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EMPLOYEE BENEFIT PLANS
 12 Months Ended
Dec. 31, 2017
Retirement Benefits [Abstract]  
Employee Benefit Plans
EMPLOYEE BENEFIT PLANS
We are required by applicable U.S. GAAP to:
▪
recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the statement of financial position;
▪
measure a plan’s assets and its obligations that determine its funded status as of the end of the fiscal year (with limited exceptions); and
▪
recognize changes in the funded status of pension and PBOP plans in the year in which the changes occur. Generally, those changes are reported in OCI and as a separate component of shareholders’ equity.
The detailed information presented below covers the employee benefit plans of Sempra Energy and its consolidated subsidiaries.
Sempra Energy has funded and unfunded noncontributory traditional defined benefit and cash balance plans, including separate plans for SDG&E and SoCalGas, which collectively cover all eligible employees, including members of the Sempra Energy board of directors who were participants in a predecessor plan on or before June 1, 1998. Pension benefits under the traditional defined benefit plans are based on service and final average earnings, while the cash balance plans provide benefits using a career average earnings methodology.
IEnova has an unfunded noncontributory defined benefit plan covering all employees. Chilquinta Energía has an unfunded noncontributory defined benefit plan covering all employees hired before October 1, 1981 and an unfunded noncontributory termination indemnity plan covering represented employees. The plans generally provide defined benefits to retirees based on date of hire, years of service and final average earnings.
Sempra Energy also has PBOP plans, including separate plans for SDG&E and SoCalGas, which collectively cover all domestic and certain foreign employees. The life insurance plans are both contributory and noncontributory, and the health care plans are contributory. Participants’ contributions are adjusted annually. Other postretirement benefits include medical benefits for retirees’ spouses.
Chilquinta Energía also has two noncontributory postretirement benefit plans which cover represented employees – a health care plan and an energy subsidy plan that provides for reduced energy rates. The health care plan includes benefits for retirees’ spouses and dependents.
Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. We review these assumptions on an annual basis and update them as appropriate. We consider current market conditions, including interest rates, in making these assumptions. We use a December 31 measurement date for all of our plans.
RABBI TRUST
In support of its Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Plans, Sempra Energy maintains dedicated assets, including a Rabbi Trust and investments in life insurance contracts, which totaled $455 million and $430 million at December 31, 2017 and 2016, respectively.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Special Termination Benefits Affecting 2017 and 2016
In 2017, certain represented and in 2016, certain nonrepresented employees age 62 or older with 5 years of service or age 55 to 61 with 10 years of service that retired under the Voluntary Retirement Enhancement Program offered in either of those years received an additional postretirement health benefit in the form of a $100,000 Health Reimbursement Account. We treated the benefit obligation attributable to the Health Reimbursement Account as a special termination benefit. This resulted in increases to the recorded liability for PBOP and net periodic benefit cost of $18 million for each of Sempra Energy Consolidated and SoCalGas in 2017, and $26 million for Sempra Energy Consolidated, $14 million for SDG&E and $11 million for SoCalGas in 2016.
The Voluntary Retirement Enhancement Program resulted in a higher than expected number of retirements in 2017 and 2016. As a result, the total lump sum benefits paid from the Sempra Energy nonqualified and SoCalGas qualified pension plans in 2017, and the SDG&E qualified pension plan in 2016, exceeded the settlement threshold, which triggered settlement accounting. This resulted in a reduction of the recorded pension liability and pension plan assets of $194 million at Sempra Energy Consolidated and $175 million at SoCalGas in 2017, and $75 million at each of Sempra Energy Consolidated and SDG&E in 2016. This also resulted in settlement charges in net periodic benefit cost of $38 million at Sempra Energy Consolidated and $30 million at SoCalGas in 2017, and $16 million at each of Sempra Energy Consolidated and SDG&E in 2016. The settlement charges at SoCalGas in 2017, and at SDG&E in 2016, were recorded as regulatory assets on the Consolidated Balance Sheets. Measurement dates of December 31, 2017 and 2016 were used for the respective settlement accounting triggered in each year, as the year-to-date lump sum benefit payments first exceeded the settlement threshold in December of both of those years.
Divestiture Affecting 2016
On September 12, 2016, Sempra LNG & Midstream completed the sale of EnergySouth, the parent company of Mobile Gas and Willmut Gas, as we discuss in Note 3. The benefit obligations and plan assets of the benefit plans that covered employees of Mobile Gas and Willmut Gas were transferred to the buyer on the date of sale. This resulted in decreases to the recorded pension liability and other postretirement benefit plan liability of $61 million and $6 million, respectively, and decreases to pension plan assets and other postretirement benefit plan assets of $44 million and $4 million, respectively, for Sempra Energy Consolidated.
Benefit Obligations and Assets
The following three tables provide a reconciliation of the changes in the plans’ projected benefit obligations and the fair value of assets during 2017 and 2016, and a statement of the funded status at December 31, 2017 and 2016:
PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Pension benefits
 
Other postretirement
benefits
 
2017
 
2016
 
2017
 
2016
CHANGE IN PROJECTED BENEFIT OBLIGATION
 
 
 
 
 
 
 
Net obligation at January 1
$
3,679

 
$
3,649

 
$
922

 
$
963

Service cost
117

 
107

 
21

 
20

Interest cost
151

 
160

 
39

 
42

Contributions from plan participants
—

 
—

 
20

 
20

Actuarial loss (gain)
286

 
116

 
6

 
(81
)
Benefit payments
(182
)
 
(217
)
 
(63
)
 
(61
)
Divestiture of EnergySouth
—

 
(61
)
 
—

 
(6
)
Plan amendments
1

 
—

 
—

 
—

Special termination benefits
—

 
—

 
18

 
26

Curtailments
(1
)
 
