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FAIR VALUE MEASUREMENTS | 3 Months Ended
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Jun. 30, 2015
Notes to Consolidated Financial Statements [Abstract] |
Fair Value Measurements | NOTE 8. FAIR VALUE MEASUREMENTS We discuss the valuation techniques and inputs we use to measure fair value and the definition of the three levels of t he fair value hierarchy in Note 1 of the Notes to Consolida ted Financial Statements in the Annual Report. We have not changed the valuation techniques or inputs we use to me asure fair value during the six months ended June 30, 2015. 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 June 30, 2015 and December 31, 2014. We classify financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities, and their placement within the fair value hierarchy levels. The fair value of commodity derivative assets and liabilities is presented in accordance with our netting policy, as we discuss in No te 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 June 30, 2015 and December 31, 2014 in the tables below include the following: Nuclear decommissioning trusts reflect the assets of SDG&E’s nuclear decommissioning trusts, excluding cash balances. A third party trustee values the trust assets using prices from a pricing service based on a market approach. We validate these prices by comparis on to prices from other independent data sources. Equity and certain debt securities are valued using quoted prices listed on nationally recognized securities exchanges or based on closing prices reported in the active market in which the identical securit y is traded (Level 1). Other debt securities are valued based on yields that are currently available for comparable securities of issuers with similar credit ratings (Level 2). We enter into commodity contracts and interest rate derivatives primarily as a means to manage price exposures. We may also manage foreign exchange rate exposures using derivatives. We primarily use a market approach with market participant assumptions to value these derivatives. Market participant assumptions include those about r isk, 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 t he 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 instru ments, 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 under “Level 3 Information.” We record commodity derivative con tracts that are subject to rate recovery as commodity costs that are offset by regulatory account balances and are recovered in rates. Investments include marketable securities that we value using a market approach based on closing prices reported in the a ctive market in which the identical security is traded (Level 1). There were no transfers into or out of Level 1, Level 2 or Level 3 for Sempra Energy Consolidated, SDG&E or SoCalGas during the periods presented, nor any changes in valuation techniques use d in recurring fair value measurements.
RECURRING FAIR VALUE MEASURES – SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
| Fair value at June 30, 2015
|  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 665 | $ | ― | $ | ― | $ | ― | $ | 665
Debt securities: |  |  |  |  |  |  |  |  |  |
Debt securities issued by the U.S. Treasury and other |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies |  | 50 |  | 48 |  | ― |  | ― |  | 98
Municipal bonds |  | ― |  | 152 |  | ― |  | ― |  | 152
Other securities |  | ― |  | 209 |  | ― |  | ― |  | 209
Total debt securities |  | 50 |  | 409 |  | ― |  | ― |  | 459
Total nuclear decommissioning trusts(2) |  | 715 |  | 409 |  | ― |  | ― |  | 1,124
Interest rate and foreign exchange instruments |  | ― |  | 43 |  | ― |  | ― |  | 43
Commodity contracts not subject to rate recovery |  | 6 |  | 13 |  | ― |  | 17 |  | 36
Commodity contracts subject to rate recovery |  | ― |  | 1 |  | 87 |  | 27 |  | 115
Total | $ | 721 | $ | 466 | $ | 87 | $ | 44 | $ | 1,318
Liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate and foreign exchange instruments | $ | ― | $ | 172 | $ | ― | $ | ― | $ | 172
Commodity contracts not subject to rate recovery |  | 4 |  | 4 |  | ― |  | (6) |  | 2
Commodity contracts subject to rate recovery |  | ― |  | 54 |  | 45 |  | (42) |  | 57
Total | $ | 4 | $ | 230 | $ | 45 | $ | (48) | $ | 231
| Fair value at December 31, 2014
|  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 655 | $ | ― | $ | ― | $ | ― | $ | 655
Debt securities: |  |  |  |  |  |  |  |  |  |
Debt securities issued by the U.S. Treasury and other |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies |  | 62 |  | 47 |  | ― |  | ― |  | 109
Municipal bonds |  | ― |  | 129 |  | ― |  | ― |  | 129
Other securities |  | ― |  | 207 |  | ― |  | ― |  | 207
Total debt securities |  | 62 |  | 383 |  | ― |  | ― |  | 445
Total nuclear decommissioning trusts(2) |  | 717 |  | 383 |  | ― |  | ― |  | 1,100
