SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 
FORM 10-K/A

AMENDMENT 1

(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934 

For the fiscal year ended     December 31, 1997          
   OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934

For the transition period from                     to     

                Exact
               Name of                                                  
Commission     Registrant                                 IRS Employer    
File           as specified        State of               Identification  
Number         in its charter      Incorporation          Number                
----------     --------------      --------------         --------------     
1-3779         SAN DIEGO GAS &                                            
               ELECTRIC COMPANY      California           95-1184800       
                                                                                
1-11439        ENOVA CORPORATION     California           33-0643023       
                                                                                
101 ASH STREET, SAN DIEGO, CALIFORNIA                      92101   
-----------------------------------------                ----------
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code    (619)696-2000
                                                     --------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                                  Name of each exchange
Title of each class                                 on which registered
-------------------                               ---------------------
San Diego Gas & Electric Company
Preference Stock (Cumulative) Without Par Value
  (except $1.70 and $1.7625 Series)                             American
Cumulative Preferred Stock, $20 Par Value (except 4.60% Series) American

Enova Corporation                    
Common Stock, Without Par Value                     New York and Pacific

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
San Diego Gas & Electric Company                    None
Enova Corporation                                   None

Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange 
Act of 1934 during the preceding 12 months and (2) has been subject to 
such filing requirements for the past 90 days. 
Yes [ X ]   No  [   ]   
 
Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this 
Form 10-K or any amendment to this 
Form 10-K.  [  ]  

Exhibit Index on page 90.  Glossary on page 98. 

Aggregate market value of the voting stock held by non-affiliates of the 
registrant as of January 31, 1998:
Enova Corporation Common Stock                            $2.9 Billion
San Diego Gas & Electric Company Preferred Stock          $22 Million

Common Stock outstanding without par value as of January 31, 1998:
Enova Corporation                                          113,606,162
San Diego Gas & Electric Company     Wholly owned by Enova Corporation

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the March 1998 Proxy Statement prepared for the April 1998 
annual meeting of shareholders are incorporated by reference into Part 
III.

                                   1

<PAGE>

ENOVA CORPORATION


FORM 10-K/A

AMENDMENT 1


The undersigned registrant hereby amends Item 7, Management's Discussion 
and Analysis of Financial Condition and Results of Operations, and Item 
8, Financial Statements and Supplementary Data, of its Annual Report for 
1997 on Form 10-K as set forth in the pages attached hereto. In these 
items, the following modifications have been made: in the second 
paragraph on page 26 and the second paragraph of Note 1 on page 58, in 
both places,  the word "shareholder" should be replaced by the word 
"shareable."   

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this amendment to be signed on its behalf by 
the undersigned thereunto duly authorized.






Date:  February 27, 1998                By:       /s/   F. H. Ault
                                           _____________________________
                                           Vice President and Controller

                                     2

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  
RESULTS OF OPERATIONS -- Enova Corporation/San Diego Gas & Electric  
Company 
 
GENERAL 
Enova Corporation (referred to herein as Enova, which includes the  
parent and its wholly owned subsidiaries) was formed in January 1996 to  
become the parent company of San Diego Gas & Electric (SDG&E). At that  
time SDG&E's outstanding common stock was converted on a share-for-share  
basis into Enova Corporation common stock. SDG&E's debt securities,  
preferred stock and preference stock were unaffected and remained with  
SDG&E.     
     SDG&E is an operating public utility engaged in the electric and  
gas businesses. It generates and purchases electric energy and  
distributes it to 1.2 million customers in San Diego County and an  
adjacent portion of Orange County, California. It also purchases and  
distributes natural gas to 721,000 customers in San Diego County and  
transports electricity and gas for others. California has enacted an  
electric-restructuring law that affects the operations of SDG&E and the  
other California investor-owned electric utilities. This information is  
discussed below under "Electric Industry Restructuring." Enova has  
several other subsidiaries (referred to herein as nonutility  
subsidiaries). Enova Financial invests in limited partnerships  
representing approximately 1,200 affordable-housing properties located  
throughout the United States. Califia leases computer equipment. These  
two subsidiaries are expected to provide income tax benefits over the  
next several years. Enova International is involved in energy projects  
outside the United States. Pacific Diversified Capital is the parent  
company of Phase One Development, which has been involved in real estate  
development. Enova Energy is an energy management and consulting firm  
offering services to utilities and large consumers. In December 1997,  
subsidiaries of Enova Energy and Houston Industries formed a joint  
venture, El Dorado Energy, to build, own and operate a natural gas-fired  
power plant in Boulder City, Nevada. Enova Technologies is in the  
business of developing new technologies generally related to utilities  
and energy. In January 1997, Enova Energy, Enova Technologies and  
certain subsidiaries of Pacific Enterprises (discussed below) formed  
Energy Pacific, a joint venture to market integrated energy and energy- 
related products and services. Energy Pacific has recently changed its  
name to Sempra Energy Solutions. In January 1998, Sempra Energy  
Solutions completed the acquisition of CES/Way International, a leading  
national energy-service provider. In December 1997, Enova and Pacific  
Enterprises completed the joint acquisition of AIG Trading Corporation  
(AIG), a leading natural gas and power marketing firm based in  
Greenwich, Connecticut. AIG has subsequently changed its name to Sempra  
Energy Trading. Additional information regarding Enova's nonutility  
subsidiaries is described herein under "Electric Generation" and  
"Liquidity and Capital Resources - Investing Activities," and in Notes  
1, 2 and 3 of the notes to consolidated financial statements.  
 
BUSINESS COMBINATION 
In October 1996, Enova and Pacific Enterprises (PE), parent company of  
Southern California Gas Company (SoCalGas), announced that they have  
agreed to combine the two companies. Enova and PE have selected Sempra  
Energy as the name of the new company formed by the business  
combination. As a result of the combination, which was unanimously  
approved by the boards of directors of both companies, (i) each  
outstanding share of common stock of Enova will be converted into one  
share of common stock of Sempra Energy, (ii) each outstanding share of  
common stock of PE will be converted into 1.5038 shares of Sempra  
Energy's common stock and (iii) the preferred stock and preference stock  
 
                                   25 
 
<PAGE> 
 
of SDG&E, PE and SoCalGas will remain outstanding. In March 1997, the  
shareholders of Enova and PE approved the combination. Consummation of  
the combination is conditional upon the approvals of the California  
Public Utilities Commission (CPUC) and various other regulatory bodies  
(see below). 
     In June 1997, the CPUC revised its procedural schedule for the  
business combination after delaying until July 1997 its final decision  
on the Performance-Based Ratemaking (PBR) proceeding for SoCalGas. (The  
CPUC's decision on SoCalGas' PBR proceeding adopted a rate-setting  
mechanism for SoCalGas that provides incentives for cost control and  
efficiency improvement, including comparisons of productivity and other  
factors against benchmarks based on industry performance. SoCalGas had  
been operating under traditional "cost of service" regulation. The  
decision provides for, among other things, a net rate reduction of $160  
million.) In accordance with the CPUC's revised schedule, the  
administrative law judge handling the proceeding issued a draft decision  
on February 23, 1998. That draft decision proposed approval of the  
combination. Among other things, the draft decision proposed 50/50  
sharing of the net cost savings resulting from the combination between  
shareholders and customers, but only for five years rather than the 10  
years sought. The draft decision would reduce the net shareable  
savings from $1.1 billion to $340 million. The CPUC decision is  
scheduled for the end of March 1998. 
    In November 1997, the California attorney general issued an  
advisory opinion concluding that the business combination would not  
adversely affect competition within either the wholesale electricity or  
interstate gas markets. The opinion included a recommendation that the  
CPUC consider requiring SoCalGas to auction offsetting volumes of  
natural gas transportation rights equal to the load with SDG&E that will  
be withdrawn if the CPUC concludes that SDG&E would be eliminated as a  
potential competitor in the partially regulated intrastate gas  
transmission market.  
    In September 1997, the CPUC staff issued a final Negative  
Declaration, concluding that the business combination will not result in  
any activities or operational changes that may cause a significant  
adverse effect on the environment. 
    In June 1997, the Federal Energy Regulatory Commission (FERC)  
approved the business combination, subject to the conditions that the  
combined company will not unfairly use any potential market power  
regarding natural gas transportation to gas-fired electric-generation  
plants. The FERC acknowledged that this issue is clearly within the  
jurisdiction of the CPUC and the conditions will be considered during  
the CPUC review process. Therefore, the FERC's final decision is not  
expected to be issued before the CPUC's approval. 
    In August 1997, the Nuclear Regulatory Commission approved the  
business combination, ruling that the creation of the new company will  
not affect SDG&E's qualifications to hold the license for its  
20-percent interest in the San Onofre Nuclear Generating Station  
(SONGS).  
    Remaining regulatory reviews, which are not expected to be  
concluded prior to the CPUC decision, include clearance by the U.S.  
Department of Justice, under the Hart-Scott-Rodino Antitrust Act, and  
approval by the Securities and Exchange Commission. Both agencies will  
review the business combination for its impacts on competition. 
    The commencement of combined operations is expected in the summer  
of 1998. Earnings of the combined company could be negatively impacted  
in 1998, and to a lesser extent in subsequent years, by delays in  
achieving cost savings from the combination caused by the later-than- 
expected effective combination date, CPUC limitations on transactions  
between SDG&E and SoCalGas, which may be modified by the CPUC  
combination proceedings (discussed below), the possibility that the CPUC  
 
                                    26 
 
<PAGE> 
 
might not permit recovery of certain costs of the combination and might  
reduce the period or percentage for shareholder participation in the  
related cost savings, and slower-than-anticipated growth in revenues  
from Sempra Energy Solutions. Additional information regarding the  
proposed business combination is described in Note 1 of the notes to  
consolidated financial statements. 
 
RESULTS OF OPERATIONS 
Operating Results	  Electric revenues increased 11 percent in 1997,  
primarily due to an increase in sales for resale to other utilities and  
increased retail sales volume due to weather. Electric revenues  
increased 6 percent in 1996, primarily due to the accelerated recovery  
of SONGS Units 2 and 3 which commenced in April 1996. Gas revenues  
increased 14 percent in 1997, primarily due to weather-related higher  
sales volume and higher purchased-gas prices, offset by an increase in  
customer purchases of gas directly from other suppliers (for whom SDG&E  
provides transportation). Gas revenues increased 12 percent in 1996,  
reflecting higher purchased-gas prices.  
 
Operating Expenses   Electric fuel expense increased 22 percent in 1997,  
primarily due to increased natural gas prices and increased natural gas- 
fired generation resulting from SONGS Units 2 and 3 refuelings. Electric  
fuel expense increased 34 percent in 1996, primarily due to increased  
generation and increases in natural gas prices. 
    Purchased-power expenses increased 42 percent in 1997, primarily due  
to increased volume, which resulted from lower nuclear-generation  
availability from the SONGS refuelings and increased use of purchased  
power due to decreased purchased-power prices. Purchased-power expenses  
decreased 9 percent in 1996, reflecting the availability of lower-cost  
nuclear generation and decreases in purchased-power capacity charges. 
    Gas purchased for resale increased 20 percent in 1997 and 34 percent  
in 1996, primarily due to increases in sales volume and in natural gas  
prices.  
    The changes in maintenance expenses reflect the nuclear refuelings  
in 1997 and 1995. 
    General and administrative expenses decreased 15 percent in 1997,  
primarily due to higher 1996 costs for customer service, partially  
offset by the expenses relating to the proposed business combination  
with Pacific Enterprises.  
 
Earnings   1997 earnings per common share were $2.20 compared to $1.98  
in 1996 and $1.94 in 1995. The increase in earnings in 1997 is primarily  
due to incentive rewards for Performance-Based Ratemaking (PBR) and  
Demand-Side Management (DSM) programs, retirements of debt and common  
shares, and improved earnings of Enova Financial, partially offset by  
expenses relating to the proposed business combination with Pacific  
Enterprises. Other events that improved 1997 earnings included income  
tax benefits from the 1995 sale of Wahlco Environmental Systems and  
capital gains from the sale of property held by Pacific Diversified  
Capital. The increase in earnings in 1996 is primarily due to DSM  
rewards, partially offset by SDG&E's lower authorized return on equity.  
    Earnings per share for the quarter ended December 31, 1997, were  
$0.72, compared to $0.47 for the same period in 1996. The increase in  
earnings for the quarter was due to numerous offsetting factors,  
including PBR and DSM rewards, retirement of common shares, higher off- 
system electric sales, previously announced seasonal variability related  
to the elimination of electric balancing accounts, and expenses relating  
to the proposed business combination with Pacific Enterprises. Although  
the elimination of the balancing accounts did not have any effect on  
1997 full-year earnings, quarterly earnings now fluctuate significantly,  
depending on monthly or seasonal changes in electric sales and fuel  
 
                                  27 
 
<PAGE> 
 
prices. In general, earnings are expected to be higher in high sales- 
volume months and lower in others. In 1998 and future years, full-year  
earnings also will be affected by sales volumes. 
    Some of the PBR rewards recorded in 1997 had been pending with the  
CPUC for several years. During 1998, SDG&E will not have a multiple-year  
backlog of these PBR rewards to record. In addition, because of the  
elimination of the Generation and Dispatch PBR mechanism and the San  
Onofre Nuclear Generating Station Target Capacity Factor mechanism, the  
impact of performance rewards on future earnings will be reduced. 
    Califia and Enova Financial's contributions to earnings for the year  
were $0.21 in 1997, $0.19 in 1996 and $0.17 in 1995. Contributions to  
earnings by Enova Energy and Enova Technologies were negatively impacted  
in 1997 by the slower-than-anticipated growth in revenues from Sempra  
Energy Solutions. 
 
LIQUIDITY AND CAPITAL RESOURCES 
SDG&E's operations continue to be a major source of liquidity. In  
addition, financing needs are met primarily through issuances of short- 
term and long-term debt. These capital resources are expected to remain  
available. Cash requirements include utility capital expenditures,  
nonutility subsidiaries' investments, and repayments and retirements of  
long-term debt. Nonutility cash requirements include capital  
expenditures associated with subsidiary activities related to the plans  
to distribute natural gas in Mexico and the eastern United States; new  
products; investments in Sempra Energy Trading, CES/Way International  
and El Dorado Energy; and affordable-housing, leasing and other  
investments. Additional information on these activities is discussed  
under "Cash Flows from Investing Activities" below. In addition to  
changes described elsewhere, major changes in cash flows are described  
below. 
 
Cash Flows from Operating Activities   The major changes in cash flows  
from operations among the three years result from changes in income  
taxes, accounts receivable, other current assets, accounts payable, and  
regulatory balancing accounts. The changes in cash flows related to  
income taxes were primarily due to the timing of certain deductions in  
1997 and higher 1996 income tax payments in connection with settlements  
with the Internal Revenue Service. The changes in cash flows related to  
accounts and notes receivable were primarily due to increases in sales  
in December 1997. The changes in cash flows related to other current  
assets were primarily due to advances made to unconsolidated  
subsidiaries during late 1997. The changes in cash flows related to  
accounts payable were primarily due to fluctuations in natural gas  
purchases and prices from year to year. The changes in cash flows  
related to regulatory balancing accounts were primarily due to  
overcollections in the Electric Revenue Adjustment Mechanism (ERAM)  
account as a result of higher-than-authorized sales volumes in 1997 and  
changes in prices for natural gas in 1996.  
    Quarterly cash dividends of $0.39 per share were declared for the  
year ended December 31, 1997. The dividend payout ratios for the years  
ended December 31, 1997, 1996, 1995, 1994 and 1993 were 71 percent, 79  
percent, 80 percent, 130 percent, and 82 percent, respectively. The  
increase in the payout ratio for the year ended December 31, 1994, was  
due to writedowns recorded during 1994. For additional information  
regarding the writedowns, see Enova Corporation's 1996 Annual Report.  
The payment of future dividends is within the discretion of the Enova  
Board of Directors and is dependent upon future business conditions,  
earnings and other factors. Net cash flows provided by operating  
activities currently are sufficient to maintain the payment of dividends  
at the present level. 
 
