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 at December 31, 2017 and 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.

The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in Note 9 in “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, 2017 and 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 December 31, 2017 and 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 December 31, 2017
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	491		$	5	$	—	$	496
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	45			9		—		54
Municipal bonds	—			250		—		250
Other securities	—			217		—		217
Total debt securities	45			476		—		521
Total nuclear decommissioning trusts⁽¹⁾	536			481		—		1,017
Interest rate and foreign exchange instruments	—			7		—		7
Commodity contracts not subject to rate recovery	5			12		—		17
Effect of netting and allocation of collateral⁽²⁾	2			—		—		2
Commodity contracts subject to rate recovery	—			2		126		128
Effect of netting and allocation of collateral⁽²⁾	12			—		5		17
Total	$	555		$	502	$	131	$	1,188

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	217	$	—	$	217
Commodity contracts not subject to rate recovery	—			6		—		6
Commodity contracts subject to rate recovery	23			7		154		184
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	—		$	230	$	154	$	384

	Fair value at December 31, 2016
	Level 1			Level 2		Level 3		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⁽¹⁾	544			363		—		907
Interest rate and foreign exchange instruments	—			9		—		9
Commodity contracts not subject to rate recovery	—			15		—		15
Effect of netting and allocation of collateral⁽²⁾	2			7		—		9
Commodity contracts subject to rate recovery	1			3		96		100
Effect of netting and allocation of collateral⁽²⁾	27			—		5		32
Total	$	574		$	397	$	101	$	1,072

Liabilities:
Interest rate and foreign exchange instruments	$	—		$	252	$	—	$	252
Commodity contracts not subject to rate recovery	16			11		—		27
Effect of netting and allocation of collateral⁽²⁾	(17		)	—		—		(17		)
Commodity contracts subject to rate recovery	19			8		170		197
Effect of netting and allocation of collateral⁽²⁾	(18		)	—		—		(18		)
Total	$	—		$	271	$	170	$	441


⁽¹⁾	Excludes cash balances and cash equivalents.


⁽²⁾	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.



RECURRING FAIR VALUE MEASURES – SDG&E
(Dollars in millions)
	Fair value at December 31, 2017
	Level 1			Level 2		Level 3		Total
Assets:
Nuclear decommissioning trusts:
Equity securities	$	491		$	5	$	—	$	496
Debt securities:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies	45			9		—		54
Municipal bonds	—			250		—		250
Other securities	—			217		—		217
Total debt securities	45			476		—		521
Total nuclear decommissioning trusts⁽¹⁾	536			481		—		1,017
Commodity contracts subject to rate recovery	—			—		126		126
Effect of netting and allocation of collateral⁽²⁾	11			—		5		16
Total	$	547		$	481	$	131	$	1,159

Liabilities:
Interest rate instruments	$	—		$	13	$	—	$	13
Commodity contracts subject to rate recovery	23			5		154		182
Effect of netting and allocation of collateral⁽²⁾	(23		)	—		—		(23		)
Total	$	—		$	18	$	154	$	172

	Fair value at December 31, 2016
	Level 1			Level 2		Level 3		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⁽¹⁾	544			363		—		907
Commodity contracts not subject to rate recovery	—			—		—		—
Effect of netting and allocation of collateral⁽²⁾	1			—		—		1
Commodity contracts subject to rate recovery	1			2		96		99
Effect of netting and allocation of collateral⁽²⁾	25			—		5		30
Total	$	571		$	365	$	101	$	1,037

Liabilities:
Interest rate instruments	$	—		$	25	$	—	$	25
Commodity contracts subject to rate recovery	17			7		170		194
Effect of netting and allocation of collateral⁽²⁾	(16		)	—		—		(16		)
Total	$	1		$	32	$	170	$	203


⁽¹⁾	Excludes cash balances and cash equivalents.


⁽²⁾	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.