—

 
—

 
—

Settlements
(194
)
 
(75
)
 
—

 
(1
)
Net obligation at December 31
3,857

 
3,679

 
963

 
922

 
 
 
 
 
 
 
 
CHANGE IN PLAN ASSETS
 

 
 

 
 

 
 

Fair value of plan assets at January 1
2,459

 
2,484

 
1,057

 
1,003

Actual return on plan assets
421

 
207

 
185

 
94

Employer contributions
155

 
104

 
10

 
6

Contributions from plan participants
—

 
—

 
20

 
20

Benefit payments
(182
)
 
(217
)
 
(63
)
 
(61
)
Divestiture of EnergySouth
—

 
(44
)
 
—

 
(4
)
Settlements
(194
)
 
(75
)
 
—

 
(1
)
Fair value of plan assets at December 31
2,659

 
2,459

 
1,209

 
1,057

Funded status at December 31
$
(1,198
)
 
$
(1,220
)
 
$
246

 
$
135

Net recorded (liability) asset at December 31
$
(1,198
)
 
$
(1,220
)
 
$
246

 
$
135

PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
SAN DIEGO GAS & ELECTRIC COMPANY
(Dollars in millions)
 
Pension benefits
 
Other postretirement
benefits
 
2017
 
2016
 
2017
 
2016
CHANGE IN PROJECTED BENEFIT OBLIGATION
 
 
 
 
 
 
 
Net obligation at January 1
$
935

 
$
965

 
$
190

 
$
165

Service cost
29

 
29

 
5

 
5

Interest cost
38

 
41

 
8

 
7

Contributions from plan participants
—

 
—

 
7

 
7

Actuarial loss (gain)
50

 
7

 
(9
)
 
6

Benefit payments
(83
)
 
(25
)
 
(16
)
 
(14
)
Special termination benefits
—

 
—

 
—

 
14

Settlements
—

 
(75
)
 
—

 
—

Transfer of liability from (to) other plans
2

 
(7
)
 
—

 
—

Net obligation at December 31
971

 
935

 
185

 
190

 
 
 
 
 
 
 
 
CHANGE IN PLAN ASSETS
 

 
 

 
 

 
 

Fair value of plan assets at January 1
714

 
752

 
169

 
161

Actual return on plan assets
120

 
59

 
30

 
13

Employer contributions
22

 
3

 
5

 
2

Contributions from plan participants
—

 
—

 
7

 
7

Benefit payments
(83
)
 
(25
)
 
(16
)
 
(14
)
Settlements
—

 
(75
)
 
—

 
—

Transfer of assets from other plans
3

 
—

 
—

 
—

Fair value of plan assets at December 31
776

 
714

 
195

 
169

Funded status at December 31
$
(195
)
 
$
(221
)
 
$
10

 
$
(21
)
Net recorded (liability) asset at December 31
$
(195
)
 
$
(221
)
 
$
10

 
$
(21
)
PROJECTED BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
SOUTHERN CALIFORNIA GAS COMPANY
(Dollars in millions)
 
Pension benefits
 
Other postretirement
benefits
 
2017
 
2016
 
2017
 
2016
CHANGE IN PROJECTED BENEFIT OBLIGATION
 
 
 
 
 
 
 
Net obligation at January 1
$
2,343

 
$
2,255

 
$
691

 
$
752

Service cost
76

 
67

 
14

 
14

Interest cost
98

 
101

 
29

 
32

Contributions from plan participants
—

 
—

 
13

 
13

Actuarial loss (gain)
216

 
77

 
16

 
(86
)
Benefit payments
(73
)
 
(158
)
 
(44
)
 
(45
)
Special termination benefits
—

 
—

 
18

 
11

Settlements
(175
)
 
—

 
—

 
—

Transfer of liability from other plans
1

 
1

 
—

 
—

Net obligation at December 31
2,486

 
2,343

 
737

 
691

 
 
 
 
 
 
 
 
CHANGE IN PLAN ASSETS
 

 
 

 
 

 
 

Fair value of plan assets at January 1
1,579

 
1,537

 
870

 
822

Actual return on plan assets
269

 
128

 
151

 
79

Employer contributions
93

 
72

 
3

 
1

Contributions from plan participants
—

 
—

 
13

 
13

Benefit payments
(73
)
 
(158
)
 
(44
)
 
(45
)
Settlements
(175
)
 
—

 
—

 
—

Transfer of assets from other plans
1

 
—

 
—

 
—

Fair value of plan assets at December 31
1,694

 
1,579

 
993

 
870

Funded status at December 31
$
(792
)
 
$
(764
)
 
$
256

 
$
179

Net recorded (liability) asset at December 31
$
(792
)
 
$
(764
)
 