                                   28 
 
<PAGE> 
 
    Enova has initiated an enterprise-wide program to prepare the  
company's computer systems and applications for the year 2000 and  
beyond. A comprehensive review has been conducted to identify the  
systems that could be affected by the year 2000 issue and an  
implementation plan has been developed. The year 2000 issue results from  
time-sensitive software applications that recognize a date using only  
two digits. For example, "00" may be recognized as the year 1900 rather  
than the year 2000. This could result in a system failure or  
miscalculations. This year 2000 problem creates risk for the company  
from unforeseen problems in its own computer systems and from third  
parties with whom the company deals on financial transactions.  
Management has not yet assessed whether the company's date-conversion  
project will be completed on a timely basis nor the impact of third- 
party computer system failures. The company expects to incur internal  
staff costs as well as consulting and other expenses related to  
infrastructure and facilities enhancements necessary to prepare the  
systems for the year 2000. Expenditures for the testing and conversion  
of system applications were $4 million in 1997 and are expected to be  
between $20 million and $25 million over the next two years. These costs  
are expensed as incurred. 
 
Cash Flows from Financing Activities   Enova did not issue additional  
stock or long-term debt in 1997, except for SDG&E-related refinancings  
and electric industry restructuring-related rate-reduction bonds.  
Additional information concerning the rate-reduction bonds is discussed  
below and under "Electric Industry Restructuring." Enova and SDG&E do  
not plan any issuances in 1998.  
    In October 1997, SDG&E issued $25 million of tax-exempt Industrial  
Development Bonds (IDBs) through the City of Chula Vista. The variable- 
rate bonds were issued at an initial rate of 3.5 percent. The proceeds  
from the bonds, which will mature in 2023, were used to redeem $25  
million of 8.75 percent IDBs with the City of San Diego. Also during  
1997, SDG&E purchased and retired $62 million of 9.625 percent and 8.5  
percent first mortgage bonds. 
    In December 1997, $658 million of rate-reduction bonds were issued  
on SDG&E's behalf at an average interest rate of 6.26 percent. A portion  
of the bond proceeds was used to retire $14.9 million of variable-rate,  
taxable IDBs in December 1997 and $15.7 million of variable-rate,  
taxable IDBs in January 1998. Additional retirements are planned.  
Additional information concerning the rate-reduction bonds is provided  
below under "Electric Industry Restructuring." 
    SDG&E currently has approximately $83 million of temporary  
investments that will be maintained into the future. The purpose of  
maintaining such a level of investments is to offset a like amount of  
long-term debt.  The specific debt series being offset consists of  
variable-rate IDBs. The CPUC has approved specific ratemaking treatment  
which allows SDG&E to offset IDBs as long as there is at least a like  
amount of temporary investments. If and when SDG&E requires all or a  
portion of the $83 million of IDBs to meet future needs for long-term  
debt, such as to finance new construction, the amount of investments  
which is being maintained will be reduced below $83 million and the  
level of IDBs being offset will be reduced by the same amount. 
    During 1997, Enova Corporation repurchased three million shares of  
its outstanding common stock. During 1998, the $1.82-series preferred  
stock becomes callable at $26 per share.  
    SDG&E maintains its capital structure so as to obtain long-term  
financing at the lowest possible rates. The following table shows the  
percentages of capital represented by the various components. In 1993  
the capital structure is net of the construction funds held by a  
trustee. 
 
                                   29 
 
<PAGE> 
 
 
                        1993   1994   1995   1996      1997        Goal 
                                                   ----------- 
                                                   (A)     (B)      (A) 
------------------------------------------------------------------------ 
Common equity            47 %   48 %   49 %   50 %  51 %   41 %  46-49 % 
Preferred stock           4      4      4      4     4      3      3-5 
Debt and leases          49     48     47     46    45     56    46-49 
------------------------------------------------------------------------ 
Total                   100 %  100 %  100 %  100 % 100 %  100 %    100 % 
------------------------------------------------------------------------ 
  (A) Excludes rate reduction bonds ($658 million at December 31, 1997). 
  (B) Includes rate reduction bonds ($658 million at December 31, 1997). 
 
    The CPUC regulates SDG&E's capital structure, limiting the dividends  
it may pay Enova. At December 31, 1997, $152 million of common equity  
was available for future dividends. In addition, at December 31, 1997,  
approximately one half of the $658 million of rate-reduction bonds was  
also available for future dividends. Of this available amount, $100  
million in dividends were paid by SDG&E to Enova on January 2, 1998, in  
conjunction with the acquisition of Sempra Energy Trading. This  
restriction is not expected to affect Enova's ability to meet its cash  
obligations. 
    In December 1997, Moody's Investors Service upgraded SDG&E's long- 
term-bond rating from an A1/stable outlook to an A1/positive outlook,  
reflecting SDG&E's business mix, which is heavily weighted toward  
distribution and transmission. The outlook upgrade also reflects the  
probability of recovery of stranded costs and the expected proceeds from  
the sale of generating assets (see discussion under "Electric  
Generation"). Standard & Poor's Ratings Group affirmed SDG&E's long- 
term-bond rating of A+/positive outlook. 
 
Cash Flows from Investing Activities   Cash used in investing activities  
in 1997 included SDG&E's construction expenditures and payments to its  
nuclear decommissioning trusts. SDG&E's capital expenditures were $197  
million in 1997 and are estimated to be $242 million in 1998. Actual  
capital expenditures in 1997 were lower than anticipated due to changes  
in the scope and timing of several major capital projects. Estimated  
1998 capital expenditures are closer to normal levels, with increases to  
meet industry restructuring needs and improvements to the electric  
distribution system. SDG&E continuously reviews its construction,  
investment and financing programs and revises them in response to  
changes in competition, customer growth, inflation, customer rates, the  
cost of capital, and environmental and regulatory requirements. Among  
other things, the level of expenditures in the next few years will  
depend heavily on the impacts of industry restructuring and the sale of  
SDG&E's Encina and South Bay power plants and other electric-generating  
assets, as well as the timing and extent of expenditures to comply with  
air-emission reduction and other environmental requirements. Additional  
information concerning the proposed sale of SDG&E's electric-generating  
assets is provided below under "Electric Generation." 
    Payments to the nuclear-decommissioning trusts are expected to  
continue until SONGS is decommissioned, which is not expected to occur  
before 2013. Although Unit 1 was permanently shut down in 1992, it is  
scheduled to be decommissioned concurrently with Units 2 and 3. However,  
this will depend on the outcome of the proposed sale of SDG&E's  
electric-generating assets, including its interest in SONGS. 
    Enova's level of nonutility expenditures in the next few years will  
depend primarily on the activities of its subsidiaries other than SDG&E,  
including Sempra Energy Solutions and the natural gas distribution  
projects in Mexico and the eastern United States. Nonutility  
expenditures were $158 million in 1997 and are estimated to be $100  
 
                                    30 
 
<PAGE> 
 
million in 1998, not including special projects. The decrease in  
expected expenditures in 1998 is primarily attributable to a decrease in  
expected investments by Enova Financial. 
    As discussed previously, in January 1997, certain subsidiaries of  
Enova and Pacific Enterprises formed Sempra Energy Solutions, a joint  
venture to market integrated energy and energy-related products and  
services. During 1997, Enova invested $21 million in Sempra Energy  
Solutions. In addition, in January 1998, Sempra Energy Solutions  
completed the acquisition of CES/Way International, a leading national  
energy-service provider. 
    In September 1997, Sempra Energy Solutions formed a joint venture  
with Bangor Hydro to build, own and operate a $40 million natural gas  
distribution system in Bangor, Maine. In addition, in December 1997  
Sempra Energy Solutions signed a partnership agreement with Frontier  
Utilities to build and operate a $55 million natural gas distribution  
system in North Carolina.  
    In December 1997, Enova and Pacific Enterprises completed the joint  
acquisition of AIG Trading Corporation, a leading natural gas and power  
marketing firm. Enova contributed $110.6 million to that acquisition,  
which was subsequently renamed Sempra Energy Trading. 
    In July 1997, Enova International and its partners, Pacific  
Enterprises International and Proxima S.A. de C.V., delivered their  
first supply of natural gas to Baja California. The Mexican company  
formed by the three partners, Distribuidora de Gas Natural de Mexicali,  
will invest up to $25 million during the first five years of the 30-year  
license period to supply natural gas to the region. The partnership is  
expected to serve 25,000 customers over the next four years. In March  
1997, the Mexican Energy Regulatory Commission awarded the partners  
their second natural gas privatization license in Mexico, allowing  
Distribuidora de Gas Natural de Chihuahua to build and operate a natural  
gas distribution system in Chihuahua. That partnership plans to invest  
approximately $50 million in the project and is expected to serve 50,000  
customers over the next five years. In January 1998, Enova International  
and its partner, Union Fenosa ACEX of Spain, submitted a bid to build,  
own and operate a natural gas distribution system in Monterrey, Mexico.  
The project will consist of an initial investment of $190 million for a  
system that will serve 320,000 customers, with an additional $60 million  
invested over five years to serve a total of 400,000 customers. Two  
other international consortia have submitted bids on the project. The  
Mexican Energy Regulatory Commission is expected to announce the winning  
bidder in March 1998. 
    In December 1997, Enova Power Corporation, a subsidiary of Enova  
Energy, and Houston Industries Power Generation formed El Dorado Energy,  
a joint venture to build, own and operate a natural gas power plant in  
Boulder City, Nevada. Enova invested $2.3 million in El Dorado Energy in  
1997 and expects to invest an additional $37 million in 1998 and $17  
million in 1999.  
    Additional information about these acquisitions and joint ventures  
is discussed in Note 3 of the notes to consolidated financial  
statements. 
 
Derivative Financial Instruments   The policy of Enova is to use  
derivative financial instruments to reduce exposure to fluctuations in  
interest rates, foreign currency exchange rates and natural gas prices.  
These financial instruments are with major investment firms and expose  
Enova to market and credit risks. At times, these risks may be  
concentrated with certain counterparties, although counterparty  
nonperformance is not anticipated. 
    SDG&E periodically enters into interest-rate swap and cap agreements  
to moderate its exposure to interest-rate changes and to lower its  
overall cost of borrowing. These swap and cap agreements generally  
 
                                  31 
 
<PAGE> 
 
remain off the balance sheet as they involve the exchange of fixed- and  
variable-rate interest payments without the exchange of the underlying  
principal amounts. The related gains or losses are reflected in the  
income statement as part of interest expense. SDG&E would be exposed to  
interest-rate fluctuations on the underlying debt should other parties  
to the agreement not perform. Such nonperformance is not anticipated. At  
December 31, 1997, SDG&E had an agreement for a floating-to-fixed-rate  
swap associated with $45 million of variable-rate bonds maturing in  
2002. 
    SDG&E's pension fund periodically uses foreign-currency forward  
contracts to reduce its exposure to exchange-rate fluctuations  
associated with certain investments in foreign equity securities. These  
contracts generally have maturities ranging from three to six months. At  
December 31, 1997, and 1996, there were no foreign-currency forward  
contracts outstanding. 
    In November 1996, SDG&E commenced price risk management activities,  
on a limited basis, in the area of hedging price volatility of natural  
gas requirements. SDG&E uses energy derivatives for both hedging and  
trading purposes within certain limitations imposed by company policies.  
These derivative financial instruments include forward contracts, swaps,  
options and other contracts which have maturities ranging from 30 days  
to nine months. Additional information on derivative financial  
instruments of SDG&E is provided in Note 8 of the notes to consolidated  
financial statements and under "Market Risk" below. 
    Sempra Energy Trading Corp. derives a substantial portion of its  
revenue from trading activities in natural gas, petroleum and  
electricity. Trading profits are earned as Sempra Energy Trading acts as  
a dealer in structuring and executing transactions that permit its  
counterparties to manage their risk profiles. In addition, Sempra Energy  
Trading takes positions in energy markets based on the expectations of  
future market conditions. These positions may be offset with similar  
positions or may be offset in the exchange traded markets. These  
positions include options, forwards, futures and swaps. Additional  
information on derivative financial instruments of Sempra Energy Trading  
is provided in Note 3 of the notes to consolidated financial statements  
and under "Market Risk" below. 
 
Market Risk   Market risk arises from the potential change in the value  
of financial instruments and physical commodities based on fluctuations  
in natural gas, petroleum and electricity commodity exchange prices and  
basis. Market risk is also affected by changes in volatility and  
liquidity in markets in which these instruments are traded. SDG&E  
utilizes a variety of financial structures, products and terms which  
require the company to manage, on a portfolio basis, the resulting  
market risks inherent in these transactions, subject to parameters  
established by company policies. Market risks are monitored separately  
from the groups that create or actively manage these risk exposures to  
ensure compliance with the company's stated risk management policies at  
both the Enova and subsidiary levels.  
    SDG&E measures the risk in its portfolio on a daily basis in  
accordance with value-at-risk methodologies, which simulate forward  
price curves in the energy markets to estimate the size and probability  
of future potential losses. The quantification of market risk using  
value-at-risk provides a consistent measure of risk across diverse  
energy markets and products. The use of this methodology requires a  
number of key assumptions, including the selection of a confidence level  
for losses and the holding period chosen for the value-at-risk  
calculation.  
    SDG&E expresses value-at-risk as the amount of SDG&E's earnings at  
risk based on a 95 percent confidence level using a time horizon of the  
average life of the portfolio. As of December 31, 1997, SDG&E's value- 
 
                                    32 
 
<PAGE> 
 
at-risk for its price-risk management activities was $2.8 million (net  
of income taxes) of SDG&E's net earnings. Since this is not an absolute  
measure of risk under all conditions for all products, SDG&E performs  
alternative scenario analyses to estimate the economic impact of a  
sudden market movement on the value of the portfolio. This and the  
professional judgment of experienced business and risk managers is used  
to supplement the value-at-risk methodology. 
    Based upon the ongoing policies and controls discussed above, SDG&E  
does not anticipate a material adverse effect on its financial position  
or results of operations as a result of market fluctuations. 
    A Risk Management Committee, composed of Enova and Pacific  
Enterprises officers, is responsible for monitoring operating  
performance and compliance with established risk management policies for  
Sempra Energy Solutions and its subsidiaries. Sempra Energy Trading has  
established position and stop-loss limits for each line of business to  
monitor its market risk and traders are required to maintain positions  
within these market-risk limits. The position limits are monitored  
during the day by Sempra Energy Trading's senior management, which  
determines whether to adjust its market-risk profile. 
    All of Sempra Energy Trading's market-risk sensitive instruments are  
entered into for trading purposes. The following table provides the  
potential changes in net principal transaction revenues resulting from  
hypothetical 10-percent increases and 10-percent decreases in the  
applicable commodity prices for significant commodity market-price  
sensitive instruments held on December 31, 1997. This quantitative  
information about market risk is limited because it does not take into  
account potential hedging transactions or changes to the market-risk  
profile of the portfolio by management in reaction to such changes in  
market conditions. Additionally, it does not take into account  
anticipated management reaction to breaches of counterparty credit  
limitations caused by the shocks within a given risk category. Further,  
inherent limitations arise from assuming that hypothetical 10-percent  
increases and 10-percent decreases in commodity prices move in the same  
direction, and this information does not recognize co-movements in  
prices. 
    The following table presents the impact on Sempra Energy Trading's  
net principal transaction revenues resulting from a 10-percent increase  
and a 10-percent decrease in the respective December 31, 1997 commodity  
prices: 
 
In thousands of dollars 
----------------------------------------------------------------------- 
Commodity                    10% Increase    10% Decrease 
----------------------------------------------------------------------- 
Crude oil and derivatives    $ 3,288         $ (3,288) 
Natural gas                   (2,441)           2,441 
Emission credits                 (81)              81 
Electricity                     (540)             540 
----------------------------------------------------------------------- 
 
    SDG&E's payments to the externally managed nuclear decommissioning  
trust funds expose SDG&E to market risk. Market risk can result from  
fluctuations in the volatility and liquidity in markets in which these  
instruments are traded. These fluctuations can also correspondingly  
affect the level of funding of the decommissioning trust. 
 
