adopt the standards on January 1, 2019. As part of our evaluation, we formed a steering committee comprised of members from relevant Sempra Energy business units, are compiling our population of contracts and are preparing our lease accounting assessments. Based on our assessment to date, we have determined that we will elect the practical expedients available under the transition guidance described above. We continue to monitor outstanding issues currently being addressed by the FASB, including guidance under a FASB exposure draft that would allow entities an optional transition method to apply ASU 2016-02 in the period of adoption rather than in the earliest period presented. Conclusions that the FASB reaches on outstanding issues may impact our application of these ASUs.

ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”: ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments. The standard introduces an “expected credit loss” impairment model that requires immediate recognition of estimated credit losses expected to occur over the remaining life of most financial assets measured at amortized cost, including trade and other receivables, loan commitments and financial guarantees. ASU 2016-13 also requires use of an allowance to record estimated credit losses on available-for-sale debt securities and expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the credit losses.

For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect of the standard on our ongoing financial reporting and have not yet selected the year in which we will adopt the standard.

ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments” and ASU 2016-18, “Restricted Cash”: ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows to reduce diversity in practice. Of the eight issues addressed in ASU 2016-15, we were impacted by the following issues:


▪	Issue 1 – debt prepayment or debt extinguishment costs


▪	Issue 3 – contingent consideration payments made after a business combination


▪	Issue 5 – proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies)

ASU 2016-18 requires amounts classified as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. A reconciliation between the balance sheet and the statement of cash flows must be disclosed when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. ASU 2016-15 and ASU 2016-18 must be adopted retrospectively. We early adopted ASU 2016-15 and ASU 2016-18 in the fourth quarter of 2017. Neither ASU impacted SoCalGas’ Statements of Cash Flows.

Upon adoption of ASU 2016-15 and ASU 2016-18, the Sempra Energy and SDG&E Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 were impacted as follows:



IMPACT FROM ADOPTION OF ASU 2016-15 AND ASU 2016-18
(Dollars in millions)
	Years ended December 31,
	2016									2015
	As previously reported			Effect of adoption			As adjusted			As previously reported			Effect of adoption			As adjusted
Sempra Energy Consolidated Statements of Cash Flows:
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities – other	$	63		$	(1	)	$	62		$	66		$	—		$	66
Changes in other assets	56			(7		)	49			(162		)	(7		)	(169		)
Net cash provided by operating activities	2,319			(8		)	2,311			2,905			(7		)	2,898

Cash flows from investing activities:
Expenditures for investments and acquisition of businesses, net of cash and cash equivalents acquired	(1,582		)	1,582			—			(200		)	200			—
Expenditures for investments and acquisitions, net of cash, cash equivalents and restricted cash acquired	—			(1,504		)	(1,504		)	—			(198		)	(198		)
Increases in restricted cash	(139		)	139			—			(100		)	100			—
Decreases in restricted cash	175			(175		)	—			93			(93		)	—
Other	—			9			9			1			8			9
Net cash used in investing activities	(4,886		)	51			(4,835		)	(2,885		)	17			(2,868		)

Cash flows from financing activities:
Other	(10		)	(11		)	(21		)	(17		)	(3		)	(20		)
Net cash provided by (used in) financing activities	2,513			(11		)	2,502			(173		)	(3		)	(176		)

Effect of exchange rate changes on cash and cash equivalents	—			—			—			(14		)	14			—
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			(3		)	(3		)	—			(14		)	(14		)

Decrease in cash and cash equivalents	(54		)	54			—			(167		)	167			—
Decrease in cash, cash equivalents, and restricted cash	—			(25		)	(25		)	—			(160		)	(160		)

Cash and cash equivalents, January 1	403			(403		)	—			570			(570		)	—
Cash, cash equivalents and restricted cash, January 1	—			450			450			—			610			610
Cash and cash equivalents, December 31	349			(349		)	—			403			(403		)	—
Cash, cash equivalents and restricted cash, December 31	—			425			425			—			450			450
SDG&E Consolidated Statements of Cash Flows:
Cash flows from operating activities:
Changes in other assets	$	(16	)	$	(4	)	$	(20	)	$	(122	)	$	(3	)	$	(125	)
Net cash provided by operating activities	1,327			(4		)	1,323			1,664			(3		)	1,661

Cash flows from investing activities:
Increases in restricted cash	(49		)	49			—			(39		)	39			—
Decreases in restricted cash	60			(60		)	—			35			(35		)	—
Other	—			6			6			—			5			5
Net cash used in investing activities	(1,319		)	(5		)	(1,324		)	(1,086		)	9			(1,077		)