$
256

 
$
179



Actuarial losses (gains) fluctuate based on changes in assumptions that we describe below in “Assumptions for Pension and Other Postretirement Benefit Plans” and updates to census data. In 2017, 2016 and 2015, the Society of Actuaries released updated mortality improvement projection scales, reflecting changes to projected observed longevity improvements in its mortality tables. We have incorporated these assumptions, adjusted for the Sempra Energy companies’ actual mortality experience, in our calculations for each of those years. Actuarial losses in pension plans at Sempra Energy Consolidated in 2017 were driven primarily by actuarial losses at SDG&E and SoCalGas due to a decrease in discount rates and, additionally at SoCalGas, actuarial losses due to updated census data. Actuarial losses in PBOP plans at Sempra Energy Consolidated in 2017 were driven primarily by actuarial losses at SDG&E and SoCalGas due to a decrease in discount rates, offset by actuarial gains at SDG&E and partially offset by actuarial gains at SoCalGas due to a reduction in the 2018 expected health care costs.
Net Assets and Liabilities
The assets and liabilities of the pension and PBOP plans are affected by changing market conditions as well as when actual plan experience is different than assumed. Such events result in investment gains and losses, which we defer and recognize in pension and other postretirement benefit costs over a period of years. Our funded pension and PBOP plans use the asset smoothing method, except for those at SDG&E. This method develops an asset value that recognizes realized and unrealized investment gains and losses over a three-year period. This adjusted asset value, known as the market-related value of assets, is used in conjunction with an expected long-term rate of return to determine the expected return-on-assets component of net periodic cost. SDG&E does not use the asset smoothing method, but rather recognizes realized and unrealized investment gains and losses during the current year.
The 10-percent corridor accounting method is used at Sempra Energy Consolidated, SDG&E and SoCalGas. Under the corridor accounting method, if as of the beginning of a year unrecognized net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets, the excess is amortized over the average remaining service period of active participants. The asset smoothing and 10-percent corridor accounting methods help mitigate volatility of net periodic costs from year to year.
We recognize the overfunded or underfunded status of defined benefit pension and other postretirement plans as assets or liabilities, respectively; unrecognized changes in these assets and/or liabilities are normally recorded in Accumulated Other Comprehensive Income (Loss) on the balance sheet. The California Utilities record regulatory assets and liabilities that offset the funded pension and other postretirement plans’ assets or liabilities, as these costs are expected to be recovered in future utility rates based on agreements with regulatory agencies.
The California Utilities record annual pension and other postretirement net periodic benefit costs equal to the contributions to their plans as authorized by the CPUC. The annual contributions to the pension plans are limited to a minimum required funding amount as determined by the IRS. The annual contributions to PBOP plans are equal to the lesser of the maximum tax deductible amount or the net periodic cost calculated in accordance with U.S. GAAP for pension and PBOP plans. Until the date of sale, Mobile Gas recorded annual pension and other postretirement net periodic benefit costs based on an estimate of the net periodic cost at the beginning of the year calculated in accordance with U.S. GAAP for pension and PBOP plans, as authorized by the Alabama Public Service Commission. Any differences between booked net periodic benefit cost and amounts contributed to the pension and other postretirement plans for the California Utilities are disclosed as regulatory adjustments in accordance with U.S. GAAP for rate-regulated entities.
The net (liability) asset is included in the following categories on the Consolidated Balance Sheets at December 31:
PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS, NET OF PLAN ASSETS AT DECEMBER 31
(Dollars in millions)
 
Pension benefits
 
Other postretirement
benefits
 
2017
 
2016
 
2017
 
2016
Sempra Energy Consolidated:
 
 
 
 
 
 
 
Noncurrent assets
$
—

 
$
—

 
$
266

 
$
179

Current liabilities
(69
)
 
(56
)
 
(1
)
 
—

Noncurrent liabilities
(1,129
)
 
(1,164
)
 
(19
)
 
(44
)
Net recorded (liability) asset
$
(1,198
)
 
$
(1,220
)
 
$
246

 
$
135

SDG&E:
 

 
 

 
 

 
 

Noncurrent assets
$
—

 
$
—

 
$
10

 
$
—

Current liabilities
(13
)
 
(10
)
 
—

 
—

Noncurrent liabilities
(182
)
 
(211
)
 
—

 
(21
)
Net recorded (liability) asset
$
(195
)
 
$
(221
)
 
$
10

 
$
(21
)
SoCalGas:
 

 
 

 
 

 
 

Noncurrent assets
$
—

 
$
—

 
$
256

 
$
179

Current liabilities
(3
)
 
(2
)
 
—

 
—

Noncurrent liabilities
(789
)
 
(762
)
 
—

 
—

Net recorded (liability) asset
$
(792
)
 
$
(764
)
 
$
256

 
$
179



Amounts recorded in AOCI at December 31, 2017 and 2016, net of income tax effects and amounts recorded as regulatory assets, are as follows:
AMOUNTS IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
 
Pension benefits
 
Other postretirement
benefits
 
2017
 
2016
 
2017
 
2016
Sempra Energy Consolidated:
 
 
 
 
 
 
 
Net actuarial (loss) gain
$
(84
)
 
$
(95
)
 
$
4

 
$
3

Prior service cost
(4
)
 
(4
)
 
—

 
—

Total
$
(88
)
 
$
(99
)
 
$
4

 
$
3

SDG&E:
 

 
 

 
 

 
 

Net actuarial loss
$
(8
)
 
$
(8
)
 
 

 
 

SoCalGas:
 

 
 

 
 

 
 

Net actuarial loss
$
(6
)
 
$
(6
)
 
 

 
 

Prior service cost
(2
)
 
(3
)
 
 

 
 

Total
$
(8
)
 
$
(9
)
 
 

 
 



The accumulated benefit obligation for defined benefit pension plans at December 31, 2017 and 2016 was as follows:
ACCUMULATED BENEFIT OBLIGATION
(Dollars in millions)
 
Sempra Energy Consolidated
 
SDG&E
 
SoCalGas
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Accumulated benefit obligation
$
3,551

 
$
3,465

 
$
930

 
$
904

 
$
2,241

 
$
2,167



Sempra Energy, SDG&E and SoCalGas each have a funded pension plan. We also have unfunded pension plans at Sempra Energy, SDG&E, SoCalGas, IEnova and Chilquinta Energía. The following table shows the obligations of funded pension plans with benefit obligations in excess of plan assets at December 31:
OBLIGATIONS OF FUNDED PENSION PLANS
(Dollars in millions)
 
2017
 
2016
Sempra Energy Consolidated:
 
 
 
Projected benefit obligation
$
3,623

 
$
3,431

Accumulated benefit obligation
3,334

 
3,227

Fair value of plan assets
2,659

 
2,459

SDG&E:
 