Credit Risk   Credit risk relates to the risk of loss that would be  
incurred as a result of nonperformance by counterparties pursuant to the  
terms of their contractual obligations. SDG&E and Sempra Energy Trading  
avoid concentration of counterparties and maintain credit policies with  
regard to counterparties that management believes significantly minimize  
 
                                   33 
 
<PAGE> 
 
overall credit risk. These policies include an evaluation of potential  
counterparties' financial condition (including credit rating),  
collateral requirements under certain circumstances, and the use of  
standardized agreements which allow for the netting of positive and  
negative exposures associated with a single counterparty. 
    The companies monitor credit risk exposure through an approval  
process and the assignment of credit limits. These credit limits are  
established based on risk and return considerations under terms  
customarily available in the industry. 
 
ELECTRIC INDUSTRY RESTRUCTURING 
Background   In September 1996, the state of California enacted a law  
restructuring California's electric utility industry (AB 1890). The  
legislation adopts the December 1995 CPUC policy decision that  
restructures the industry to stimulate competition and reduce rates. 
    In May 1997, the CPUC issued a decision providing for direct access  
to be available to all California electric customers on January 1, 1998.  
The CPUC concluded that there were no technical or operational barriers  
to justify limiting direct access availability once electric  
restructuring commenced. The decision allowed customers to begin  
choosing electricity providers in November 1997. In December 1997, the  
CPUC agreed to delay the initiation of electric restructuring until  
March 31, 1998, to allow California's Power Exchange (PX) and  
Independent System Operator (ISO) to resolve computer software problems  
and conduct additional user training. Beginning on March 31, 1998,  
customers will be given the choice to continue to purchase electricity  
from their local utility under regulated tariffs, to enter into  
contracts with other energy service providers (i.e., private generators,  
brokers, etc.) or buy their power from the independent PX that serves as  
a wholesale power pool allowing all energy producers to participate  
competitively. The PX obtains power from qualifying facilities, nuclear  
units and, lastly, from the lowest-bidding suppliers. The ISO will  
schedule the power transactions and access to the transmission system.  
To facilitate this, the utilities will transfer the operational control  
of their transmission facilities to the ISO. The local utility will  
continue to provide distribution services, regardless of which source  
the consumer chooses. These customer choices will, in effect, open up  
the service territories of all California utilities. This will allow  
Enova, through Sempra Energy Solutions, to pursue customers outside of  
SDG&E's traditional service territory to provide electricity and other  
energy-related services. This also allows other energy-service providers  
to enter SDG&E's service territory to compete for generation customers.  
	 
Transition Costs   Both the CPUC decision and the California legislation  
allow utilities, within certain limits, the opportunity to recover their  
stranded costs incurred for certain above-market CPUC-approved  
facilities, contracts and obligations through the establishment of a  
nonbypassable competition transition charge (CTC). The CPUC's direction  
is that traditional cost-of-service regulation will move toward  
performance-based regulation.  
    Utilities are allowed a reasonable opportunity to recover their  
stranded costs through December 31, 2001. Stranded costs such as  
reasonable employee-related costs directly caused by restructuring and  
purchased-power contracts (including those with qualifying facilities)  
may be recovered beyond 2001, subject to a reasonableness review. 
    SDG&E's transition-cost application, filed in October 1996,  
identified $2 billion of estimated stranded costs, including generation,  
purchased-power and qualifying facilities' contracts, and regulatory  
assets. The amount includes sunk costs, as well as ongoing costs the  
CPUC finds necessary to maintain generation facilities through December  
31, 2001. These identified transition costs were determined to be  
 
                                   34 
 
<PAGE> 
 
reasonable by independent auditors selected by the CPUC, with $73  
million identified as requiring further action before being deemed  
recoverable transition costs. Through December 31, 1997, SDG&E has  
recovered transition costs of $0.2 billion for nuclear generation and  
$0.1 billion for nonnuclear generation. Additionally, overcollections of  
$0.1 billion recorded in the Energy Cost Adjustment Clause (ECAC) and  
the Electric Revenue Adjustment Mechanism (ERAM) balancing accounts as  
of December 31, 1997, have been applied to transition cost recovery,  
leaving approximately $1.6 billion for future CTC recovery. Included  
therein is $0.4 billion for post-2001 purchased-power-contract payments  
that may be recovered after 2001, subject to an annual reasonableness  
review. Outside of the exceptions discussed above, transition costs not  
recovered by December 31, 2001, will not be collected from customers.  
Such costs, if any, would be written off as a charge against earnings.  
AB 1890 clarifies that all existing and future consumers must pay CTC,  
except for a segment of self-generators and irrigation districts. SDG&E  
has very few, if any, of these types of customers and does not  
anticipate a material impact from the exemption. During the 1998-2001  
period, the recovery of transition costs is limited by the rate freeze  
(discussed below). Management believes that the rates within the rate  
freeze and the proceeds from the sale of electric-generating assets  
(discussed below) will be sufficient to recover all of SDG&E's approved  
transition costs by December 31, 2001. 
    In November 1997, the CPUC issued a decision allowing SDG&E the  
opportunity to recover all of its sunk nonnuclear generation costs, with  
the exception of $39 million in fixed costs relating to gas  
transportation to power plants, which SDG&E believes will be recovered  
through contracts with the ISO. The decision does not include generation  
plant additions made after December 20, 1995. Instead, SDG&E must file  
an application seeking a CPUC reasonableness review thereof. In October  
1997, SDG&E filed an application with the CPUC seeking recovery of $14.5  
million in 1996 capital additions for the Encina and South Bay power  
plants. A final CPUC decision is expected in 1998. 
 
Rate-Reduction Bonds   AB 1890 required a 10-percent rate reduction for  
residential and small-commercial customers beginning in January 1998. AB  
1890 also provided for the issuance of rate-reduction bonds by an agency  
of the state of California to enable California's investor-owned  
electric utilities (IOUs) to use the proceeds to finance this rate  
reduction. In December 1997, $658 million of rate-reduction bonds were  
issued on behalf of SDG&E at an average interest rate of 6.26 percent.  
These bonds are being repaid over 10 years by SDG&E's residential and  
small-commercial customers via a nonbypassable charge on their  
electricity bills. In September 1997, SDG&E and the other California  
IOUs received a favorable ruling by the Internal Revenue Service on the  
tax treatment of the bond transaction. The ruling states, among other  
things, that the receipt of the bond proceeds does not result in gross  
income to SDG&E at the time of issuance, but rather the proceeds are  
taxable over the life of the bonds. The Securities and Exchange  
Commission determined that these bonds should be reflected on the  
utilities' balance sheets as debt, even though the bonds are not secured  
by, or payable from, utility assets, but rather by the revenue streams  
collected from customers. SDG&E formed a subsidiary, SDG&E Funding LLC,  
to facilitate the issuance of the rate-reduction bonds. In exchange for  
the bond proceeds, SDG&E sold to SDG&E Funding all of its rights to the  
revenue streams. Consequently, the revenue streams are not the property  
of SDG&E nor are they available to satisfy any claims of SDG&E's  
creditors. There was no gain or loss recorded from the issuance of the  
bonds or the receipt of the proceeds. SDG&E has begun to use a portion  
of the proceeds to redeem its higher cost debt, described herein under  
"Liquidity and Capital Resources - Financing Activities." In December  
 
                                   35 
 
<PAGE> 
 
1997, the California Supreme Court dismissed a petition submitted by a  
coalition of consumer groups to overturn the CPUC's Rate-Reduction Bond  
financing orders. A related coalition of consumer groups has also put  
together a California ballot initiative that, among other things, would  
possibly result in an additional 10-percent rate reduction, require that  
this rate reduction be achieved through the elimination or reduction of  
CTC payments and prohibit the collection of the charge on customer bills  
that would finance the rate reduction. SDG&E cannot predict the final  
outcome of the initiative. If the initiative were to be voted into law  
and upheld by the courts, the financial impact on SDG&E could be  
substantial. 
 
Electric Rates   AB 1890 included a rate freeze for all customers. Until  
the earlier of March 31, 2002, or when transition cost recovery is  
complete, SDG&E's average system rate will be frozen at 9.64 cents per  
kilowatt-hour, except for the impacts of natural gas price changes and  
the mandatory 10-percent rate reduction. As a result of significant  
increases in natural gas prices during the first quarter of 1997, SDG&E  
received CPUC authority to increase rates, but rates could not be  
increased above 9.985 cents per kwh. With the 10-percent rate reduction  
beginning on January 1, 1998, the maximum system-average rate became  
9.43 cents per kwh. SDG&E's ability to recover its transition costs is  
dependent on its total revenues under the rate freeze exceeding normal  
cost-of-service revenues during the transition period by at least the  
amount of the CTC less any proceeds from the sale of electric-generating  
assets (discussed below). During the transition period, SDG&E will not  
earn awards from special programs, such as DSM, unless total revenues  
are also adequate to cover the awards. Fuel-price volatility is the most  
significant variable in the ability of SDG&E to recover its transition  
costs and program awards.   
 
Balancing Accounts   In October 1997, the CPUC issued a decision  
eliminating the ECAC and the ERAM balancing accounts, effective December  
31, 1997. As of December 31, 1997, net overcollections for these  
accounts of $130 million have been transferred to the interim  
transition-cost-balancing account to be applied to CTC recovery, subject  
to a reasonableness review. The decision eliminates further ECAC  
proceedings for generation costs incurred beginning in January 1998.  
Additionally, the decision eliminates all other electric balancing  
accounts, except for those associated with the administration of DSM,  
low-income assistance, and research and development (R&D) programs,  
which will be used to assist in the administration of public-purpose  
funds (discussed below). In addition, SDG&E has requested the retention  
of the Electric Vehicle balancing account through December 31, 1998. The  
elimination of ERAM and ECAC resulted in earnings volatility that began  
in the first quarter of 1997. Although no effect in 1997 was seen for  
the full year, quarterly earnings fluctuated significantly, as was the  
case for the other California IOUs. The largest impacts were reduced  
first-quarter earnings and increased third-quarter earnings. This  
quarterly volatility pattern is expected to continue in the future.  
Beginning in 1998, annual earnings also will be affected by sales  
volumes. 
 
Regulatory Accounting Standards   SDG&E had been accounting for the  
economic effects of regulation on all of its utility operations in  
accordance with Statement of Financial Accounting Standards (SFAS) No.  
71, "Accounting for the Effects of Certain Types of Regulation." Under  
SFAS No. 71, a regulated entity records a regulatory asset if it is  
probable that, through the ratemaking process, the utility will recover  
that asset from customers. Regulatory liabilities represent future  
reductions in revenues for amounts due to customers. 
 
                                      36 
 
<PAGE> 
 
    The SEC indicated a concern that the California IOUs may not meet  
the criteria of SFAS No. 71 with respect to their electric-generation  
net regulatory assets. SDG&E has ceased the application of SFAS No. 71  
to its generation business, in accordance with the conclusion by the  
Emerging Issues Task Force of the Financial Accounting Standards Board  
that the application of SFAS No. 71 should be discontinued when  
deregulatory legislation is issued that determines that a portion of an  
entity's business will no longer be regulated. SDG&E's discontinuance of  
SFAS No. 71 applied to its generation business will not result in a  
write-off of its net regulatory assets, since the CPUC has approved the  
recovery of these assets by the distribution portion of its business,  
subject to the rate freeze. 
 
Consumer Education   In August 1997, the CPUC authorized $89 million in  
rate recovery to fund California's Customer Education Program (CEP).  
SDG&E's share of this amount is approximately $9 million. The CEP's  
objective is to provide information to California electric customers to  
help them compare and choose among electric products and services in a  
competitive environment. The CEP began in September 1997 and is expected  
to end by May 31, 1998.  
 
Public-Purpose Programs   The CPUC has established a new administrative  
structure and initial funding levels to manage DSM, renewable-energy,  
low-income assistance and R&D programs beginning in January 1998. The  
CPUC has formed independent boards to oversee a competitive bidding  
process to administer DSM and low-income programs. On an interim basis,  
the CPUC has required that the California IOUs transfer their  
administration of DSM and low-income programs to these boards by October  
1998, and January 1999, respectively. Until the transition to a fully  
competitive energy-service market is complete, customers will be  
required to provide the funding. For 1998, SDG&E will be funded $32  
million and $12 million for DSM and renewables programs, respectively.  
Low-income assistance funding will remain at 1996 authorized levels. The  
California Energy Commission will be allocated most of the $63 million  
authorized to administer the R&D programs, of which SDG&E will be funded  
$4 million. SDG&E's earnings potential from DSM programs will be reduced  
when the transition to the competitive market is complete.   
 
Federal Restructuring Activities   In October 1997, the FERC approved  
key elements of the California IOUs' restructuring proposal effective  
January 1, 1998. This includes the transfer by the IOUs of the  
operational control of their transmission facilities to the ISO, which  
is under FERC jurisdiction. The FERC also approved, on an interim basis,  
the establishment of the California PX to operate as an independent  
wholesale power pool. The California IOUs will pay to the PX a  
restructuring charge (in four annual installments) and an  
administrative-usage charge for each megawatt-hour of volume transacted.  
SDG&E's share of the restructuring charge is approximately $10 million,  
which is eligible for transition-cost recovery. The IOUs have jointly  
guaranteed $300 million of commercial loans to the PX and ISO for their  
development and initial start-up. SDG&E's share of the guarantee is $30  
million. 
 
ELECTRIC GENERATION	 
In November 1997, SDG&E's Board of Directors approved a plan to auction  
the company's power plants and other electric-generating assets,  
enabling SDG&E to continue to concentrate its business on the  
transmission and distribution of electricity and natural gas as  
California opens its electric utility industry to competition in 1998.  
The plan includes the divestiture of SDG&E's fossil power plants - the  
Encina (Carlsbad, California) and South Bay (Chula Vista, California)  
 
                                   37 
 
<PAGE> 
 
plants - and its combustion turbines, as well as its 20-percent interest  
in the San Onofre Nuclear Generating Station (SONGS) and its portfolio  
of long-term purchased-power contracts, including those with qualifying  
facilities. The power plants, including the interest in SONGS, have a  
net book value as of December 31, 1997, of $800 million ($200 million  
for fossil and $600 million for SONGS) and a combined generating  
capacity of 2,400 megawatts. The proceeds from the auction will be  
applied directly to SDG&E's transition costs. In December 1997, SDG&E  
filed with the CPUC for its approval of the auction plan. The sale of  
the nonnuclear generating assets is expected to be completed by the end  
of the first quarter of 1999. 
    Although the other California IOUs are required by the CPUC to  
divest themselves of at least 50 percent of their fossil power plants as  
a part of industry restructuring, SDG&E is not under the same mandate.  
Other companies in the free market, not bound by the rules that apply to  
the state's regulated utilities, are expected to have a greater  
opportunity to provide competitive generation services with SDG&E's  
plants. The FERC has ruled that it has jurisdiction over all electricity  
sales into the California PX, meaning that the buyers of divested  
California power plants would qualify as wholesale power generators. The  
FERC's ruling has increased the interest in the nonnuclear plants owned  
by the other California IOUs, and is expected to have the same impact on  
SDG&E's fossil plants. 
    As previously discussed, subsidiaries of Enova Energy and Houston  
Industries have formed a joint venture to build, own and operate a 480- 
megawatt natural gas-fired power plant in Boulder City, Nevada, 40 miles  
southeast of Las Vegas. The joint venture, called El Dorado Energy,  
plans to sell the plant's electricity into the wholesale market to  
utilities throughout the western United States. The new plant will  
employ an advanced combined-cycle gas-turbine technology, enabling it to  
become one of the more efficient and environmentally friendly power  
plants in the nation. Its proximity to existing natural gas pipelines  
and electric transmission lines will allow El Dorado to actively compete  
in the deregulated electric-generation market. Construction on the $280  
million project, which will be funded 50 percent each by Enova and  
Houston Industries, began in the first quarter of 1998, with an expected  
operational date set for the fourth quarter of 1999.    
 