Interest rate and foreign exchange instruments |  | ― |  | 48 |  | ― |  | ― |  | 48
Commodity contracts not subject to rate recovery |  | 28 |  | 16 |  | ― |  | (11) |  | 33
Commodity contracts subject to rate recovery |  | ― |  | 1 |  | 107 |  | 14 |  | 122
Total | $ | 745 | $ | 448 | $ | 107 | $ | 3 | $ | 1,303
Liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate and foreign exchange instruments | $ | ― | $ | 155 | $ | ― | $ | ― | $ | 155
Commodity contracts not subject to rate recovery |  | 3 |  | 9 |  | ― |  | (4) |  | 8
Commodity contracts subject to rate recovery |  | ― |  | 52 |  | ― |  | (36) |  | 16
Total | $ | 3 | $ | 216 | $ | ― | $ | (40) | $ | 179
(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 June 30, 2015
|  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 665 | $ | ― | $ | ― | $ | ― | $ | 665
Debt securities: |  |  |  |  |  |  |  |  |  |
Debt securities issued by the U.S. Treasury and other |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies |  | 50 |  | 48 |  | ― |  | ― |  | 98
Municipal bonds |  | ― |  | 152 |  | ― |  | ― |  | 152
Other securities |  | ― |  | 209 |  | ― |  | ― |  | 209
Total debt securities |  | 50 |  | 409 |  | ― |  | ― |  | 459
Total nuclear decommissioning trusts(2) |  | 715 |  | 409 |  | ― |  | ― |  | 1,124
Commodity contracts not subject to rate recovery |  | ― |  | ― |  | ― |  | 1 |  | 1
Commodity contracts subject to rate recovery |  | ― |  | ― |  | 87 |  | 26 |  | 113
Total | $ | 715 | $ | 409 | $ | 87 | $ | 27 | $ | 1,238
Liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate instruments | $ | ― | $ | 43 | $ | ― | $ | ― | $ | 43
Commodity contracts not subject to rate recovery |  | 1 |  | ― |  | ― |  | (1) |  | ―
Commodity contracts subject to rate recovery |  | ― |  | 54 |  | 45 |  | (42) |  | 57
Total | $ | 1 | $ | 97 | $ | 45 | $ | (43) | $ | 100
| Fair value at December 31, 2014
|  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 655 | $ | ― | $ | ― | $ | ― | $ | 655
Debt securities: |  |  |  |  |  |  |  |  |  |
Debt securities issued by the U.S. Treasury and other |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies |  | 62 |  | 47 |  | ― |  | ― |  | 109
Municipal bonds |  | ― |  | 129 |  | ― |  | ― |  | 129
Other securities |  | ― |  | 207 |  | ― |  | ― |  | 207
Total debt securities |  | 62 |  | 383 |  | ― |  | ― |  | 445
Total nuclear decommissioning trusts(2) |  | 717 |  | 383 |  | ― |  | ― |  | 1,100
Commodity contracts subject to rate recovery |  | ― |  | ― |  | 107 |  | 12 |  | 119
Total | $ | 717 | $ | 383 | $ | 107 | $ | 12 | $ | 1,219
Liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate instruments | $ | ― | $ | 47 | $ | ― | $ | ― | $ | 47
Commodity contracts not subject to rate recovery |  | 1 |  | ― |  | ― |  | (1) |  | ―
Commodity contracts subject to rate recovery |  | ― |  | 51 |  | ― |  | (36) |  | 15
Total | $ | 1 | $ | 98 | $ | ― | $ | (37) | $ | 62
(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 June 30, 2015
|  |  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Commodity contracts not subject to rate recovery | $ | ― | $ | ― | $ | ― | $ | 2 | $ | 2
Commodity contracts subject to rate recovery |  | ― |  | 1 |  | ― |  | 1 |  | 2
Total | $ | ― | $ | 1 | $ | ― | $ | 3 | $ | 4
Liabilities: |  |  |  |  |  |  |  |  |  |
Commodity contracts not subject to rate recovery | $ | 1 | $ | ― | $ | ― | $ | (1) | $ | ―
Total | $ | 1 | $ | ― | $ | ― | $ | (1) | $ | ―
|  | Fair value at December 31, 2014
|  |  | Level 1 |  | Level 2 |  | Level 3 |  | Netting(1) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Commodity contracts subject to rate recovery | $ | ― | $ | 1 | $ | ― | $ | 2 | $ | 3
Total | $ | ― | $ | 1 | $ | ― | $ | 2 | $ | 3
Liabilities: |  |  |  |  |  |  |  |  |  |
Commodity contracts not subject to rate recovery | $ | 2 | $ | ― | $ | ― | $ | (2) | $ | ―
Commodity contracts subject to rate recovery |  | ― |  | 1 |  | ― |  | ― |  | 1
Total | $ | 2 | $ | 1 | $ | ― | $ | (2) | $ | 1
(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 Congestion Revenue Rights (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 June 30,
| 2015 | 2014
Balance as of April 1 | $ | 102 | $ | 95
Realized and unrealized (losses) gains |  | (60) |  | 5
Allocated transmission instruments |  | 1 |  | ―
Settlements |  | (1) |  | (15)
Balance as of June 30 | $ | 42 | $ | 85
Change in unrealized gains or losses relating to |  |  |  |
instruments still held at June 30 | $ | 45 | $ | ―
| Six months ended June 30,
| 2015 | 2014
Balance as of January 1 | $ | 107 | $ | 99
Realized and unrealized (losses) gains |  | (54) |  | 6
Allocated transmission instruments |  | 1 |  | 1
Settlements |  | (12) |  | (21)
Balance as of June 30 | $ | 42 | $ | 85
Change in unrealized gains or losses relating to |  |  |  |
instruments still held at June 30 | $ | 46 | $ | ―