 
 

Projected benefit obligation
$
939

 
$
902

Accumulated benefit obligation
900

 
874

Fair value of plan assets
776

 
714

SoCalGas:
 

 
 

Projected benefit obligation
$
2,462

 
$
2,320

Accumulated benefit obligation
2,220

 
2,148

Fair value of plan assets
1,694

 
1,579


Net Periodic Benefit Cost
The following three tables provide the components of net periodic benefit cost and pretax amounts recognized in OCI for the years ended December 31:
NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI
SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Pension benefits
 
Other postretirement benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
NET PERIODIC BENEFIT COST
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
117

 
$
107

 
$
114

 
$
21

 
$
20

 
$
26

Interest cost
151

 
160

 
154

 
39

 
42

 
44

Expected return on assets
(161
)
 
(166
)
 
(173
)
 
(66
)
 
(69
)
 
(68
)
Amortization of:
 

 
 

 
 

 
 
 
 

 
 

Prior service cost (credit)
11

 
11

 
11

 
1

 
—

 
(4
)
Actuarial loss (gain)
36

 
30

 
38

 
(4
)
 
(1
)
 
—

Settlement and curtailment charges
38

 
16

 
4

 
—

 
—

 
—

Special termination benefits
—

 
—

 
—

 
18

 
26

 
—

Regulatory adjustment
(42
)
 
(57
)
 
(110
)
 
—

 
(11
)
 
12

Total net periodic benefit cost
150

 
101

 
38

 
9

 
7

 
10

 
 
 
 
 
 
 
 
 
 
 
 
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS
 

 
 

 
 

 
 

 
 

 
 

RECOGNIZED IN OCI
 

 
 

 
 

 
 

 
 

 
 

Net loss (gain)
—

 
26

 
17

 
(2
)
 
(2
)
 
(4
)
Prior service cost
1

 
—

 
4

 
—

 
—

 
—

Amortization of actuarial loss
(18
)
 
(10
)
 
(14
)
 
—

 
—

 
—

Amortization of prior service cost
(1
)
 
(1
)
 
—

 
—

 
—

 
—

Total recognized in OCI
(18
)
 
15

 
7

 
(2
)
 
(2
)
 
(4
)
   Total recognized in net periodic benefit cost and OCI
$
132

 
$
116

 
$
45

 
$
7

 
$
5

 
$
6

NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI
SAN DIEGO GAS & ELECTRIC COMPANY
(Dollars in millions)
 
Pension benefits
 
Other postretirement benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
NET PERIODIC BENEFIT COST
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
29

 
$
29

 
$
29

 
$
5

 
$
5

 
$
7

Interest cost
38

 
41

 
39

 
8

 
7

 
8

Expected return on assets
(47
)
 
(49
)
 
(54
)
 
(11
)
 
(12
)
 
(11
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service cost
1

 
1

 
8

 
3

 
3

 
3

Actuarial loss (gain)
9

 
10

 
2

 
—

 
(1
)
 
—

Settlement charge
—

 
16

 
—

 
—

 
—

 
—

Special termination benefits
—

 
—

 
—

 
—

 
14

 
—

Regulatory adjustment
(8
)
 
(45
)
 
(20
)
 
—

 
(14
)
 
—

Total net periodic benefit cost
22

 
3

 
4

 
5

 
2

 
7

 
 
 
 
 
 
 
 
 
 
 
 
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS
 

 
 

 
 

 
 

 
 

 
 

RECOGNIZED IN OCI
 

 
 

 
 

 
 

 
 

 
 

Net loss (gain)
2

 
1

 
(6
)
 
—

 
—

 
—

Amortization of actuarial loss
(1
)
 
(1
)
 
(1
)
 
—

 
—

 
—

Total recognized in OCI
1

 
—

 
(7
)
 
—

 
—

 
—

   Total recognized in net periodic benefit cost and OCI
$
23

 
$
3


$
(3
)
 
$
5

 
$
2

 
$
7

NET PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OCI
SOUTHERN CALIFORNIA GAS COMPANY
(Dollars in millions)
 
Pension benefits
 
Other postretirement benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
NET PERIODIC BENEFIT COST
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
76

 
$
67

 
$
74

 
$
14

 
$
14

 
$
17

Interest cost
98

 
101

 
98

 
29

 
32

 
34

Expected return on assets
(103
)
 
(103
)
 
(106
)
 
(53
)
 
(56
)
 
(56
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service cost (credit)
9

 
9

 
9

 
(3
)
 
(4
)
 
(7
)
Actuarial loss (gain)
19

 
11

 
21

 
(3
)
 
—

 
—

Settlement charge
30

 
—

 
—

 
—

 
—

 
—

Special termination benefits
—

 
—

 
—

 
18

 
11

 
—

Regulatory adjustment
(34
)
 
(12
)
 
(90
)
 
—

 
3

 
12

Total net periodic benefit cost
95

 
73

 
6

 
2

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS
 

 
 

 
 

 
 

 
 

 
 

RECOGNIZED IN OCI
 

 
 

 
 

 
 

 
 

 
 

Net loss
—

 
4

 
—

 
—

 
—

 
—

Prior service cost
—

 
2

 
2

 
—

 
—

 
—

Amortization of prior service cost
(1
)
 
—

 
—

 
—

 
—

 
—

Total recognized in OCI
(1
)
 