AFFILIATE TRANSACTION GUIDELINES 
In December 1997, the CPUC issued a decision on the rules governing  
transactions between a regulated utility and its affiliates that are not  
regulated by the CPUC. The decision adopts guidelines that are more  
favorable to consumers and less restrictive to utilities and their  
affiliates than the conditions that were recommended in October 1997 by  
a CPUC administrative law judge's proposed decision and an alternate  
decision by two CPUC commissioners. Key elements of the decision  
include: allowing the unregulated affiliates to operate within the  
utility's service territory without limitation; permitting utilities to  
share logos with their parent company and unregulated affiliates as long  
as proper disclaimers to California customers clearly communicate the  
utility-affiliate relationship; and allowing officers or board of  
directors of the parent company to also hold positions with the utility  
or unregulated affiliate, but not both. The rules adopted require  
separating functions between the utility and the affiliates with the  
exception of sharing certain corporate support services. These  
guidelines include transactions between affiliated utilities. However,  
these transactions have been addressed by the CPUC in the Enova/Pacific  
Enterprises business combination proceedings and the draft decision  
arising from that proceeding would exclude transactions between SDG&E  
and SoCalGas from the guidelines.   
 
                                   38 
 
<PAGE> 
 
PERFORMANCE-BASED RATEMAKING (PBR)   
Background   The CPUC has affirmed its belief that the new competitive  
environment should be based on policies that encourage efficient  
operation and improved productivity rather than on reasonableness  
reviews and disallowances. SDG&E has been participating in a PBR process  
for base rates, gas procurement, and electric generation and dispatch.  
SDG&E has applied to extend the Gas Procurement mechanism. The  
Generation and Dispatch mechanism has been terminated. SDG&E has filed a  
proposal for a new Distribution PBR mechanism to replace the current  
experimental Base-Rate PBR when it terminates at the end of 1998. 
 
Base Rates   In December 1997, the CPUC approved $6.5 million in  
performance rewards for SDG&E's 1996 PBR. The CPUC has eliminated the  
price-performance benchmark indicator, which compares SDG&E's average  
electric-system rate to a national average, from SDG&E's Base-Rate PBR  
effective in 1997 due to the electric-rate freeze. For the 1998 PBR, all  
customer sharing amounts will be credited to the transition-cost  
balancing account rather than refunded to customers. 
    In December 1997, the CPUC eliminated SDG&E's 1999 General Rate Case  
filing requirement, and replaced it with a 1999 Cost of Service study in  
its new Distribution PBR application for electric distribution and gas  
operations (filed in January 1998 to begin in 1999). The Distribution  
PBR, which includes six categories of performance indicators, will  
measure SDG&E's ability to provide efficient, safe and reliable utility  
transmission (gas only) and distribution services. The application  
requests a $60 million increase in SDG&E's revenue requirements ($35  
million for electric distribution and $25 million for gas). The electric  
distribution increase does not affect rates and, therefore, reduces the  
amount available to recover transition costs. Under the new mechanism,  
all customer-sharing amounts will be reflected as reductions to future  
rates rather than refunded directly to customers. SDG&E's ability to  
control its costs within the limits of the revenues authorized by the  
study will impact future earnings. 
 
1998 Revenues   In December 1997, the CPUC approved a $67 million  
increase in SDG&E's authorized electric distribution revenue  
requirements and a $7 million increase in gas base rates, effective on  
January 1, 1998. The electric distribution increase, which reflects 1998  
PBR escalations, does not affect rates and, therefore, reduces the  
amount available to recover transition costs. 
 
Natural Gas   In September 1997, SDG&E filed with the CPUC its  
application for a permanent Gas Procurement PBR mechanism. The filing  
proposes a mechanism structured around a commodity price cap plus an  
incremental adjustment, designed to recover transportation costs to the  
California border. SDG&E is holding settlement discussions with the  
CPUC's Office of Ratepayer Advocates over the proposed  
new mechanism. 
 
NATURAL GAS OPERATIONS  
The ongoing restructuring of the natural gas utility industry has  
allowed customers to bypass utilities as suppliers and, to a lesser  
extent, as transporters of natural gas. Currently, nonutility  
electricity producers and other large customers may use a natural gas  
utility's facilities to transport gas purchased from other suppliers.  
Also, smaller customers may form groups to buy natural gas from another  
supplier. 
    In January 1998, the CPUC opened a rulemaking proceeding designed to  
open the natural gas industry to all customers, expanding the  
opportunities of residential and small commercial customers to have  
access to competing natural gas suppliers. The rulemaking will allow  
 
                                     39 
 
<PAGE> 
 
smaller customers to receive the price and service benefits already  
realized by larger customers. A potential benefit from future natural  
gas reform, benefiting both customers and industry participants, would  
be the opportunity for energy providers to offer integrated retail  
electric and natural gas service to develop synergies between the two  
energy markets. In developing a natural gas retail restructuring  
proposal, the CPUC has provided several guiding principles: replace  
traditional regulation with competition in those markets where  
competition or the potential for competition exists, thereby allowing  
market forces to dictate prices; reform regulation for those utility  
functions that are not fully competitive; maintain a standard of  
consumer protection in both competitive and noncompetitive markets; and  
maintain supply reliability and ensure the safety of consumers' natural  
gas service. Hearings on the proposed restructuring are scheduled to  
begin in April 1998, with a final CPUC decision expected to be issued  
before the end of 1998.  
    Enova's nonutility subsidiaries are involved in several projects to  
develop natural gas systems in the United States and in Mexico.  
Discussion on these activities is included herein under "Liquidity and  
Capital Resources - Investing Activities."  
 
COST OF CAPITAL 
In October 1997, SDG&E filed with the CPUC its 1998 Market Indexed  
Capital Adjustment Mechanism (MICAM). MICAM, approved by the CPUC in  
1996, adjusts SDG&E's authorized cost of capital based on changes in  
interest rates. For the current MICAM review, interest-rate movements  
over the corresponding 12 months did not trigger the mechanism to  
change, resulting in SDG&E's 1998 cost of capital remaining at 1997  
authorized levels of 11.60 percent for the rate of return on equity and  
9.35 percent for the rate of return on rate base. Beginning in 1998,  
MICAM only applies to electric distribution and gas rate base, and  
excludes the rates of return on nuclear and nonnuclear generating assets  
(recovered as transition costs), which are authorized at rates of 7.14  
percent and 6.75 percent, respectively. During 1998, the CPUC will  
conduct proceedings to establish separate rates for the electric and gas  
components. SDG&E's authorized capital structure, which excludes the  
rate-reduction bonds, remains 49.75 percent common equity, 44.5 percent  
long-term debt and 5.75 percent preferred stock.  
    Electric transmission rates are regulated by the FERC. SDG&E's 1998  
rate of return for transmission is 9.54 percent. 
 
RESOURCE PLANNING 
Sources of Fuel and Energy    SDG&E's primary sources of fuel and  
purchased power include natural gas from Canada and the Southwest,  
surplus power from other utilities in the Southwest and the Northwest,  
and uranium from Canada. Although short-term natural gas supplies are  
volatile due to weather and other conditions, these sources should  
provide SDG&E with an adequate supply of competitively priced natural  
gas. SDG&E has been involved in litigation concerning its long-term  
contracts for natural gas with four Canadian suppliers. SDG&E has  
settled with one supplier, with gas being delivered under the terms of  
the settlement agreement. The remaining suppliers have ceased deliveries  
pending legal resolution. A U.S. Court of Appeals has upheld a U.S.  
District Court's decision to invalidate the contracts with two of the  
suppliers, although the value of the gas delivered has not yet been  
determined by the court. SDG&E has long-term pipeline capacity  
commitments related to these contracts for natural gas supplies. If the  
supply of Canadian natural gas to SDG&E is not resumed, SDG&E intends to  
use the capacity in other ways, including the release of a portion of  
this capacity to third parties. SDG&E cannot predict the final outcome  
of the litigation, but does not expect that an unfavorable outcome would  
 
                                   40 
 
<PAGE> 
 
have a material effect on its financial condition, results of operations  
or liquidity. Additional information on Canadian gas litigation is  
discussed in Note 9 of the notes to consolidated financial statements. 
 
San Onofre Nuclear Generating Station   In January 1996, the CPUC  
approved the accelerated recovery of the existing capital costs of Units  
2 and 3. The decision allowed SDG&E to recover its remaining investment  
in the units at a lower rate of return (7.14 percent) over an eight-year  
period beginning in 1996, rather than over the life of the units'  
license, which extends to 2013. The accelerated recovery began in April  
1996. At December 31, 1997, approximately $600 million was not yet  
recovered. California electric-industry-restructuring legislation  
requires that all generation-related stranded assets, which includes the  
uneconomic sunk costs of Units 2 and 3, be recovered by 2001. The 1996  
decision also includes a performance incentive plan that encourages  
continued, efficient operation of the plant. Under this plan, customers  
will pay about $0.04 per kilowatt-hour through December 31, 2003. This  
pricing structure replaces the traditional method of recovering the  
units' operating expenses and capital improvements. This is intended to  
make the units more competitive with other sources.  
    The California Coastal Commission (CCC) approved the SONGS owners'  
preliminary plan to provide 150 acres of wetlands restoration, 150 acres  
of kelp reef and other mitigation that was ordered by the CCC in April  
1997. SDG&E's share of the cost is estimated to be $23 million.  
Additional information is included under "Water Quality" below. 
    While conducting routine inspections of Unit 3 during its scheduled  
refueling in the second quarter of 1997, it was noted that, in several  
areas, the thickness of the heat transfer tubes' structural supports was  
significantly reduced, apparently due to erosion. In June 1997, the  
Nuclear Regulatory Commission approved the removal of the affected tubes  
from service as a corrective action and the unit's return to service.  
Unit 2, which also had this inspection during its scheduled refueling in  
the first quarter of 1997, showed no signs of this type of erosion. As a  
precautionary measure, Unit 2 was shut down in January 1998 for a 30-day  
mid-cycle outage for an inspection of its steam generators. The SONGS  
owners have scheduled a 30-day outage for Unit 3 in March 1998, for this  
inspection. The discovery of such problems in the future could increase  
the possibility that the units would be removed from service prior to  
2013.   
 
ENVIRONMENTAL MATTERS 
SDG&E's operations are conducted in accordance with federal, state and  
local environmental laws and regulations governing hazardous wastes, air  
and water quality, land use and solid-waste disposal. SDG&E incurs  
significant costs to operate its facilities in compliance with these  
laws and regulations, and to clean up the environment as a result of  
prior operations of SDG&E or of others. 
    The costs of compliance with environmental laws and regulations are  
normally recovered in customer rates. However, restructuring of the  
California electric-utility industry (see "Electric Industry  
Restructuring" above) will change the way utility rates are set and  
costs are recovered. SDG&E has proposed a change in the hazardous waste  
memorandum account to exclude cleanup costs related to electric- 
generation activities, as described below. Capital costs related to  
environmental regulatory compliance for electric generation are intended  
to be included in transition costs for recovery through 2001. However,  
depending on the final outcome of industry restructuring and the impact  
of competition, the costs of compliance with future environmental  
regulations may not be fully recoverable. 
    Capital expenditures to comply with environmental laws and  
regulations were $4 million in 1997, $6 million in 1996 and $4 million  
 
                                    41 
 
<PAGE> 
 
in 1995, and are expected to be $38 million in the aggregate over the  
next five years. These expenditures primarily include the estimated cost  
of retrofitting SDG&E's power plants to reduce air emissions. However,  
in November 1997 SDG&E announced a plan to auction its power plants and  
other electric-generating resources. Additional information on SDG&E's  
plan to divest its electric-generating assets is discussed in Note 10 of  
the notes to consolidated financial statements.  
 
Hazardous Wastes   In 1994, the CPUC approved the Hazardous Waste  
Collaborative, which allows utilities to recover cleanup costs of  
hazardous waste contamination at sites where the utility may have  
responsibility or liability under the law to conduct or participate in  
any required cleanup. In general, utilities are allowed to recover 90  
percent of their cleanup costs and any related costs of litigation with  
responsible parties. SDG&E has asked the CPUC that beginning on January  
1, 1998, the hazardous waste memorandum account be modified to exclude  
cleanup costs related to electric-generation activities. Electric-  
generation-related cleanup costs are intended to be eligible for  
transition cost recovery. A CPUC decision is still pending. 
    SDG&E lawfully disposed of hazardous wastes at facilities owned and  
operated by other entities. Operations at these facilities may result in  
actual or threatened risks to the environment or public health. Where  
the owner or operator of such a facility fails to complete any  
corrective action required by regulatory agencies to abate such risks,  
applicable environmental laws may impose an obligation to undertake  
corrective actions on SDG&E and others who disposed of hazardous wastes  
at the facility. 
    During the early 1900s, SDG&E and its predecessors manufactured gas  
from coal and oil at its Station A facility and at two small facilities  
in Escondido and Oceanside. Certain amounts of residual by-products from  
the gas manufacturing process and subsurface hydrocarbon contamination  
were discovered on portions of the Station A site during an  
environmental assessment which was completed in 1996. A risk assessment  
has been completed for Station A and demolition was performed during  
1997 at a cost of $1 million. Cleanup will commence in 1998, to be  
completed in 1999, and is estimated to cost $5 million for subsurface  
remediation. SDG&E also may be required to assess certain off-site  
contamination which, in part, may have originated from the gas  
manufacturing process or other operations at Station A. Not included in  
this estimate are potential costs related to a previously removed  
shallow underground tank-like structure found under a public street  
immediately west of Station A. Any potential costs related to this tank  
would be immaterial. SDG&E is completing negotiations for an appropriate  
site-remediation work plan for Station A with the County of San Diego  
Department of Environmental Health. 
    The Escondido facility was remediated during 1990 through 1993 at a  
cost of $3 million and a site-closure letter from the Department of  
Environmental Health has been received. However, contaminants similar to  
those on the Escondido site have been observed on adjacent property. In  
1997, SDG&E assessed the nature and extent of these off-site  
contaminants at a cost of $75,000. Hazardous contaminants were found on  
property to the east of the site and are believed to have originated  
from SDG&E operations. Remediation of these contaminants was initiated  
in 1997 and completed in 1998 at a total cost of $250,000. A site- 
closure letter has been requested from the Department of Environmental  
Health. Nonhazardous contaminants were determined to be present on  
property to the north, but may not require further action subject to  
future land-use decisions. Finally, potential contaminants resulting  
from the gas manufacturing process by-products were assessed at the  
Oceanside facility, as well as on adjacent property. The cost to  
remediate the hazardous contaminants discovered in the assessment at the  
 
                                   42 
 
<PAGE> 
 
property adjacent to the Oceanside facility and at the facility itself  
is estimated to be $150,000. 
    Asbestos was used in the construction of SDG&E's Station B power  
plant, which closed in 1993. Activities to dismantle and decommission  
the facility require the removal of the asbestos in a manner complying  
with all applicable environmental, health and safety laws. This work  
also includes the removal or cleanup of paints containing heavy metals  
and small amounts of PCBs, fuel oil and other substances. These  
activities commenced in 1997 at a cost of $3 million. This work effort  
is expected to be completed in 1998 at an estimated additional cost of  
$3 million.  
 