Cash flows from financing activities:
Other⁽¹⁾	(4		)	(2		)	(6		)	(2		)	(2		)	(4		)
Net cash used in financing activities	(20		)	(2		)	(22		)	(566		)	(2		)	(568		)

(Decrease) increase in cash and cash equivalents	(12		)	12			—			12			(12		)	—
(Decrease) increase in cash, cash equivalents, and restricted cash	—			(23		)	(23		)	—			16			16

Cash and cash equivalents, January 1	20			(20		)	—			8			(8		)	—
Cash, cash equivalents and restricted cash, January 1	—			43			43			—			27			27
Cash and cash equivalents, December 31	8			(8		)	—			20			(20		)	—
Cash, cash equivalents and restricted cash, December 31	—			20			20			—			43			43

⁽¹⁾ Previously labeled “Debt issuance costs.”

ASU 2017-01, “Clarifying the Definition of a Business”: ASU 2017-01 narrows the definition of a business and provides a framework to assist entities in determining whether a transaction involves an asset or a business. Specifically, the ASU provides a “screen” for determining when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If the screen threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 must be applied prospectively on or after the effective date. Early adoption is permitted. We early adopted ASU 2017-01 on July 1, 2017.

ASU 2017-04, “Simplifying the Test for Goodwill Impairment”: ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will be required to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. For public entities, ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments are to be applied on a prospective basis. We have not yet selected the year in which we will adopt the standard.

ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”: ASU 2017-05 clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. For public entities, ASU 2017-05 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. Entities may apply a full retrospective or modified retrospective approach. Under a modified retrospective approach, entities are required to apply the guidance to any transactions that are not completed as of the adoption date. We adopted the standard in conjunction with our adoption of ASC 606 on January 1, 2018 using the modified retrospective transition method. As we discuss in Note 1, Sempra Renewables expects the formation of a tax equity arrangement to be completed in the first half of 2018. While the arrangement would be in the scope of this ASU, we do not expect it to have a material impact on our financial condition, results of operations or cash flows.

ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”: ASU 2017-07 requires the service cost component of net periodic benefit costs to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and the other components of net periodic benefit costs to be presented separately outside of operating income. The guidance also allows only the service cost component to be eligible for capitalization. For public entities, ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Amendments are to be applied retrospectively for presentation of costs and prospectively for capitalization of service costs. The guidance allows a practical expedient that permits use of previously disclosed service costs and other costs from the pension and other postretirement benefit plan note in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the statements of operations. We adopted the standard on January 1, 2018 and elected the practical expedient available under the transition guidance.

In 2018, we expect the adoption of ASU 2017-07 to have the following impact on our Consolidated Statements of Operations for the years ended December 31, 2017 and 2016:



EXPECTED IMPACT FROM ADOPTION OF ASU 2017-07
(Dollars in millions)
	Years ended December 31,
	2017				2016
	As reported		Recast		As reported		Recast
Sempra Energy Consolidated Statements of Operations:
Operation and maintenance	$	3,117	$	3,096	$	2,970	$	2,976
Other income, net	254		233		132		138
SDG&E Consolidated Statements of Operations:
Operation and maintenance	$	1,020	$	1,024	$	1,048	$	1,062
Operating income	713		709		990		976
Other income, net	66		70		50		64
SoCalGas Statements of Operations:



Operation and maintenance	$	1,479	$	1,474	$	1,385	$	1,391
Operating income	622		627		557		551
Other income, net	36		31		32		38

ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”: ASU 2017-12 changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge accounting results. More specifically, the guidance expands the exposures that can be hedged to align with an entity’s risk management strategies, alleviates documentation requirements, eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges and requires entities to present the entire change in the fair value of a hedging instrument in the same income statement line item as the earnings effect of the hedged item. For public entities, ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. If an entity early adopts ASU 2017-12 in an interim period, any transition adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Entities will adopt ASU 2017-12 by applying a modified retrospective approach to the accounting for existing hedging relationships and will prospectively apply the new presentation and disclosure requirements. Transition elections are available for all hedges that exist at the date of adoption. We early adopted ASU 2017-12 on January 1, 2018, and it will not materially affect our financial condition, results of operations or cash flows.

ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”: ASU 2018-02 contains amendments that allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the TCJA. Under ASU 2018-02, an entity will be required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from AOCI. The amendments in this update can be applied either as of the beginning of the period of adoption or retrospectively as of the date of enactment of the TCJA and to each period in which the effect of the TCJA is recognized. For public entities, ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted. We are currently evaluating the effect of the standard on our financial reporting and have not yet selected the adoption method or the year in which we will adopt the standard.