6

 
2

 
—

 
—

 
—

   Total recognized in net periodic benefit cost and OCI
$
94

 
$
79

 
$
8

 
$
2

 
$
—

 
$
—



The estimated net loss for the pension and PBOP plans that will be amortized from AOCI into net periodic benefit cost in 2018 is $10 million for Sempra Energy Consolidated and $1 million for each of SDG&E and SoCalGas. The estimated prior service cost that will be similarly amortized in 2018 is $1 million for each of Sempra Energy Consolidated and SoCalGas and a negligible amount for SDG&E.
Assumptions for Pension and Other Postretirement Benefit Plans
Benefit Obligation and Net Periodic Benefit Cost
Except for the IEnova and Chilquinta Energía plans, we develop the discount rate assumptions based on the results of a third party modeling tool that matches each plan’s expected cash flows to interest rates and expected maturity values of individually selected bonds in a hypothetical portfolio. The model controls the level of accumulated surplus that may result from the selection of bonds based solely on their premium yields by limiting the number of years to look back for selection to 3 years for pre-30-year and 6 years for post-30-year benefit payments. Additionally, the model ensures that an adequate number of bonds are selected in the portfolio by limiting the amount of the plan’s benefit payments that can be met by a single bond to 7.5 percent.
We selected individual bonds from a universe of Bloomberg AA-rated bonds that:
▪
have an outstanding issue of at least $50 million;
▪
are non-callable (or callable with make-whole provisions);
▪
exclude collateralized bonds; and
▪
exclude the top and bottom 10 percent of yields to avoid relying on bonds which might be mispriced or misgraded.
This selection methodology also mitigates the impact of market volatility on the portfolio by excluding bonds with the following characteristics:
▪
The issuer is on review for downgrade by a major rating agency if the downgrade would eliminate the issuer from the portfolio.
▪
Recent events have caused significant price volatility to which rating agencies have not reacted.
▪
Lack of liquidity is causing price quotes to vary significantly from broker to broker.
We believe that this bond selection approach provides the best estimate of discount rates to estimate settlement values for our plans’ benefit obligations as required by applicable U.S. GAAP.
We develop the discount rate assumptions for the plans at IEnova by constructing a synthetic government zero coupon bond yield curve from the available market data, based on duration matching, and we add a risk spread to allow for the yields of high-quality corporate bonds. We develop the discount rate assumptions for the plans at Chilquinta Energía based on 10-year Chilean government bond yields and the expected local long-term rate of inflation. These methods for developing the discount rate are required when there is no deep market for high quality corporate bonds.
Long-term return on assets is based on the weighted-average of the plans’ investment allocation as of the measurement date and the expected returns for those asset types.
We amortize prior service cost using straight line amortization over average future service (or average expected lifetime for plans where participants are substantially inactive employees), which is an alternative method allowed under U.S. GAAP.
The significant assumptions affecting benefit obligation and net periodic benefit cost are as follows:
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATION
AT DECEMBER 31
 
 
 
 
Pension benefits
 
Other postretirement benefits
 
2017
 
2016
 
2017
 
2016
Sempra Energy Consolidated:
 
 
 
 
 
 
 
Discount rate
3.65
%
 
4.08
%
 
3.70
%
 
4.19
%
Rate of compensation increase
      2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

SDG&E:
 
 
 
 
 
 
 
Discount rate
3.64
%
 
4.08
%
 
3.65
%
 
4.15
%
Rate of compensation increase
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

SoCalGas:
 
 
 
 
 
 
 
Discount rate
3.65
%
 
4.10
%
 
3.70
%
 
4.20
%
Rate of compensation increase
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST
YEARS ENDED DECEMBER 31
 
 
 
 
Pension benefits
 
Other postretirement benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Sempra Energy Consolidated:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.08
%
 
4.46
%
 
4.09
%
 
4.19
%
 
4.49
%
 
4.15
%
Expected return on plan assets
7.00

 
7.00

 
7.00

 
6.47

 
6.98

 
6.98

Rate of compensation increase
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

SDG&E:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.08
%
 
4.35
%
 
4.00
%
 
4.15
%
 
4.50
%
 
4.15
%
Expected return on plan assets
7.00

 
7.00

 
7.00

 
6.91

 
6.90

 
6.91

Rate of compensation increase
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

SoCalGas:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.10
%
 
4.50
%
 
4.15
%
 
4.20
%
 
4.50
%
 
4.15
%
Expected return on plan assets
7.00

 
7.00

 
7.00

 
6.37

 
7.00

 
7.00

Rate of compensation increase
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00

 
2.00-10.00


Health Care Cost Trend Rates
Assumed health care cost trend rates have a significant effect on the amounts that we report for the health care plan costs. Following are the health care cost trend rates applicable to our postretirement benefit plans:
ASSUMED HEALTH CARE COST TREND RATES
AT DECEMBER 31
 
Other postretirement benefit plans(1)
 
Pre-65 retirees
 
Retirees aged 65 years and older
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Health care cost trend rate assumed for next year
7.00
%
 
8.00
%
 
8.10
%
 
5.00
%
 
5.50
%
 
5.50
%
Rate to which the cost trend rate is assumed to
    decline (the ultimate trend)
5.00
%
 
5.00
%
 
5.00
%
 
4.50
%
 
4.50
%
 
4.50
%
Year the rate reaches the ultimate trend
2022

 
2022

 
2022

 
2022

 
2022

 
2022

(1) 
Excludes Mobile Gas plan. For Mobile Gas, which we deconsolidated on September 12, 2016, the health care cost trend rate assumed for next year for all retirees was 8.10 percent in 2015; the ultimate trend was 5.00 percent in 2015; and the year the rate reaches the ultimate trend was 2022 in 2015. For Chilquinta Energía, the health care cost trend rate assumed for next year, and the ultimate trend, was 3.00 percent in each of 2017, 2016 and 2015.