Electric and Magnetic Fields (EMFs)  In property-damage litigation in  
1996, the California Supreme Court agreed with SDG&E and unanimously  
affirmed the 1995 California Court of Appeal decision that the CPUC has  
exclusive jurisdiction over EMF health and safety issues. The California  
Supreme Court also stated that scientific evidence is insufficient to  
conclude that EMFs pose a health hazard. In addition, in a December 1997  
case involving Pacific Gas & Electric, the California Court of Appeal  
held that the CPUC has exclusive jurisdiction over EMF personal injury,  
as well as EMF property-damage cases. Plaintiffs have sought review of  
this case at the California Supreme Court, which request is still  
pending. 
    Although scientists continue to research the possibility that  
exposure to EMFs causes adverse health effects, to date, science has  
demonstrated no cause-and-effect relationship between adverse health  
effects and exposure to the type of EMFs emitted by utilities, power  
lines and other electrical facilities. Some laboratory studies suggest  
that such exposure creates biological effects, but those effects have  
not been shown to be harmful. The studies that have most concerned the  
public are certain epidemiological studies, some of which have reported  
a weak correlation between childhood leukemia and the proximity of homes  
to certain power lines and equipment. Other epidemiological studies  
found no correlation between estimated exposure and any disease.  
Scientists cannot explain why some studies using estimates of past  
exposure report correlations between estimated EMF levels and disease,  
while others do not. 
    To respond to public concerns, the CPUC has directed California  
utilities to adopt a low-cost EMF-reduction policy that requires  
reasonable design changes to achieve noticeable reduction of EMF levels  
that are anticipated from new projects. However, consistent with the  
major scientific reviews of the available research literature, the CPUC  
has indicated that no health risk has been identified. 
 
Air Quality   The San Diego Air Pollution Control District (APCD)  
regulates air quality in San Diego County in conformance with the  
California and Federal Clean Air Acts. California's standards are more  
restrictive than federal standards. 
    During 1996 and 1997, SDG&E installed equipment on South Bay Unit 1  
in order to comply with the nitrogen oxide emission limits that the APCD  
imposed on electric-generating boilers through its Rule 69. Under this  
rule, SDG&E must maintain the total nitrogen oxide emissions from its  
entire system below a prescribed emissions cap, which decreases  
periodically through 2005. The estimated capital costs for compliance  
with the rule through 2005 are $60 million. The California Air Resources  
Board has expressed concern that Rule 69 does not meet the requirements  
of the California Clean Air Act and may advocate or propose more  
restrictive emissions limitations which will likely cause SDG&E's Rule  
69 compliance costs to increase.   
    Under a South Coast Air Quality Management District program called  
RECLAIM, SDG&E is required to reduce its nitrogen oxide emission levels  
 
                                      43 
 
<PAGE> 
 
of the natural gas compressor engines at its Moreno gas-compression  
facility by 10 percent a year through 2003. This will be accomplished  
through the installation of new emission-monitoring equipment,  
operational changes to take advantage of low-emission engines and engine  
retrofits. The cost of complying with RECLAIM may be as much as $3  
million.  
	 
Water Quality   Wastewater discharge permits issued by the Regional  
Water Quality Control Board (RWQCB) for SDG&E's Encina and South Bay  
power plants are required to enable SDG&E to discharge its cooling water  
and certain other wastewaters into the Pacific Ocean and into San Diego  
Bay. Wastewater discharge permits are prerequisite to the continued  
cooling-water and other wastewater discharges and, therefore, the  
continued operation of the power plants as they are currently  
configured. Increasingly stringent cooling-water and wastewater  
discharge limitations may be imposed in the future and SDG&E may be  
required to build additional facilities or modify existing facilities to  
comply with these requirements. Such facilities could include wastewater  
treatment facilities, cooling towers or offshore-discharge pipelines.  
Any required construction could involve substantial expenditures, and  
certain plants or units may be unavailable for electric generation  
during construction. 
    In 1981, SDG&E submitted a demonstration study in support of its  
request for two exceptions to certain thermal discharge requirements  
imposed by the California Thermal Plan for Encina power plant Unit 5. In  
November 1994, the RWQCB issued a new discharge permit, subject to the  
results of certain additional thermal discharge and cooling water  
related studies, to be used in considering SDG&E's earlier thermal  
discharge exception requests. The results of these additional studies  
were submitted to the RWQCB and the United States Environmental  
Protection Agency in 1997. If SDG&E's exception requests are denied,  
SDG&E could be required to construct off-shore discharge facilities at a  
cost of $75 million to $100 million or to perform mitigation, the costs  
of which may be significant. 
    In November 1996, the RWQCB issued a new discharge permit to SDG&E  
for the South Bay power plant. SDG&E filed an appeal to the State Water  
Resources Control Board (SWRCB) of various provisions which SDG&E  
considers unduly stringent. The SWRCB has not yet formally acted on the  
appeal. However, the SWRCB sponsored workshops with the RWQCB and the  
Environmental Health Coalition in November and December 1997, as a  
result of which several important issues may be resolved in 1998. As  
with the Encina power plant, increasingly stringent cooling-water and  
wastewater discharge limitations may require SDG&E to build additional  
facilities to comply with these requirements. To comply with its current  
permit, in 1997 SDG&E diverted its in-plant wastewater discharges from  
San Diego Bay to the sanitary sewer at a cost of $2 million. 
    During 1997, in conjunction with its permit requirements to treat  
wastewater at its Encina and South Bay power plants, SDG&E evaluated  
whether any remediation activities may be required at the power plants  
based on currently available records and other information. In addition,  
SDG&E evaluated whether remediation is required at its Silvergate plant,  
which was shut down in 1984. As a result of these evaluations, only  
minor and localized remediation efforts were required. However, these  
evaluations did not include an extensive sampling and analysis of the  
property at such sites. Extensive sampling and analysis may identify  
additional contamination or other environmental conditions requiring  
remediation.  
    As previously discussed, in December 1997, SDG&E filed an  
application with the CPUC to divest its electric-generating assets,  
including its Encina and South Bay power plants, gas combustion turbines  
and its interest in the San Onofre Nuclear Generating Station. As a part  
 
                                    44 
 
<PAGE> 
 
of the sale of any such facilities, SDG&E will complete an environmental  
baseline analysis of such sites, which may identify significant  
contamination or other environmental conditions requiring abatement or  
remediation. 
    The California Coastal Commission (CCC) required a study of the  
offshore impact on the marine environment from the cooling-water  
discharge by SONGS Units 2 and 3 as a condition of granting a  
construction permit. The study concluded that some environmental damage  
is caused by the discharge. To mitigate the damage, the CCC ordered  
Southern California Edison, SDG&E and the cities of Anaheim and  
Riverside to improve the plant's fish-protection system, build a 300- 
acre artificial reef to help restore kelp beds and restore 150 acres of  
coastal wetlands. SDG&E and Edison asked the CCC to reconsider and  
modify this mitigation plan to reduce the size of the artificial reef  
and shorten the monitoring period based on new studies that show that  
the environmental damage is much less than anticipated. During 1997 the  
CCC ordered that the plant owners proceed with a mitigation program that  
includes the enhanced fish-protection system, a 150-acre artificial reef  
and restoration of 150 acres of coastal wetlands. In addition, plant  
owners must deposit $3.6 million with the state for the enhancement of  
marine fish hatchery programs and pay for state monitoring and oversight  
of the mitigation projects. SDG&E's share of the cost is estimated to be  
$23 million. The pricing structure contained in the CPUC's decision  
regarding accelerated recovery of SONGS Units 2 and 3 (see "San Onofre  
Nuclear Generating Station" above) likely will accommodate most of these  
added mitigation costs. 
 
NEW ACCOUNTING STANDARDS 
In June 1997, the Financial Accounting Standards Board (FASB) issued  
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting  
Comprehensive Income." This statement, which is effective for 1998  
financial statements, requires reporting and display of comprehensive  
income and its components (revenues, expenses, gains and losses) in a  
full set of general-purpose financial statements. The term  
"comprehensive income" describes all changes in equity of a business  
enterprise during a period from transactions and other events including,  
as applicable, foreign-currency items, minimum pension liability  
adjustments and unrealized gains and losses on certain investments in  
debt and equity securities. Upon adoption, financial statements for  
earlier periods provided for comparative purposes must be restated. The  
impact on Enova and SDG&E of the adoption of this new accounting  
standard is considered immaterial to the companies' financial  
statements. 
    Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about  
Segments of an Enterprise and Related Information." This statement,  
which is effective for 1998 financial statements, requires that public  
companies report certain information about operating segments in  
complete sets of financial statements of the enterprise and in condensed  
financial statements of interim periods. It also requires certain  
information about the company's products and services, geographic areas  
in which they operate, and their major customers. Under SFAS No. 131,  
operating segments are to be determined consistent with the way that  
management organizes and evaluates financial information internally for  
making operating decisions and assessing performance. Upon adoption,  
statements for earlier periods provided for comparative purposes must  
reflect this information. The impact of the adoption of this new  
accounting standard is the potential redefinition of the company's  
segments. The company estimates that the primary segments upon adoption  
of SFAS No. 131 will be electric operations, gas operations, energy  
services and other. 
 
                                   45 
 
<PAGE> 
 
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS 
This Annual Report to Shareholders includes forward-looking statements  
within the definition of Section 27A of the Securities Act of 1933 and  
Section 21E of the Securities Exchange Act of 1934. When used in this  
"Management's Discussion and Analysis of Financial Condition and Results  
of Operations," the words "estimates," "expects," "anticipates," "plans"  
and "intends," variations of such words, and similar expressions are  
intended to identify forward-looking statements that involve risks and  
uncertainties. 
    Although Enova and SDG&E believe that their expectations are based  
on reasonable assumptions, they can give no assurance that those  
expectations will be realized. Important factors that could cause actual  
results to differ materially from those in the forward-looking  
statements herein include political developments affecting state and  
federal regulatory agencies, the pace and substance of electric-industry  
deregulation in California and in the United States, the ability to  
effect a coordinated and orderly implementation of both state  
legislation and the CPUC's restructuring regulations, the consummation  
and timing of the proposed business combination of Enova and Pacific  
Enterprises, the timing and level of proceeds of sales of SDG&E's  
electric-generating assets, the level of sales of electricity, the rate  
of growth of nonutility subsidiary revenues, international political  
developments, environmental regulations, and the timing and extent of  
changes in interest rates and prices for natural gas and electricity. 
 
 
                                          46 
 

<PAGE>
Item 8. Financial Statements and Supplementary Data - Enova Corporation

<TABLE> 
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED INCOME 
In thousands except per share amounts 
<CAPTION> 
                  
For the years ended December 31                    1997          1996          1995 
                                               ------------  ------------  ------------ 
<S>                                             <C>          <C>           <C> 
Operating Revenues   
  Electric                                      $1,769,421    $1,590,882    $1,503,926 
  Gas                                              398,127       348,035       310,142 
  Other                                             49,459        54,557        56,608 
                                               ------------  ------------  ------------ 
Total operating revenues                         2,217,007     1,993,474     1,870,676 
                                               ------------  ------------  ------------ 
Operating Expenses   
  Electric fuel                                    163,765       134,350       100,256
  Purchased power                                  441,490       310,731       341,727 
  Gas purchased for resale                         183,208       152,408       113,355 
  Maintenance                                       87,597        57,652        91,740 
  Depreciation and decommissioning                 347,438       332,490       278,239 
  Property and other taxes                          43,419        44,764        45,566 
  General and administrative                       223,032       262,058       210,207 
  Other                                            222,727       212,245       209,358
  Income taxes                                     160,161       151,813       134,578
                                               ------------  ------------  ------------ 
Total operating expenses                         1,872,837     1,658,511     1,525,026
                                               ------------  ------------  ------------ 
Operating Income                                   344,170       334,963       345,650 
                                               ------------  ------------  ------------ 
Other Income and (Deductions) 
  Allowance for equity funds used 
   during construction                               5,192         5,898         6,435 
  Taxes on nonoperating income                       9,959         3,339           (27) 
  Other - net                                        1,653        (3,265)       (5,876) 
                                               ------------  ------------  ------------ 
    Total other income                              16,804         5,972           532   
                                               ------------  ------------  ------------ 
Income Before Interest Charges and
  Preferred Dividends                              360,974       340,935       346,182 
                                               ------------  ------------  ------------ 
Interest Charges and Preferred Dividends   
  Long-term debt                                    85,617        89,198        95,523 
  Short-term debt and other                         19,474        17,516        20,215 
  Allowance for borrowed funds             
   used during construction                         (2,306)       (3,288)       (2,865)
  Preferred dividend requirements of SDG&E           6,582         6,582         7,663
                                               ------------  ------------  ------------ 
    Net interest charges and preferred dividends   109,367       110,008       120,536 
                                               ------------  ------------  ------------ 
Income From Continuing Operations                  251,607       230,927       225,646 
Discontinued Operations, Net of Income Taxes          --             --            148 
                                               ------------  ------------  ------------ 
Earnings Applicable to Common Shares            $  251,607    $  230,927    $  225,794 
                                               ============  ============  ============ 
Average Common Shares Outstanding                  114,322       116,572       116,535 
                                               ============  ============  ============ 
Earnings Per Common Share (basic and diluted)   $     2.20    $     1.98    $     1.94 
                                               ============  ============  ============ 
Dividends Declared Per Common Share             $     1.56    $     1.56    $     1.56 
                                               ============  ============  ============ 
 
See notes to consolidated financial statements. 
  
                                             
</TABLE> 


                                     47


<PAGE>
<TABLE> 
ENOVA CORPORATION 
CONSOLIDATED BALANCE SHEETS                                                           
In thousands of dollars                                      
<CAPTION> 
Balance at December 31                                      1997            1996 
                                                       --------------  -------------- 
<S>                                                    <C>             <C> 
ASSETS 
Utility plant - at original cost                         $5,888,539      $5,704,464 
Accumulated depreciation and decommissioning             (2,952,455)     (2,630,093) 
                                                       --------------  -------------- 
     Utility plant - net                                  2,936,084       3,074,371 
                                                       --------------  -------------- 
Investments in partnerships and unconsolidated     
   subsidiaries                                             516,113         271,035 
                                                      --------------  --------------
Nuclear decommissioning trust                               399,143         328,042 
                                                      --------------  -------------- 
Current assets                                   
   Cash and temporary investments                           624,375         173,079 
   Accounts receivable                                      231,678         186,529 
   Notes receivable                                          27,083          33,564
   Inventories                                               67,074          63,437 
   Other                                                     89,826          47,094 
                                                       --------------  -------------- 
     Total current assets                                 1,040,036         503,703  
                                                       --------------  -------------- 
Deferred taxes recoverable in rates                         184,837         189,193 
                                                       --------------  -------------- 
Deferred charges and other assets                           157,711         282,893  
                                                       --------------  -------------- 
     Total                                               $5,233,924      $4,649,237 
                                                       ==============  ============== 
CAPITALIZATION AND LIABILITIES 
Capitalization (see Statements of Consolidated  
Capital Stock and of Long-Term Debt) 
   Common equity                                         $1,570,383      $1,569,670 
   Preferred stock not subject to mandatory redemption       78,475          78,475 
   Preferred stock subject to mandatory redemption           25,000          25,000 
   Long-term debt                                         2,057,033       1,479,338 
                                                       --------------  -------------- 
     Total capitalization                                 3,730,891       3,152,483 
                                                       --------------  -------------- 
Current liabilities 
   Current portion of long-term debt                        121,700          69,902 
   Accounts payable                                         163,395         175,815 
   Dividends payable                                         46,050          47,213 
   Interest accrued                                          23,160          21,259 
   Regulatory balancing accounts overcollected - net         58,063          35,338 
   Other                                                    146,267         158,317 
                                                       --------------  -------------- 
     Total current liabilities                              558,635         507,844 
                                                       --------------  -------------- 
Customer advances for construction                           37,661          34,666 
Accumulated deferred income taxes - net                     501,030         497,400 
Accumulated deferred investment tax credits                  62,332          64,410 
Deferred credits and other liabilities                      343,375         392,434 
Contingencies and commitments (Notes 9 and 10)                --              --    
                                                       --------------  -------------- 
     Total                                               $5,233,924      $4,649,237
                                                       ==============  ============== 
 