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-priced electricity positions are reviewed and compared with market conditions to determine reasonableness. SDG&E expects all costs related to these instruments t o be recoverabl e 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 pr ices published by the California Independent System O perator (CA ISO), an objective source. Annual auction prices are published once a year, typically in the middle of November, and remain in effect for the following calendar year. The impact associated with discounting is negligible. Because auction prices a re a less observable input, these instruments are classified as Level 3. From January 1, 2015 to December 31, 2015 the auction prices range from $(16) per MWh to $8 per MWh at a given location, and from January 1, 2014 to December 31, 2014 the auction pric es ranged from $(6) per MWh to $12 per MWh at a given location. T he 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 co sts, 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 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 fo r 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 that range from $26.75 per MWh to $63.33 per MWh. A significant increase or decrease in market electricity forward prices would result in a significantly higher or lower fair value, respectively. Realized gains and losses associated with CRRs and long-term electricity positions are recor ded in Cost of Electric Fuel and Purchased Power, which is recoverable in rates, on the Condensed 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, temporary investments, accounts and notes receivable, dividends and accounts payable, short-term debt and customer deposits) approximate their carrying amounts. Investments in life insurance contracts that we hold in support of our Supplemental Executive Retirement, Cash Balance Restoration and Deferred Compensation Pla ns are carried at cash surrender values, which represent the amount of cash that could be realized under the contracts. The following table provides the carrying amounts and fair values of certain other financial instruments at June 30, 2015 and December 31, 2014:
FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
|  | June 30, 2015
|  | Carrying |  | Fair value
|  | amount |  | Level 1 | Level 2 | Level 3 | Total
Sempra Energy Consolidated: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(1)(2) | $ | 13,569 |  | $ | ― | $ | 13,772 | $ | 725 | $ | 14,497
Preferred stock of subsidiary |  | 20 |  |  | ― |  | 23 |  | ― |  | 23
SDG&E: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(2)(3) | $ | 4,747 |  | $ | ― | $ | 4,772 | $ | 320 | $ | 5,092
SoCalGas: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(4) | $ | 2,512 |  | $ | ― | $ | 2,608 | $ | ― | $ | 2,608
Preferred stock |  | 22 |  |  | ― |  | 24 |  | ― |  | 24
|  | December 31, 2014
|  | Carrying |  | Fair value
|  | amount |  | Level 1 | Level 2 | Level 3 | Total
Sempra Energy Consolidated: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(1)(2) | $ | 12,347 |  | $ | ― | $ | 12,782 | $ | 917 | $ | 13,699
Preferred stock of subsidiary |  | 20 |  |  | ― |  | 23 |  | ― |  | 23
SDG&E: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(2)(3) | $ | 4,461 |  | $ | ― | $ | 4,563 | $ | 425 | $ | 4,988
SoCalGas: |  |  |  |  |  |  |  |  |  |  |
Total long-term debt(4) | $ | 1,913 |  | $ | ― | $ | 2,124 | $ | ― | $ | 2,124
Preferred stock |  | 22 |  |  | ― |  | 25 |  | ― |  | 25
(1) | Before reductions for unamortized discount (net of premium) of $21 million at both June 30, 2015 and December 31, 2014, and excluding build-to-suit and capital leases of $351 million and $310 million at June 30, 2015 and December 31, 2014, 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.
(2) | Level 3 instruments include $320 million and $325 million at June 30, 2015 and December 31, 2014, respectively, related to Otay Mesa VIE.
(3) | Before reductions for unamortized discount of $10 million and $11 million at June 30, 2015 and December 31, 2014, respectively, and excluding capital leases of $231 million and $234 million at June 30, 2015 and December 31, 2014, respectively.
(4) | Before reductions for unamortized discount of $7 million and $8 million at June 30, 2015 and December 31, 2014, respectively, and excluding capital leases of $2 million and $1 million at June 30, 2015 and December 31, 2014, respectively.
We base the fair value of certain long-term debt and preferred stock on a market approach using quoted market prices for identical or similar securities in thinly-traded markets (Level 2). We value other long-term debt using an income approach based on the present value of estimated future cash flows discounted at rates available for similar securities (Level 3). We provide the fair values for the securiti es held in the nuclear decommissioning trust funds related to SONGS in Note 9 below.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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