A one-percent change in assumed health care cost trend rates would have had the following effects in 2017:
EFFECT OF ONE-PERCENT CHANGE IN ASSUMED HEALTH CARE COST TREND RATES
(Dollars in millions)
 
Sempra Energy Consolidated
 
SDG&E
 
SoCalGas
 
1%
 
1%
 
1%
 
1%
 
1%
 
1%
 
increase
 
decrease
 
increase
 
decrease
 
increase
 
decrease
Effect on total of service and interest
 
 
 
 
 
 
 
 
 
 
 
cost components of net periodic
 
 
 
 
 
 
 
 
 
 
 
postretirement health care benefit cost
$
5

 
$
(4
)
 
$
1

 
$
—

 
$
4

 
$
(3
)
Effect on the health care component of the
 
 
 
 
 
 
 
 
 
 
 
accumulated other postretirement
 
 
 
 
 
 
 
 
 
 
 
benefit obligations
53

 
(44
)
 
3

 
(2
)
 
48

 
(40
)
Plan Assets
Investment Allocation Strategy for Sempra Energy’s Pension Master Trust
Sempra Energy’s pension master trust holds the investments for our pension plans and a portion of the investments for our PBOP plans. We maintain additional trusts as we discuss below for certain of the California Utilities’ PBOP plans. Other than through indexing strategies, the trusts do not invest in securities of Sempra Energy.
The current asset allocation objective for the pension master trust is to protect the funded status of the plans while generating sufficient returns to cover future benefit payments and accruals. We assess the portfolio performance by comparing actual returns with relevant benchmarks. Currently, the pension plans’ target asset allocations are
▪
38 percent domestic equity
▪
26 percent international equity
▪
18 percent long credit
▪
8 percent ultra-long duration government securities
▪
5 percent return-seeking credit
▪
5 percent real assets
The asset allocation of the plans is reviewed by our Plan Funding Committee and our Pension and Benefits Investment Committee (the Committees) on a regular basis. When evaluating strategic asset allocations, the Committees consider many variables, including:
▪
long-term cost
▪
variability and level of contributions
▪
funded status
▪
a range of expected outcomes over varying confidence levels
We maintain asset allocations at strategic levels with reasonable bands of variance.
In accordance with the Sempra Energy pension investment guidelines, derivative financial instruments may be used by the pension master trust’s equity and fixed income portfolio investment managers to equitize cash, hedge certain exposures, and as substitutes for certain types of fixed income securities.
Rate of Return Assumption
The expected return on assets in our pension and PBOP plans is based on the weighted-average of the plans’ investment allocations to specific asset classes as of the measurement date. We arrive at a 7-percent expected return on assets by considering both the historical and forecasted long-term rates of return on those asset classes. We expect a return of between 7 percent and 9 percent on return-seeking assets and between 3 percent and 5 percent for risk-mitigating assets. Certain trusts that hold assets for the SDG&E other postretirement benefit plan are subject to taxation, which impacts the expected after-tax return on assets in the plan.
Concentration of Risk
Plan assets are diversified across global equity and bond markets, and concentration of risk in any one economic, industry, maturity or geographic sector is limited.
Investment Strategy for SDG&E’s and SoCalGas’ Other Postretirement Benefit Plans
SDG&E’s and SoCalGas’ PBOP plans are funded by cash contributions from SDG&E and SoCalGas and their current retirees. The assets of these plans are placed into the pension master trust and other Voluntary Employee Beneficiary Association trusts. Certain assets of SoCalGas’ PBOP plans, which are held in the pension master trust, are invested based on an allocation that seeks to mitigate risks for the assets of these plans, with 38 percent invested in return-seeking and 62 percent invested in risk-mitigating assets. The assets in the Voluntary Employee Beneficiary Association trusts are invested at an allocation similar to the pension master trust, with 74 percent invested in return-seeking and 26 percent invested in risk-mitigating assets. These allocations are periodically reviewed to ensure that plan assets are best positioned to meet plan obligations.
Fair Value of Pension and Other Postretirement Benefit Plan Assets
We classify the investments in Sempra Energy’s pension master trust and the trusts for the California Utilities’ PBOP plans based on the fair value hierarchy, except for certain investments measured at net asset value (NAV).
The following are descriptions of the valuation methods and assumptions we use to estimate the fair values of investments held by pension and other postretirement benefit plan trusts.
Equity Securities – Equity securities are valued using quoted prices listed on nationally recognized securities exchanges.
Fixed Income Securities – Certain fixed income securities are valued at the closing price reported in the active market in which the security is traded. Other fixed income securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the security is valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Certain high yield fixed-income securities are valued by applying a price adjustment to the bid side to calculate a mean and ask value. Adjustments can vary based on maturity, credit standing, and reported trade frequencies. The bid to ask spread is determined by the investment manager based on the review of the available market information.
Registered Investment Companies – Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices. Where the value is a quoted price in an active market, the investment is classified within Level 1 of the fair value hierarchy. Investments in certain fixed income securities are valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks for the remaining fixed income securities.
Common/Collective Trusts – Investments in common/collective trust funds are valued based on the NAV of units owned, which is based on the current fair value of the funds’ underlying assets.
Private Equity Funds – These funds consist of investments in private equities that are held by limited partnerships following various strategies, including private equity and corporate finance. These partnerships generally have limited lives of 10 years, after which liquidating distributions will be received. The value is determined based on the NAV of the proportionate share of an ownership interest in partners’ capital. Holdings in these types of private equity funds are negligible, as the funds are well past their expected investment term and have distributed the bulk of proceeds from investment sales.
Derivative Financial Instruments – Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies, and unrealized gain (loss) is recorded daily. Fixed income futures and options are marked to market daily. Equity index future contracts are valued at the last sales price quoted on the exchange on which they primarily trade.
While management believes the valuation methods described above are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
We provide more discussion of fair value measurements in Notes 1 and 10. The following tables set forth by level within the fair value hierarchy a summary of the investments in our pension and other postretirement benefit plan trusts measured at fair value on a recurring basis.
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 and there were no changes in the valuation techniques used.
SDG&E and SoCalGas each hold a proportionate share of investment assets in the pension master trust at Sempra Energy Consolidated. The fair values of our pension plan assets by asset category are as follows:
FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF PENSION PLANS
(Dollars in millions)
 