See notes to consolidated financial statements. 
</TABLE> 

                                            48


<PAGE>

<TABLE> 
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS 
<CAPTION> 
 
In thousands of dollars 
For the years ended December 31                         1997          1996          1995 
                                                       ---------   ---------   ---------- 
<S>                                                    <C>           <C>           <C> 
Cash Flows from Operating Activities    
  Income from continuing operations                     $ 251,607   $ 230,927   $ 225,646   
  Adjustments to reconcile income from continuing  
    operations to net cash provided by operating activities  
      Depreciation and decommissioning                    347,438     332,490     278,239   
      Amortization of deferred charges and other assets     6,246       6,556      12,068   
      Amortization of deferred credits and other        
        liabilities                                       (37,802)    (38,399)    (32,975)  
      Allowance for equity funds used during construction  (5,192)     (5,898)     (6,435)  
      Deferred income taxes and investment tax credits     18,749      (6,875)    (42,237)   
      Other - net                                          55,817      73,850      57,475   
      Changes in working capital components       
         Accounts and notes receivable                    (38,668)     (7,440)      7,141  
         Inventories                                       (3,637)      4,522       7,648   
         Other current assets                             (23,322)    (14,242)     (5,609)   
         Interest and taxes accrued                       (30,350)    (28,199)     23,131  
         Accounts payable and other current liabilities   (24,470)     49,427      26,983 
         Regulatory balancing accounts                     22,725     (37,313)     59,030
  Cash flows provided by discontinued operations             --          --         6,148  
                                                       -----------   ---------   --------- 
        Net cash provided by operating activities         539,141     559,406     616,253
                                                       -----------   ---------   --------- 
Cash Flows from Financing Activities             
  Dividends paid                                         (179,586)   (181,849)   (180,625)  
  Issuances of long-term debt                             677,850     228,946     124,641   
  Repayment of long-term debt                            (171,133)   (286,668)   (165,871)  
  Short-term borrowings - net                                --          --       (89,325)   
  Redemption of common stock                              (74,122)       (480)       (241)
  Redemption of preferred stock                              --       (15,155)        (18) 
                                                       ----------  -----------  ---------- 
Net cash provided (used) by financing activities          253,009    (255,206)   (311,439) 
                                                       ----------  -----------  ---------- 
Cash Flows from Investing Activities    
  Utility construction expenditures                      (197,184)   (208,850)   (220,748)  
  Contributions to decommissioning funds                  (22,038)    (22,038)    (22,038)  
  Other - net                                            (121,632)      3,338       3,874  
  Discontinued operations                                    --          --         5,122  
                                                       ----------  -----------  ---------- 
        Net cash used by investing activities            (340,854)   (227,550)   (233,790)  
                                                       ----------  -----------  ---------- 
Net increase                                              451,296      76,650      71,024   
Cash and temporary investments, beginning of year         173,079      96,429      25,405   
                                                       ----------  -----------  ---------- 
Cash and temporary investments, end of year           $   624,375  $  173,079  $   96,429   
                                                       ==========  ===========  ========== 
Supplemental Schedule of Noncash Investing  
  and Financing Activities      
    Real estate investments                           $   125,726  $   96,832  $   50,496   
    Cash paid                                                (309)       --        (2,550)  
                                                       -----------  -----------  --------- 
    Liabilities assumed                               $   125,417  $   96,832  $   47,946   
                                                       ===========  ===========  ========= 
 
See notes to consolidated financial statements. 
 
                                                          49
</TABLE> 
 

<PAGE>

<TABLE> 
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CHANGES IN 
CAPITAL STOCK AND RETAINED EARNINGS 
 
In thousands of dollars 
For the years ended December 31, 1995, 1996, 1997 
 
<CAPTION> 
                                   Preferred  Stock 
                             ----------------------------- 
                              Not Subject    Subject to            Premium on 
                              to Mandatory   Mandatory    Common     Capital     Retained 
                               Redemption    Redemption   Stock       Stock      Earnings  
	                                ---------     ---------  ---------   ---------   --------
<S>                            <C>           <C>         <C>         <C>         <C> 


Balance, January 1, 1995         $ 93,493    $ 25,000    $ 291,341   $ 564,508  $ 618,581 
  Earnings applicable to 
     common shares                                                                225,794 
  Long-term incentive plan 
     activity-net                                              117       1,530              
  Preferred stock retired
     (880 shares)                     (18)                                   8           
  Common stock dividends declared                                                (181,809)
-----------------------------   ---------    ---------   ---------   ---------   --------- 
Balance, December 31, 1995         93,475      25,000      291,458     566,046    662,566 
  Earnings applicable to common shares                                            230,927
  Long-term incentive plan activity-net                        113         582           
  Preferred stock retired
     (150,000 shares)             (15,000)                                (155)           
  Common stock dividends declared                                                (181,867)
-----------------------------   ---------    ---------   ---------   ---------   --------- 
Balance, December 31, 1996         78,475      25,000      291,571     566,473    711,626 
  Earnings applicable to common shares                                            251,607
  Long-term incentive plan activity-net                        172       1,158            
  Common stock retired (3,062,490 shares)                   (7,656)    (66,145)           
  Common stock dividends declared                                                (178,423)
-----------------------------   ---------    ---------   ---------   ---------   --------- 
Balance, December 31, 1997       $ 78,475    $ 25,000    $ 284,087   $ 501,486  $ 784,810 
=============================   =========    =========   =========   =========   =========  
 
See notes to consolidated financial statements. 
</TABLE> 
                                             50


<PAGE>
<TABLE> 
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CAPITAL STOCK 
In thousands of dollars except call price     
<CAPTION> 
 
Balance at December 31                                             1997         1996 
                                                                  -----------  ----------  
<S>                                       <C>          <C>        <C>           <C> 
 
COMMON EQUITY                        
Common stock, without par value, authorized 
  300,000,000 shares, outstanding: 1997, 
  113,634,744 shares; 1996, 116,628,735 shares                    $  284,087   $  291,571 
Premium on capital stock                                             501,486      566,473 
Retained earnings                                                    784,810      711,626 
                                                                  -----------  ---------- 
      Total common equity                                         $1,570,383   $1,569,670 
                                                                  ===========  ========== 
 
PREFERRED STOCK (A)                          Trading       Call 
Not subject to mandatory redemption          Symbol(B)     Price 
   $20 par value, authorized 
      1,375,000 shares                       ---------  -------- 
   5% Series, 375,000 shares outstanding      SDOPrA      $24.00   $   7,500    $    7,500 
   4.50% Series, 300,000 shares outstanding   SDOPrB      $21.20       6,000         6,000 
   4.40% Series, 325,000 shares outstanding   SDOPrC      $21.00       6,500         6,500 
   4.60% Series, 373,770 shares outstanding   --          $20.25       7,475         7,475 
Without par value (C)                      
   $1.70 Series, 1,400,000 shares outstanding --         $25.85(D)    35,000        35,000 
   $1.82 Series, 640,000 shares outstanding   SDOPrH     $26.00(D)    16,000        16,000 
                                                                  -----------   ---------- 
   Total not subject to mandatory redemption                       $  78,475    $   78,475 
                                                                  ===========   ========== 
Subject to mandatory redemption                    
  Without par value (C)                           
   $1.7625 Series, 1,000,000 shares 
      outstanding(E)                          --         $25.00(D) $  25,000    $   25,000 
                                                                  ===========  =========== 


 
 
(A) All series of preferred stock have cumulative preferences as to dividends. 
    The $20 par value preferred stock has two votes per share, whereas the no 
    par value preferred stock is nonvoting. The $20 par value preferred stock 
    has a liquidation value at par. The no par value preferred stock has a 
    liquidation value of $25 per share. 
 
(B) All listed shares are traded on the American Stock Exchange. 
 
(C) SDG&E is authorized to issue 10,000,000 shares total (both subject to and not 
    subject to mandatory redemption). Enova is authorized to issue 30,000,000 shares 
    total, of which no shares were issued and outstanding at December 31, 1997.

(D) The $1.70 and $1.7625 series are not callable until 2003; the $1.82 series 
    is not callable until November 1998. All other series are currently callable. 
 
(E) The $1.7625 series has a sinking fund requirement to redeem 50,000 shares 
    per year from 2003 to 2007. The remaining 750,000 shares must be redeemed 
    in 2008. 


See notes to consolidated financial statements. 
</TABLE>
                                             51


<PAGE>

<TABLE> 
ENOVA CORPORATION 
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT 
In thousands of dollars 
<CAPTION> 
                                                   First Call                
Balance at December 31                                Date            1997        1996 
                                                -----------------  ----------  ---------- 
<S>                                             <C>                <C>         <C> 
SDG&E                                                                                          
 First mortgage bonds                                                                      
  5.5% Series I, due March 1, 1997                 4/15/67         $     --    $   25,000 
  8.75% Series II, due March 1, 2023(A)             9/1/97               --        25,000 
  9.625% Series JJ, due April 15, 2020             4/15/00             54,260     100,000 
  6.8% Series KK, due June 1, 2015(B)            Non-callable          14,400      14,400 
  8.5% Series LL, due April 1, 2022                 4/1/02             43,725      60,000 
  7.625% Series MM, due June 15, 2002            Non-callable          80,000      80,000 
  6.1% and 6.4% Series NN, due September 1, 2018 
    and 2019(A)                                     9/1/02            118,615     118,615 
  Various % Series OO, due December 1, 2027(C)        (D)             250,000     250,000 
  5.9% Series PP, due June 1, 2018(A)               6/1/03             70,795      70,795 
  Variable % Series QQ, due June 1, 2018(A)           (E)                --        14,915 
  5.85% Series RR, due June 1, 2021(B)              6/1/03             60,000      60,000 
  5.9% Series SS, due September 1, 2018(A)          9/1/03             92,945      92,945 
  Variable % Series TT, due September 1, 2020(A)      (E)              57,650      57,650 
  Variable % Series UU, due September 1, 2020(A)      (E)              16,700      16,700 
                                                --------------     ----------  ---------- 
       Total                                                          859,090     986,020 
                                                                   ----------  ---------- 
 Unsecured bonds                                                                        
  5.90% Series CPCFA96A, due June 1, 2014(B)     Non-callable         129,820     129,820 
  Variable % Series CV96A, due July 1, 2021(C)        (E)              38,900      38,900 
  Variable % Series CV96B, due December 1, 2021(C)    (E)              60,000      60,000
  Variable % Series CV97A, due March 1, 2023(C)       (E)              25,000        --
                                                --------------     ----------  ----------
       Total                                                          253,720     228,720 
                                                                   ----------  ---------- 
                                                                                          
 Rate reduction bonds (F)                                             658,000        --   
 Capitalized leases                                                    95,301     105,315 
 Other long-term debt                                                     465         528 
 Unamortized discount on long-term debt                                (6,178)     (2,128)
 Current portion of long-term debt                                    (72,575)    (33,639)
                                                                    ----------  ---------- 
Total SDG&E                                                   	      1,787,823   1,284,816
                                                                    ----------  ----------
 
Other Subsidiaries
 Debt incurred to acquire limited partnerships,
   various rates, payable annually through 2008                       312,862     219,051
 Other long-term debt                                                   5,473      11,734
 Current portion of long-term debt                                    (49,125)    (36,263)
                                                                    ---------    ---------
Total Other Subsidiaries                                              269,210     194,522
                                                                    ---------    ---------
Total Enova                                                        $2,057,033  $1,479,338
                                                                   ===========  ==========

(A)  Issued to secure SDG&E's obligation under a series of loan agreements with the City 
     of San Diego under which the city loaned the proceeds from the sale of industrial- 
     development revenue bonds to the company to finance certain qualified facilities. 
     All series are tax-exempt except QQ and UU. 

(B)  Issued to secure SDG&E's obligation under a series of loan agreements with the 
     California Pollution Control Financing Authority under which the Authority loaned  
     proceeds from the sale of tax-exempt pollution-control revenue bonds to the company  
     to finance certain qualified facilities.                      
 
(C)  Issued to secure SDG&E's obligation under a series of loan agreements with the City 
     of Chula Vista under which the city loaned the proceeds from the sale of tax-exempt 
     industrial-development revenue bonds to the company to finance certain qualified
     facilities. 

(D)  The first call date for $75 million is December 1, 2002. The remaining $175 million
     of the bonds is currently variable rate and is callable at various dates within
     one year. Of this, $45 million is subject to a floating-to-fixed rate swap, which
     expires December 15, 2002 (Note 8). 
 
(E)  Callable at various dates within one year. 
  
                                               52

<PAGE>

(F)  Issued to facilitate 10-percent rate reduction mandated by California's electric 
     restruturing law. Issued in December 1997 at an average interest rate of 6.26 
     percent. Bonds are secured by the revenue streams collected from customers over 10 
     years and are not secured by utility assets.

See notes to consolidated financial statements. 
</TABLE> 

                                           53



<PAGE>

<TABLE> 
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED FINANCIAL 
INFORMATION BY SEGMENTS OF BUSINESS 
 
<CAPTION>
In thousands of dollars 
At December 31 or for the                   
years then ended                               1997         1996         1995 
----------------------------------          -----------  -----------  -----------   
<S>                                         <C>          <C>           <C>

Operating Revenues (A)                      $ 2,217,007  $ 1,993,474  $ 1,870,676 
                                            ===========  ===========  =========== 
Operating Income 
  Electric operations                       $   257,706  $   269,038  $   263,346 
  Gas operations                                 59,382       39,724       51,654 
  Other                                          27,082       26,201       30,650  
                                            -----------  -----------  ----------- 
       Total                                $   344,170  $   334,963  $   345,650  
                                            ===========  ===========  =========== 
Depreciation and Decommissioning 
  Electric operations                       $   286,804  $   279,251  $   227,616    
  Gas operations                                 37,078       35,027       33,225    
  Other                                          23,556       18,212       17,398    
                                            -----------  -----------  ----------- 
       Total                                $   347,438  $   332,490  $   278,239  
                                            ===========  ===========  =========== 
Utility Plant Additions (B) 
  Electric operations                       $   160,689  $   167,166  $   171,151  
  Gas operations                                 36,495       41,684       49,597 
                                            -----------  -----------  ----------- 
       Total                                $   197,184  $   208,850  $   220,748    
                                            ===========  ===========  =========== 
Identifiable Assets 
  Utility plant - net 
    Electric operations                     $ 2,487,472  $ 2,625,620  $ 2,737,201  
    Gas operations                              448,612      448,751      441,140    
                                            -----------  -----------  ----------- 
       Total                                  2,936,084    3,074,371    3,178,341 
                                            -----------  -----------  ----------- 
  Inventories 
    Electric operations                          50,354       47,445       53,828 
    Gas operations                               15,036       15,633       14,131 
    Other                                         1,684          359           --   
                                             ----------- -----------  ----------- 
       Total                                     67,074       63,437       67,959    
                                             ----------- -----------  ----------- 
  Other identifiable assets 
    Electric operations                         770,885      697,145      802,172   
    Gas operations                              128,525      161,252      148,714    
    Other                                   (C) 699,191      488,102      434,940  
                                            -----------  -----------  ----------- 
       Total                                  1,598,601    1,346,499    1,385,826    
                                            -----------  -----------  ----------- 
Other Utility Assets                            632,165      164,930      116,498  
                                            -----------  -----------  ----------- 
Total Assets                                $ 5,233,924  $ 4,649,237  $ 4,748,624  
                                            ===========  ===========  =========== 
 
(A) The detail to operating revenues is provided in the Statements of 
    Consolidated Income.  The gas operating revenues shown therein include  
    $14 million in 1997, $9 million in 1996 and $9 million in 1995, representing 
    the gross margin on sales to the electric segment.  These margins arose from 
    interdepartmental transfers of $144 million in 1997, $111 million in 1996
    and $85 million in 1995, based on transfer pricing approved by the  
    California Public Utilities Commission in tariff rates. 
 
(B) Excluding allowance for equity funds used during construction. 

(C) Includes $378 million in real estate investments.

Utility income taxes and corporate expenses are allocated between electric and gas  
operations in accordance with regulatory accounting requirements. 
 

See notes to consolidated financial statements. 