RECURRING FAIR VALUE MEASURES – SOCALGAS
(Dollars in millions)
	Fair value at December 31, 2017
	Level 1			Level 2		Level 3			Total
Assets:
Commodity contracts subject to rate recovery	$	—		$	2	$	—		$	2
Effect of netting and allocation of collateral⁽¹⁾	1			—		—			1
Total	$	1		$	2	$	—		$	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			Total
Assets:
Commodity contracts not subject to rate recovery	$	—		$	—	$	—		$	—
Effect of netting and allocation of collateral⁽¹⁾	1			—		—			1
Commodity contracts subject to rate recovery	—			1		—			1
Effect of netting and allocation of collateral⁽¹⁾	2			—		—			2
Total	$	3		$	1	$	—		$	4
Liabilities:
Commodity contracts subject to rate recovery	$	2		$	1	$	—		$	3
Effect of netting and allocation of collateral⁽¹⁾	(2		)	—		—		—	(2		)
Total	$	—		$	1	$	—		$	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⁽¹⁾
(Dollars in millions)
	Years ended December 31,
	2017			2016			2015
Balance at January 1	$	(74	)	$	19		$	107
Realized and unrealized gains (losses)	34			(120		)	(134		)
Allocated transmission instruments	6			8			12
Settlements	6			19			34
Balance at December 31	$	(28	)	$	(74	)	$	19
Change in unrealized gains (losses) relating to
instruments still held at December 31	$	30		$	(101	)	$	(27	)

⁽¹⁾ Excludes the effect of contractual ability to settle contracts under master netting agreements.

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 valuing CRRs settling in the following year. For the CRRs settling from January 1 to December 31, the auction price inputs, at a given location, are in the following ranges:



CONGESTION REVENUE RIGHTS AUCTION PRICE INPUTS

Settlement year		Price per MWh
2018	$	(7.25	)	to	$	11.99
2017		(11.88	)	to		6.93
2016		(23.81	)	to		10.23

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. 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.

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 $22.55 per MWh to $51.01 per MWh at December 31, 2017, and $17.40 per MWh to $56.67 per MWh at December 31, 2016. 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 9.

Realized gains and losses associated with CRRs and long-term electricity positions, which are recoverable in rates, are recorded in Cost of Electric Fuel and Purchased Power on the Consolidated Statements of Operations. Unrealized gains and losses are recorded as regulatory assets and liabilities, and therefore also do not affect earnings.

Fair Value of Financial Instruments

The fair values of certain of our financial instruments (cash, 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 Consolidated Balance Sheets at December 31, 2017 and 2016:



FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
	December 31, 2017
	Carrying		Fair value
	amount		Level 1		Level 2		Level 3		Total
Sempra Energy Consolidated:
Long-term amounts due from unconsolidated affiliates⁽¹⁾	$	604	$	—	$	528	$	96	$	624
Long-term amounts due to unconsolidated affiliates	35		—		32		—		32
Total long-term debt⁽²⁾⁽³⁾	17,138		817		17,134		458		18,409
SDG&E:
Total long-term debt⁽³⁾⁽⁴⁾	$	4,868	$	—	$	5,073	$	295	$	5,368
SoCalGas:
Total long-term debt⁽⁵⁾	$	3,009	$	—	$	3,192	$	—	$	3,192

	December 31, 2016
	Carrying		Fair value
	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 $29 million and $17 million at December 31, 2017 and 2016, respectively, and excluding foreign currency translation of $35 million on a Mexican peso-denominated loan at December 31, 2017.


⁽²⁾	Before reductions for unamortized discount (net of premium) and debt issuance costs of $143 million and $109 million at December 31, 2017

and 2016, respectively, and excluding build-to-suit and capital lease obligations of $877 million and $383 million at December 31, 2017 and 2016, respectively. We discuss our long-term debt in Note 5.


⁽³⁾	Level 3 instruments include $295 million and $305 million at December 31, 2017 and 2016, respectively, related to Otay Mesa VIE.