Fair value at December 31, 2017
 
Level 1
 
Level 2
 
Total
Sempra Energy Consolidated:
 
 
 
 
 
Equity securities:
 
 
 
 
 
Domestic
$
946

 
$
—

 
$
946

International
538

 
—

 
538

Registered investment companies
102

 
—

 
102

Fixed income securities:
 

 
 

 
 

Domestic government bonds
242

 
27

 
269

International government bonds
—

 
12

 
12

Domestic corporate bonds
—

 
338

 
338

International corporate bonds
—

 
64

 
64

Registered investment companies
—

 
6

 
6

Other
—

 
1

 
1

Total investment assets in the fair value hierarchy
$
1,828

 
$
448

 
2,276

Investments measured at NAV:
 
 
 
 
 
Common/collective trusts
 
 
 
 
384

Private equity funds
 
 
 
 
4

Total investment assets(1)


 


 
$
2,664

SDG&E’s proportionate share of investment assets
 
 
 
 
$
777

SoCalGas’ proportionate share of investment assets
 
 
 
 
$
1,697

 
 
 
 
 
 
 
Fair value at December 31, 2016
 
Level 1
 
Level 2
 
Total
Sempra Energy Consolidated:
 
 
 
 
 
Equity securities:
 

 
 

 
 

Domestic
$
884

 
$
—

 
$
884

International
522

 
—

 
522

Registered investment companies
127

 
—

 
127

Fixed income securities:
 

 
 

 
 

Domestic government bonds
214

 
32

 
246

International government bonds
—

 
9

 
9

Domestic corporate bonds
—

 
346

 
346

International corporate bonds
—

 
94

 
94

Registered investment companies
—

 
14

 
14

Total investment assets in the fair value hierarchy
$
1,747

 
$
495

 
2,242

Investments measured at NAV:
 
 
 
 
 
Common/collective trusts
 
 
 
 
223

Private equity funds
 
 
 
 
4

Total investment assets(2)
 
 
 
 
$
2,469

SDG&E’s proportionate share of investment assets
 
 
 
 
$
717

SoCalGas’ proportionate share of investment assets
 
 
 
 
$
1,585

(1) 
Excludes cash and cash equivalents of $13 million and accounts payable of $18 million.
(2) 
Excludes cash and cash equivalents of $14 million and accounts payable of $24 million.

The fair values by asset category of the PBOP plan assets held in the pension master trust and in the additional trusts for SoCalGas’ PBOP plans and SDG&E’s PBOP plan trusts are as follows:

FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS
(Dollars in millions)
 
Fair value at December 31, 2017
 
Level 1
 
Level 2
 
Total
SDG&E:
 
 
 
 
 
Equity securities:
 
 
 
 
 
Domestic
$
46

 
$
—

 
$
46

International
26

 
—

 
26

Registered investment companies
52

 
—

 
52

Fixed income securities:
 

 
 

 
 

Domestic government bonds
12

 
1

 
13

International government bonds
—

 
1

 
1

Domestic corporate bonds
—

 
17

 
17

International corporate bonds
—

 
3

 
3

Registered investment companies
—

 
17

 
17

Total investment assets in the fair value hierarchy
136

 
39

 
175

Investments measured at NAV – Common/collective trusts
 
 
 
 
20

Total investment assets(1)
 
 
 
 
195

 
 
 
 
 
 
SoCalGas:
 

 
 

 
 

Equity securities:
 

 
 

 
 

Domestic
78

 
—

 
78

International
44

 
—

 
44

Registered investment companies
41

 
—

 
41

Fixed income securities:
 

 
 

 
 

Domestic government bonds
125

 
13

 
138

International government bonds
—

 
7

 
7

Domestic corporate bonds
—

 
164

 
164

International corporate bonds
—

 
28

 
28

Registered investment companies
—

 
85

 
85

Total investment assets in the fair value hierarchy
288

 
297

 
585

Investments measured at NAV – Common/collective trusts
 
 
 
 
406

Total investment assets(2)
 
 
 
 
991

 
 
 
 
 
 
Other Sempra Energy:
 

 
 

 
 

Equity securities:
 

 
 

 
 

Domestic
7

 
—

 
7

International
5

 
—

 
5

Registered investment companies
1

 
—

 
1

Fixed income securities:
 

 
 

 
 

Domestic government bonds
1

 
1

 
2

Domestic corporate bonds
—

 
2

 
2

International corporate bonds
—

 
1

 
1

Total investment assets in the fair value hierarchy
14

 
4

 
18

Investments measured at NAV – Common/collective trusts
 
 
 
 
2

Private equity funds
 
 
 
 
1

Total other Sempra Energy investment assets
 
 
 
 
21

 
 
 
 
 
 
Total Sempra Energy Consolidated investment assets in the fair value hierarchy
$
438

 
$
340

 
 
Total Sempra Energy Consolidated investment assets(3)


 


 
$
1,207

(1) 
Excludes cash and cash equivalents of $1 million and accounts payable of $1 million held in SDG&E PBOP plan trusts.
(2) 
Excludes cash and cash equivalents of $4 million and accounts payable of $2 million held in SoCalGas PBOP plan trusts.
(3) 
Excludes cash and cash equivalents of $5 million and accounts payable of $3 million at Sempra Energy Consolidated.