</TABLE> 
                                              54


<PAGE>

<TABLE>

ENOVA CORPORATION 
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands except per share amounts
<CAPTION>


Quarter ended                         March 31      June 30    September 30   December 31
------------------------------------------------------------------------------------------

<S>                                <C>            <C>          <C>            <C>
1997
Operating revenues                $   507,930    $  501,481    $  581,058    $   626,538
Operating expenses                    438,535       416,241       485,699        532,362
                                  -----------    ----------    ----------    -----------
Operating income                       69,395        85,240        95,359         94,176
Other income and (deductions)           6,086          (124)       (3,425)        14,267
Net interest charges and 
   preferred dividends                 26,615        28,738        26,868         27,146
                                  -----------    ----------    ----------    -----------
Earnings applicable to 
   common shares                  $    48,866    $   56,378    $   65,066    $    81,297
Average common shares outstanding     116,452       113,616       113,616        113,643
Earnings per common share
   (basic and diluted)*           $      0.42    $     0.50    $     0.57    $      0.72




1996
Operating revenues                $   465,897    $  470,967    $  507,593    $   549,017
Operating expenses                    372,905       396,442       420,307        468,857
                                  -----------    ----------    ----------    -----------
Operating income                       92,992        74,525        87,286         80,160
Other income                            1,168            11         4,373            420
Net interest charges and
   preferred dividends                 28,108        27,186        28,914         25,800
                                  -----------    ----------    ----------    -----------
Earnings applicable to
   common shares                  $    66,052    $   47,350    $   62,745   $     54,780
Average common shares outstanding     116,570       116,565       116,566        116,587
Earnings per common share
   (basic and diluted)*           $      0.57    $     0.41    $     0.54   $       0.47



These amounts are unaudited, but in the opinion of Enova reflect all adjustments necessary 
for a fair presentation. 

* The sum of quarterly earnings per share does not equal the annual total due to rounding.
</TABLE>


<TABLE>

Quarterly Common Stock Data (Unaudited)
<CAPTION>
                           1997                                       1996
             First    Second    Third    Fourth         First   Second   Third    Fourth
             Quarter  Quarter   Quarter  Quarter        Quarter  Quarter  Quarter  Quarter

<S>          <C>      <C>       <C>      <C>            <C>      <C>      <C>      <C>

Market price

  High       23       24 3/8   25 1/4   27 1/8          24 3/4   23 1/8   23       23 
  Low        21 5/8   21 3/8   23 3/8   23 15/16        21 5/8   20 3/8   20 1/2   21 5/8
Dividends
  declared   $0.39    $0.39    $0.39    $0.39           $0.39    $0.39    $0.39    $0.39

</TABLE>

                                          55


<PAGE>

<TABLE>

ENOVA CORPORATION
Ratings at December 31, 1997 (Unaudited)

<CAPTION>
Issue                      Standard & Poor's                               Moody's

<S>                           <C>                                           <C>

Bonds                           A+                                             A1
Commercial paper               A-1                                            P-1
Preferred stock                 A                                              a2


The presentation of these ratings is not a recommendation to buy, sell or hold these 
securities.
</TABLE>
                                           56


<PAGE>
INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors of Enova Corporation:

We have audited the accompanying consolidated balance sheets and the 
statements of consolidated capital stock and of consolidated long-
term debt of Enova Corporation and subsidiaries as of December 31, 
1997 and 1996, and the related statements of consolidated income, 
consolidated changes in capital stock and retained earnings, 
consolidated cash flows, and consolidated financial information by 
segments of business for each of the three years in the period ended 
December 31, 1997. These consolidated financial statements are the 
responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted 
auditing standards. Those standards require that we plan and perform 
the audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates 
made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present 
fairly, in all material respects, the financial position of Enova 
Corporation and subsidiaries as of December 31, 1997 and 1996, and 
the results of their operations and their cash flows for each of the 
three years in the period ended December 31, 1997, in conformity with 
generally accepted accounting principles.


/S/ DELOITTE & TOUCHE LLP


DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1998
                                          57


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ENOVA CORPORATION


NOTE 1: BUSINESS COMBINATION
In October 1996 Enova Corporation and Pacific Enterprises (PE), parent 
company of Southern California Gas Company (SoCalGas), announced an 
agreement to combine the two companies. As a result of the combination, 
(i) each outstanding share of common stock of Enova will be converted 
into one share of common stock of the new company, (ii) each outstanding 
share of common stock of PE will be converted into 1.5038 shares of 
common stock of the new company and (iii) the preferred stock and 
preference stock of SDG&E, PE and SoCalGas will remain outstanding. 
    	The combination was unanimously approved by the boards of directors 
of both companies and subsequently was approved by the shareholders of 
both companies. The combination will be a tax-free transaction and is 
expected to be accounted for as a pooling of interests. Enova and PE 
have selected Sempra Energy as the name of the new combined company, 
with the corporate headquarters to be located in San Diego, California. 
Headquarters for SDG&E and SoCalGas, whose names will be retained, will 
remain in San Diego and Los Angeles, California, respectively. 
Consummation of the combination is conditional upon the approvals of the 
California Public Utilities Commission and various other regulatory 
bodies, with completion expected in the summer of 1998. On February 23, 
1998, the CPUC's administrative law judge handling the proceeding issued 
a draft decision that proposed approval of the combination. Among other 
things, the draft decision proposed 50/50 sharing of the net cost 
savings resulting from the combination between shareholders and 
customers, but only for five years rather than the 10 years sought. The 
draft decision would reduce the net shareable savings from $1.1 
billion to $340 million. The CPUC decision is scheduled for the end of 
March 1998. Additional information concerning Enova/PE joint activities 
is discussed in Note 3.


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations  On January 1, 1996, Enova Corporation (referred to 
herein as Enova, which includes the parent and its wholly owned 
subsidiaries) became the parent of SDG&E and its unregulated 
subsidiaries (referred to herein as nonutility subsidiaries). SDG&E's 
outstanding common stock was converted on a share-for-share basis into 
Enova common stock. SDG&E's debt securities, preferred and preference 
stock were unaffected and remain with SDG&E.
    	The consolidated financial statements include Enova and its wholly 
owned subsidiaries. The subsidiaries include SDG&E, Califia, Enova 
Financial, Enova Energy, Enova Technologies, Enova International and 
Pacific Diversified Capital. In 1997, nonutility subsidiaries 
contributed 8 percent to operating income (8 percent in 1996 and 9 
percent in 1995).

Utility Plant and Depreciation  Utility plant represents the buildings, 
equipment and other facilities used by SDG&E to provide electric and gas 
service. The cost of utility plant includes labor, materials, contract 
services and related items, and an allowance for funds used during 
construction. The cost of retired depreciable utility plant, plus 
removal costs minus salvage value is charged to accumulated 
depreciation. Information regarding industry restructuring and its 
effect on utility plant is included in Note 10. Utility plant in service 
by major functional categories at December 31, 1997, are: electric 
generation $1.8 billion, electric distribution $2.3 billion, electric 
transmission $0.7 billion, other electric $0.3 billion and gas 
operations $0.8 billion. The corresponding amounts at December 31, 1996, 
were essentially the same as 1997. Accumulated depreciation and 
decommissioning of electric and gas utility plant in service at December 
31, 1997, are $2.6 billion and $0.4 billion, respectively, and at 
December 31, 1996, were $2.2 billion and $0.4 billion, respectively. 

                                       58

<PAGE>

    Depreciation expense is based on the straight-line method over the 
useful lives of the assets or a shorter period prescribed by the 
California Public Utilities Commission (CPUC) (for SONGS, see below). 
The provisions for depreciation as a percentage of average depreciable 
utility plant (by major functional categories) in 1997 and (in 1996, 
1995, respectively) are: electric generation 8.83 (7.57, 4.04), electric 
distribution 4.39 (4.38, 4.36), electric transmission 3.28 (3.25, 3.21), 
other electric 6.02 (5.95, 5.89) and gas operations 4.03 (4.07, 4.06). 
The increases for electric generation in 1997 and 1996 reflect the 
accelerated recovery of San Onofre Nuclear Generating Station (SONGS) 
Units 2 and 3 approved by the CPUC in April 1996.

Inventories  Included in inventories at December 31, 1997, are SDG&E's 
$43 million of materials and supplies ($40 million in 1996), and $22 
million of fuel oil and natural gas ($23 million in 1996). Materials and 
supplies are valued at average cost; fuel oil and natural gas are valued 
by the last-in first-out (LIFO) method.

Other Current Assets  Included in other current assets at December 31, 
1997, is $44 million for Enova's current and deferred income taxes ($47 
million in 1996). Included therein is SDG&E's portion of $26 million 
($33 million in 1996).

Short-term Borrowings  There were no short-term borrowings at December 
31, 1997, and 1996. At December 31, 1997, SDG&E had $50 million of bank 
lines available to support commercial paper. Commitment fees are paid on 
the unused portion of the lines and there are no requirements for 
compensating balances.

Other Current Liabilities  Included in other current liabilities at 
December 31, 1997, is Califia's $21 million current portion of deferred 
lease revenue ($33 million in 1996) and $35 million for SDG&E's accrued 
vacation and sick leave ($33 million in 1996). In 1996 the $21 million 
noncurrent portion of Califia's deferred lease revenue is included in 
"Deferred Credits and Other Liabilities." The deferred revenue is 
amortized over the lease terms that end in 1998.

Allowance for Funds Used During Construction (AFUDC)  The allowance 
represents the cost of funds used to finance the construction of utility 
plant and is added to the cost of utility plant. AFUDC also increases 
income, as an offset to interest charges shown in the Statements of 
Consolidated Income, although it is not a current source of cash. The 
average rate used to compute AFUDC was 9.35 percent in 1997, 9.36 
percent in 1996 and 9.74 percent in 1995.

Effects of Regulation  SDG&E's accounting policies conform with 
generally accepted accounting principles for regulated enterprises and 
reflect the policies of the CPUC and the Federal Energy Regulatory 
Commission. SDG&E has been preparing its financial statements in 
accordance with the provisions of Statement of Financial Accounting 
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of 
Regulation," under which a regulated utility may record a regulatory 
asset if it is probable that, through the ratemaking process, the 
utility will recover that asset from customers. Regulatory liabilities 
represent future reductions in revenues for amounts due to customers. To 
the extent that a portion of SDG&E's operations is no longer subject to 
SFAS No. 71, or recovery is no longer probable as a result of changes in 
regulation or SDG&E's competitive position, the related regulatory 
assets and liabilities would be written off. In addition, SFAS No. 121, 
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," 
affects utility plant and regulatory assets such that a loss must be 
recognized whenever a regulator excludes all or part of an asset's cost 
from rate base. As discussed in Note 10, California enacted a law 
restructuring the electric utility industry. The law adopts the December 
1995 CPUC policy decision, and allows California utilities the 
opportunity to recover existing utility plant and regulatory assets over 
a transition period that ends in 2001. SDG&E has ceased the application 
of SFAS No. 71 with respect to its electric-generation business. SDG&E 
continues to evaluate the applicability of SFAS No. 121 as industry 
restructuring progresses. Additional information 

                                      59

<PAGE>

concerning regulatory assets and liabilities is described below in 
"Revenues and Regulatory Balancing Accounts" and in Note 10.

Revenues and Regulatory Balancing Accounts  Revenues from utility 
customers have consisted of deliveries to customers and the changes in 
regulatory balancing accounts. Earnings fluctuations from changes in the 
costs of fuel oil, purchased energy and natural gas, and consumption 
levels for electricity and the majority of natural gas previously were 
eliminated by balancing accounts authorized by the CPUC.  This is still 
the case for natural gas sales. However, as a result of California's 
electric-restructuring law, beginning in 1997 overcollections recorded 
in the Energy Cost Adjustment Clause (ECAC) and Electric Revenue 
Adjustment Mechanism (ERAM) balancing accounts were transferred to the 
interim transition cost-balancing account, which is being applied to 
transition cost recovery (see Note 10). At December 31, 1997, 
overcollections of $130 million were included in this account. Of this 
amount, $98 million of overcollections were recorded at December 31, 
1996. The elimination of ECAC and ERAM resulted in quarter-to-quarter 
earnings volatility in 1997. This earnings volatility will continue in 
future years. Additional information on industry restructuring is 
included in Note 10.

Deferred Charges and Other Assets  Deferred charges include SDG&E's 
unrecovered premium on early retirement of debt and other regulatory-
related expenditures that SDG&E expects to recover in future rates, 
excluding generation operations (discussed above). These items are 
amortized as recovered in rates. The net regulatory assets associated 
with SDG&E's generation operations at December 31, 1997, were credited 
to the interim transition cost balancing account.

Deferred Credits and Other Liabilities  Other liabilities at December 
31, 1997, include $117 million of accumulated decommissioning costs 
associated with SONGS Unit 1 ($96 million in 1996), which was 
permanently shut down in 1992. Additional information on SONGS Unit 1 
decommissioning costs is included in Note 5. 	

Discontinued Operations
Enova's financial statements for periods prior to 1996 reflect the June 
1995 sale of Wahlco Environmental Systems, Inc. as discontinued 
operations, in accordance with Accounting Principles Board Opinion No. 
30, "Reporting the Effects of a Disposal of a Segment of Business." 
Discontinued operations are summarized in the table below:
 
In millions of dollars                                       1995
---------------------------------------------------------------------
Revenues                                                   $  24
Loss from operations before income taxes                      --
Loss on disposal before income taxes                         (12)
Income tax benefits                                           12

The loss on disposal of Wahlco reflects the sale of Wahlco and Wahlco's 
1995 net operating losses prior to the sale.

Use of Estimates in the Preparation of Financial Statements  The 
preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities 
and disclosure of contingent assets and liabilities at the date of the 
financial statements and the reported amounts of revenues and expenses 
during the reporting period. Actual results could differ from those 
estimates.

Statements of Consolidated Cash Flows  Temporary investments are highly 
liquid investments with original maturities of three months or less, or 
investments that are readily convertible to cash.

Basis of Presentation  Certain prior-year amounts have been reclassified 
to conform to the current year's format.

                                     60

<PAGE>

NOTE 3: SIGNIFICANT ACQUISITIONS AND JOINT VENTURES
Sempra Energy Trading  On December 31, 1997, Enova and Pacific 
Enterprises completed their acquisition (50% interest each) of Sempra 
Energy Trading (formerly AIG Trading Corporation), a leading natural gas 
and power marketing firm headquartered in Greenwich, Connecticut, for a 
total cost of $225 million.
    Sempra Energy Trading's primary business focus is wholesale trading 
and marketing of natural gas, power and oil to customers primarily in 
North America. Sempra Energy Trading had net assets of $30 million at 
December 31, 1997.
    An allocation of the purchase price has not yet been completed. The 
difference between the cost and underlying equity in the net assets will 
be amortized over a period of not more than 15 years.
    As of December 31, 1997, Sempra Energy Trading's trading assets and 
trading liabilities approximate the following:

In millions of dollars
---------------------------------------------------------------------
Trading Assets
  Unrealized gains on swaps and forwards                        $ 497
  Due from commodity clearing organization and clearing brokers    41
  OTC commodity options purchased                                  33
  Due from trading counterparties                                  16
---------------------------------------------------------------------
      Total                                                     $ 587
=====================================================================

Trading Liabilities
   Unrealized losses on swaps and forwards                      $ 487
   Due to trading counterparties                                   41
   OTC commodity options written                                   29
---------------------------------------------------------------------
      Total                                                     $ 557
=====================================================================

    	The notional amounts of Sempra Energy Trading's financial 
instruments are provided below and include a maturity profile as of 
December 31, 1997, based upon the expected timing of the future cash 
flows. The notional amounts do not necessarily represent the amounts 
exchanged by parties to the financial instruments and do not measure 
Sempra Energy Trading's exposure to credit or market risks. The notional 
or contractual amounts are used to summarize the volume of financial 
instruments, but do not reflect the extent to which positions may offset 
one another. Accordingly, Sempra Energy Trading is exposed to much 
smaller amounts potentially subject to risk.