⁽⁴⁾	Before reductions for unamortized discount and debt issuance costs of $45 million at December 31, 2017 and 2016, respectively, and excluding capital lease obligations of $732 million and $240 million at December 31, 2017 and 2016, respectively.


⁽⁵⁾	Before reductions for unamortized discount and debt issuance costs of $24 million and $27 million at December 31, 2017 and 2016, respectively, and excluding capital lease obligations of $1 million at December 31, 2017.

We determine the fair value of certain long-term amounts due from/to 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 funds related to SONGS in Note 13.

NON-RECURRING FAIR VALUE MEASURES

Sempra Mexico

IEnova Pipelines. In September 2016, IEnova completed the acquisition of PEMEX’s 50-percent interest in IEnova Pipelines, increasing its ownership interest to 100 percent. As a result of IEnova obtaining control over IEnova Pipelines, in the year ended December 31, 2016, Sempra Mexico recognized a pretax gain of $617 million ($432 million after-tax) for the excess of the acquisition-date fair value of its previously held equity interest in IEnova Pipelines ($1.144 billion) over the carrying value of that interest ($520 million) and losses reclassified from AOCI ($7 million), included as Remeasurement of Equity Method Investment on Sempra Energy’s Consolidated Statement of Operations. The valuation technique used to measure the acquisition-date fair value of our equity interest in IEnova Pipelines immediately prior to the business acquisition was based on the fair value of the entire business combination ($2.288 billion) less the fair value of the consideration paid ($1.144 billion, the equity sale price). We discuss the IEnova Pipelines acquisition in Note 3.

TdM. In February 2016, management approved a plan to market and sell Sempra Mexico’s TdM 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. In September 2016, we received market information that indicated that the fair value of TdM may be less than its carrying value. As a result, after performing an analysis of the information, Sempra Mexico reduced the carrying value of TdM by recognizing a noncash impairment charge of $131 million ($111 million after-tax) in the third quarter of 2016. In 2017, Sempra Mexico received a purchase price offer resulting from negotiations with an active market participant. This new 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. Impairments recorded for TdM are included in Impairment Losses on Sempra Energy’s Consolidated Statements of Operations. Market values resulting from a third-party bidding process and a purchase price offer are considered to be Level 2 inputs in the fair value hierarchy, as they represent observable pricing inputs.

Sempra LNG & Midstream

Rockies Express. As we discuss in Note 3, in March 2016, Sempra LNG & Midstream agreed to sell its 25-percent interest in Rockies Express for cash consideration of $440 million, subject to adjustment at closing. In March 2016, we recorded a noncash impairment of our investment in Rockies Express of $44 million ($27 million after-tax). The charge is included in Equity Earnings, Before Income Tax, on the Sempra Energy Consolidated Statement of Operations for the year ended December 31, 2016. We considered the sale price for our equity interest in Rockies Express to be a market participants’ view of the total value of Rockies Express and measured the fair value of our investment based on the equity sale price.

The following table summarizes significant inputs impacting our non-recurring fair value measures:

NON-RECURRING FAIR VALUE MEASURES – 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

Investment in IEnova Pipelines

1,144

⁽¹⁾

Market approach

Level 2

100%

Equity sale price

100%

TdM

145

⁽²⁾

Market approach

Level 2

100%

Purchase price offers

100%

TdM

⁽³⁾

Market approach

Level 2

100%

Purchase price offer

100%

Investment in
Rockies Express

440

⁽⁴⁾

Market approach

Level 2

100%

Equity sale price

100%


⁽¹⁾	At measurement date of September 26, 2016, immediately prior to acquiring a 100-percent ownership interest in IEnova Pipelines.


⁽²⁾	At measurement date of September 29, 2016.


⁽³⁾	At measurement date of June 30, 2017. At December 31, 2017, TdM has a carrying value of $78 million, reflecting subsequent business activity, and is classified as held for sale.


⁽⁴⁾	At measurement date of March 29, 2016. On May 9, 2016, Sempra LNG & Midstream sold its equity interest in Rockies Express.