FAIR VALUE MEASUREMENTS – INVESTMENT ASSETS OF OTHER POSTRETIREMENT BENEFIT PLANS
(Dollars in millions)
 
Fair value at December 31, 2016
 
Level 1
 
Level 2
 
Total
SDG&E:
 
 
 
 
 
Equity securities:
 
 
 
 
 
Domestic
$
41

 
$
—

 
$
41

International
24

 
—

 
24

Registered investment companies
46

 
—

 
46

Fixed income securities:
 

 
 

 
 

Domestic government bonds
10

 
1

 
11

Domestic corporate bonds
—

 
16

 
16

International corporate bonds
—

 
3

 
3

Registered investment companies
—

 
17

 
17

Total investment assets in the fair value hierarchy
121

 
37

 
158

Investments measured at NAV – Common/collective trusts
 
 
 
 
11

Total investment assets(1)
 
 
 
 
169

 
 
 
 
 
 
SoCalGas:
 

 
 

 
 

Equity securities:
 

 
 

 
 

Domestic
130

 
—

 
130

International
77

 
—

 
77

Registered investment companies
46

 
—

 
46

Fixed income securities:
 

 
 

 
 

Domestic government bonds
52

 
8

 
60

International government bonds
—

 
2

 
2

Domestic corporate bonds
—

 
94

 
94

International corporate bonds
—

 
28

 
28

Registered investment companies
—

 
47

 
47

Total investment assets in the fair value hierarchy
305

 
179

 
484

Investments measured at NAV – Common/collective trusts
 
 
 
 
386

Total investment assets(2)
 
 
 
 
870

 
 
 
 
 
 
Other Sempra Energy:
 

 
 

 
 

Equity securities:
 

 
 

 
 

Domestic
6

 
—

 
6

International
3

 
—

 
3

Fixed income securities:
 

 
 

 
 

Domestic government bonds
1

 
—

 
1

International government bonds
—

 
1

 
1

Domestic corporate bonds
—

 
2

 
2

International corporate bonds
—

 
1

 
1

Registered investment companies
—

 
1

 
1

Total investment assets in the fair value hierarchy
10

 
5

 
15

Investments measured at NAV – Common/collective trusts
 
 
 
 
3

Total other Sempra Energy investment assets
 
 
 
 
18

 
 
 
 
 
 
Total Sempra Energy Consolidated investment assets in the fair value hierarchy
$
436

 
$
221

 
 
Total Sempra Energy Consolidated investment assets(3)


 


 
$
1,057

(1) 
Excludes cash and cash equivalents of $1 million and accounts payable of $1 million held in SDG&E PBOP plan trusts.
(2) 
Excludes cash and cash equivalents of $4 million and accounts payable of $4 million held in SoCalGas PBOP plan trusts.
(3) 
Excludes cash and cash equivalents of $5 million and accounts payable of $5 million at Sempra Energy Consolidated.
Future Payments
We expect to contribute the following amounts to our pension and PBOP plans in 2018:
EXPECTED CONTRIBUTIONS
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
 
 Sempra Energy Consolidated
 
SDG&E
 
SoCalGas
Pension plans
$
226

 
$
48

 
$
113

Other postretirement benefit plans
9

 
3

 
2



The following table shows the total benefits we expect to pay for the next 10 years to current employees and retirees from the plans or from company assets.
EXPECTED BENEFIT PAYMENTS
(Dollars in millions)
 
Sempra Energy Consolidated
 
SDG&E
 
SoCalGas
 
Pension benefits
 
Other postretirement benefits
 
Pension benefits
 
Other postretirement benefits
 
Pension benefits
 
Other postretirement benefits
2018
$
351

 
$
52

 
$
90

 
$
10

 
$
192

 
$
38

2019
304

 
52

 
76

 
10

 
188

 
39

2020
294

 
54

 
74

 
10

 
179

 
40

2021
285

 
53

 
71

 
11

 
173

 
40

2022
273

 
53

 
68

 
11

 
172

 
40

2023-2027
1,217

 
262

 
314

 
52

 
782

 
197

PROFIT SHARING PLANS
Under Chilean law, Chilquinta Energía is required to pay all employees either (1) 30 percent of Chilquinta Energía’s taxable income after deducting a 10-percent return on equity, allocated in proportion to the annual salary of each employee or (2) 25 percent of each employee’s annual salary, with a maximum mandatory profit sharing of 4.75 months of Chile’s legal minimum salary. Chilquinta Energía has elected the second option but calculates the profit sharing amounts with actual employee salaries instead of the legal minimum salary, resulting in a higher cost. The amounts are paid out each pay period. Chilquinta Energía recorded annual profit sharing expense of $7 million for 2017, $5 million for 2016 and $3 million for 2015 related to this plan.
Under Peruvian law, Luz del Sur is required to pay their employees 5 percent of Luz del Sur’s taxable income, paid once a year and allocated as follows: 50 percent based on each employee’s annual hours worked and 50 percent based on each employee’s annual salary. Luz del Sur recorded annual profit sharing expense of $12 million in 2017 and $10 million in both 2016 and 2015 related to this plan.
SAVINGS PLANS
Sempra Energy offers trusteed savings plans to all domestic employees, all employees in Mexico and certain employees in Chile. Employee participation, employee contributions and employer matching contributions are subject to the provisions of the respective plans, and for employee contributions, limits imposed by the respective governmental authorities.
Employer contributions to the savings plans were as follows:
EMPLOYER CONTRIBUTIONS TO SAVINGS PLANS
(Dollars in millions)
 
2017
 
2016
 
2015
Sempra Energy Consolidated
$
41

 
$
42

 
$
43

SDG&E
14

 
15

 
17

SoCalGas
22

 
22

 
21



The market value of Sempra Energy common stock held by the savings plans was $1.1 billion at both December 31, 2017 and 2016.