<TABLE>
<CAPTION>
                          Within    One to Five    Five to Ten    After
In millions of dollars   One Year      Years         Years      Ten Years  Total
--------------------------------------------------------------------------------
<S>                      <C>           <C>           <C>         <C>      <C>
Forwards and 
   commodity swaps        $3,175        $458          $90         $74     $3,797
Futures                      856         189           --          --      1,045
Options purchased            704          52           --          --        756
Options written              592          62           --          --        654
--------------------------------------------------------------------------------
      Total               $5,327        $761          $90         $74     $6,252
================================================================================
</TABLE>

    Enova and Pacific Enterprises have jointly and severally guaranteed 
certain trading obligations of Sempra Energy Trading with credit worthy 
counterparties in connection with authorized transactions and in 
connection with funding. The total obligations guaranteed by the 
companies as of December 31, 1997, are $190 million.

Sempra Energy Solutions  In January 1998 Sempra Energy Solutions 
completed the acquisition of CES/Way International, a leading national 
energy-service

                                      61

<PAGE>

provider. In September 1997 Sempra Energy Solutions formed a joint 
venture with Bangor Hydro to build, own and operate a $40 million 
natural gas distribution system in Bangor, Maine. In December 1997, 
Sempra Energy Solutions signed a partnership agreement with Frontier 
Utilities to build and operate a $55 million natural gas distribution 
system in North Carolina.
	
Enova International Gas Distribution Projects  Enova International, 
Pacific Enterprises International and Proxima S.A. de C.V., partners in 
the Mexican companies Distribuidora de Gas Natural de Mexicali and 
Distribuidora de Gas Natural de Chihuahua, are the licensees to build 
and operate natural gas distribution systems in Mexicali and Chihuahua. 
DGN - Mexicali will invest up to $25 million during the first five years 
of the 30-year license period. DGN - Chihuahua plans to invest $50 
million in the gas distribution project in Chihuahua over the next five 
years.
	
El Dorado Power Project  In December 1997 Enova Power Corporation, a 
subsidiary of Enova Energy, and Houston Industries Power Generation 
(HIPG) formed a joint venture, El Dorado Energy, to build, own and 
operate a 480-megawatt natural gas-fired plant in Boulder City, Nevada. 
Total cost of construction is expected to be $280 million, with each 
company providing 50 percent of the funding. Enova Power and HIPG each 
will be responsible for 50 percent of the plant's fuel procurement and 
output marketing. Construction on the plant is expected to begin in the 
first quarter of 1998 and be completed in the fourth quarter of 1999.


NOTE 4: LONG-TERM DEBT 
Amounts and due dates of long-term debt are shown on the Statements of 
Consolidated Long-Term Debt. Excluding capital leases, which are 
described in Note 9, maturities of long-term debt for SDG&E are $66 
million due in 1998, $65 million due in 1999, 2000 and 2001, and $145 
million due in 2002. Total maturities of long-term debt for nonutility 
subsidiaries are $49 million for 1998, $53 million for 1999, $44 million 
for 2000, $35 million for 2001 and $34 million for 2002. SDG&E has CPUC 
authorization to issue an additional $185 million in long-term debt. 

First Mortgage Bonds  First mortgage bonds are secured by a lien on 
substantially all of SDG&E's utility plant. Additional first mortgage 
bonds may be issued upon compliance with the provisions of the bond 
indenture, which provides for, among other things, the issuance of an 
additional $1.3 billion of first mortgage bonds at December 31, 1997. 
Certain first mortgage bonds may be called at SDG&E's option.
    First mortgage bonds totaling $249 million have variable-interest-
rate provisions. During 1997, SDG&E retired $127 million of first 
mortgage bonds, of which $102 million were retired prior to scheduled 
maturity.

Unsecured Bonds  During 1997, SDG&E issued $25 million of unsecured 
bonds. Unsecured bonds totaling $124 million have variable-interest-rate 
provisions.

Rate-Reduction Bonds  In December 1997, $658 million of rate-reduction 
bonds were issued on behalf of SDG&E at an average interest rate of 6.26 
percent. These bonds were issued to facilitate the 10-percent rate 
reduction mandated by California's electric-restructuring law. These 
bonds are being repaid over 10 years by SDG&E's residential and small-
commercial customers via a charge on their electricity bills. These 
bonds are secured by the revenue streams collected from customers and 
are not secured by, or payable from, utility assets. Additional 
information on rate-reduction bonds and electric industry restructuring 
is discussed in Note 10.

Other  At December 31, 1997, SDG&E had $340 million of bank lines, 
providing a committed source of long-term borrowings, with no debt 
outstanding. Bank lines, unless renewed by SDG&E, expire in 1998 ($60 
million) and in 2000 ($280 million). Commitment fees are paid on the 
unused portion of the lines and there are no requirements for 
compensating balances. 

                                     62

<PAGE>

    Nonutility loans (Enova Financial and Califia) of $318 million and 
$231 million at December 31, 1997, and 1996, respectively, are secured 
by real estate and equipment.
    SDG&E's interest payments, including those applicable to short-term 
borrowings, amounted to $89 million in 1997, $93 million in 1996 and 
$100 million in 1995. Nonutility interest payments amounted to $12 
million in 1997, $12 million in 1996 and $14 million in 1995. 	
    SDG&E periodically enters into interest-rate swap and cap agreements 
to moderate its exposure to interest-rate changes and to lower its 
overall cost of borrowings. At December 31, 1997, SDG&E had such an 
agreement, maturing in 2002, with underlying debt of $45 million. See 
additional information in Note 8. 	
    Although holders of variable-rate bonds may elect to redeem them 
prior to scheduled maturity, for purposes of determining the maturities 
listed above, it is assumed the bonds will be held to maturity.

NOTE 5: FACILITIES UNDER JOINT OWNERSHIP
SONGS and the Southwest Powerlink transmission line are owned jointly 
with other utilities. SDG&E's interests at December 31, 1997, are: 

In millions of dollars
----------------------------------------------------------------------
                                                         Southwest
Project                                      SONGS       Powerlink
----------------------------------------------------------------------
Percentage ownership                           20              89
Utility plant in service                   $1,143           $ 217
Accumulated depreciation                   $  593           $  96
Construction work in progress              $    9           $  --

    	SDG&E's share of operating expenses is included in the Statements 
of Consolidated Income. Each participant in the projects must provide 
its own financing. The amounts specified above for SONGS include nuclear 
production, transmission and other facilities. 

SONGS Decommissioning  Objectives, work scope and procedures for the 
future dismantling and decontamination of the SONGS units must meet the 
requirements of the Nuclear Regulatory Commission, the Environmental 
Protection Agency, the California Public Utilities Code and other 
regulatory bodies. 	
    SDG&E's share of decommissioning costs for the SONGS units is 
estimated to be $401 million in current dollars and is based on studies 
performed and updated periodically by outside consultants. The most 
recent study was performed in 1993. A new study is planned for 1998.  A 
new escalation methodology was utilized to estimate the liability in 
1997. This methodology was authorized by the CPUC in its 1996 
Performance-Based Ratemaking decision for Southern California Edison 
(principal owner of SONGS), and incorporates an internal rate of return 
calculation that results in higher escalation amounts. Although electric 
industry restructuring legislation requires that stranded costs, which 
include SONGS plant costs, be amortized in rates by 2001, the recovery 
of decommissioning costs is allowed until the time as the costs are 
fully recovered.
    The amount accrued each year is based on the amount allowed by 
regulators and is currently being collected in rates. This amount is 
considered sufficient to cover SDG&E's share of future decommissioning 
costs. The depreciation and decommissioning expense reflected on the 
Statements of Consolidated Income includes $22 million of 
decommissioning expense for each of the years 1997, 1996 and 1995. 
    The amounts collected in rates are invested in externally managed 
trust funds. In accordance with SFAS No. 115, "Accounting for Certain 
Investments in Debt and Equity Securities," the securities held by the 
trust are considered available for sale and are adjusted to market value 
($399 million at December 31, 1997, and $328 million at December 31, 
1996) and shown on the Consolidated Balance Sheets. The fair values 
reflect unrealized gains of $89 million and $50 million at December 31, 
1997, and 1996, respectively. The corresponding accumulated accrual is 
included on the Consolidated Balance Sheets in 

                                      63

<PAGE>

"Accumulated Depreciation and Decommissioning" for SONGS Units 2 and 3 
and in "Deferred Credits and Other Liabilities" for Unit 1. SONGS Unit 1 
was permanently shut down in 1992.
    	The Financial Accounting Standards Board is reviewing the 
accounting for liabilities related to closure and removal of long-lived 
assets, such as nuclear power plants, including the recognition, 
measurement and classification of such costs. The Board could require, 
among other things, that SDG&E's future balance sheets include a 
liability for the estimated decommissioning costs, and a related 
increase in the cost of utility plant. 
    	Additional information regarding SONGS is included in Notes 9 and 
10.


NOTE 6: EMPLOYEE BENEFIT PLANS
Pension Plan  SDG&E has a defined-benefit pension plan, which covers 
substantially all of its employees. Benefits are related to the 
employees' compensation. Plan assets consist primarily of common stocks 
and bonds. SDG&E funds the plan based on the projected unit credit 
actuarial cost method. Net pension cost consisted of the following for 
the years ended December 31: 

In thousands of dollars                     1997     1996     1995
----------------------------------------------------------------------
Cost related to current service          $16,756   $18,547   $14,598
Interest on projected benefit obligation  39,089    37,253    30,760
Return on plan assets                   (119,554)  (72,829) (132,674)
Net amortization and deferral             63,500    25,315    93,708
----------------------------------------------------------------------
Cost pursuant to general 
   accounting standards                     (209)    8,286     6,392
Regulatory adjustment                         --   (15,286)      608
----------------------------------------------------------------------
   Net cost (benefit)                     $ (209)  $(7,000)   $7,000
======================================================================

    	The plan's status was as follows at December 31: 

In thousands of dollars                     1997              1996
----------------------------------------------------------------------
Accumulated benefit obligation
   Vested                                $495,278           $435,029
   Non-vested                              11,637             12,321
----------------------------------------------------------------------
      Total                              $506,915           $447,350
======================================================================

Plan assets at fair value                $699,000           $598,610
Projected benefit obligation              589,911            539,391
----------------------------------------------------------------------
Plan assets less projected 
   benefit obligation                     109,089             59,219
Unrecognized effect of accounting change     (761)              (950)
Unrecognized prior service cost            28,444             31,315
Unrecognized actuarial gains             (204,061)          (157,082)
----------------------------------------------------------------------
   Net liability                         $(67,289)          $(67,498)
======================================================================

    The projected benefit obligation assumes a 7.25 percent actuarial 
discount rate in 1997 (7.50 percent in 1996) and a 5.0 percent average 
annual compensation increase. The expected long-term rate of return on 
plan assets is 8.5 percent. The increase in the total accumulated 
benefit obligation and projected benefit obligation at December 31, 
1997, is due primarily to a decrease in the actuarial discount rate. 
SDG&E's annual cost for a supplemental retirement plan for a limited 
number of key employees was approximately $3 million in 1997, 1996 and 
1995. 

                                  64

<PAGE>

Post-Retirement Health Benefits  SDG&E provides certain health and life 
insurance benefits to retired employees. These benefits are accrued 
during the employee's years of service, up to the year of benefit 
eligibility. SDG&E is recovering the cost of these benefits based upon 
actuarial calculations and funding limitations. The costs for the 
benefits were $4 million in 1997, $5 million in 1996 and $5 million in 
1995. These costs include $2 million of amortization per year for the 
unamortized transition obligation (arising from the initial 
implementation of this accounting policy) of approximately $31 million, 
which is being amortized through 2012. 

Savings Plan  Essentially all employees are eligible to participate in 
SDG&E's savings plan. Eligible employees may make a contribution of 1 
percent to 15 percent of their base pay to the savings plan for 
investment in mutual funds or in Enova common stock. SDG&E contributes 
amounts equal to up to 3 percent of participants' compensation for 
investment in Enova common stock. SDG&E's annual compensation expense 
for this plan was $3 million in 1997, $2 million in 1996 and $2 million 
in 1995. 

Stock-Based Compensation  Enova has a long-term incentive stock 
compensation plan that provides for aggregate awards of up to 2,700,000 
shares of Enova common stock. The plan terminates in April 2005. In each 
of the last 10 years, 49,000 shares to 75,000 shares of stock were 
issued to officers and key employees, subject to forfeiture over four 
years if certain corporate goals are not met. The long-term incentive 
stock compensation plan also provides for the granting of stock options. 
In October 1997, Enova rescinded all options granted in October 1996. 
There were no stock options outstanding at December 31, 1997. As 
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," 
SDG&E has adopted the disclosure-only requirements of SFAS No. 123 and 
continues to account for stock-based compensation by applying the 
provisions of Accounting Principles Board Opinion No. 25, "Accounting 
for Stock Issued to Employees." The differences between compensation 
cost included in net income and the related cost measured by the fair-
value-based method defined in SFAS No. 123 are immaterial. SDG&E's 
compensation expense for this plan was approximately $1 million in 1997, 
$1 million in 1996 and $2 million in 1995.

                                       65


<PAGE>

NOTE 7: INCOME TAXES 
Income tax payments totaled $162 million in 1997, $176 million in 1996 
and $148 million in 1995. 
    The components of accumulated deferred income taxes at December 31 
are as follows:

In thousands of dollars                         1997          1996 
----------------------------------------------------------------------
Deferred tax liabilities 
   Differences in financial and tax 
      bases of utility plant                 $567,804       $628,617 
   Loss on reacquired debt                     30,535         26,399 
   Other                                       91,708         80,033 
----------------------------------------------------------------------
      Total deferred tax liabilities          690,047        735,049 
----------------------------------------------------------------------
Deferred tax assets 
   Unamortized investment tax credits          62,144         66,729
   Equipment leasing activities                 8,494         22,333
   Regulatory balancing accounts               27,903         37,010
   Unbilled revenue                            22,365         21,923
   Other                                       89,856        123,158 
---------------------------------------------------------------------
      Total deferred tax assets               210,762        271,153 
---------------------------------------------------------------------
Net deferred income tax liability             479,285        463,896 
Current portion (net asset)                    21,745         33,504 
---------------------------------------------------------------------
Non-current portion (net liability)          $501,030       $497,400 
=====================================================================

    	The components of income tax expense are as follows:
 
In thousands of dollars           1997          1996          1995 
---------------------------------------------------------------------
Current 
   Federal                     $93,040       $115,410       $134,212 
   State                        38,413         39,939         42,630 
---------------------------------------------------------------------
   Total current taxes         131,453        155,349        176,842 
---------------------------------------------------------------------
Deferred 
   Federal                      23,222            434        (23,914) 
   State                         1,600         (1,518)       (13,464) 
---------------------------------------------------------------------
   Total deferred taxes         24,822         (1,084)       (37,378) 
---------------------------------------------------------------------
Deferred investment 
      tax credits - net         (6,073)        (5,791)        (4,859) 
---------------------------------------------------------------------
   Total income tax expense   $150,202       $148,474       $134,605 
=====================================================================
 
    Federal and state income taxes are allocated between operating 
income and other income. 

                                        66


<PAGE>

    	The reconciliation of the statutory federal income tax rate to the 
effective income tax rate is as follows:

                                           1997      1996     1995 
---------------------------------------------------------------------
Statutory federal income tax rate         35.0 %    35.0 %    35.0 % 
Depreciation                               8.1       6.3       5.5 
State income taxes - net of 
   federal income tax benefit              7.0       6.9       5.5 
Tax credits                              (10.8)     (9.5)     (7.6)
Equipment leasing activities              (2.3)     (2.8)     (2.8) 
Repair allowance                          (1.9)     (1.2)     (3.0) 
Other - net                                2.3       4.4       4.8 
---------------------------------------------------------------------
   Effective income tax rate              37.4 %    39.1 %    37.4 % 
=====================================================================


NOTE 8: FINANCIAL INSTRUMENTS
Fair Value   The fair values of financial instruments (cash, temporary 
investments, funds held in trust, notes receivable, investments in 
limited partnerships, dividends payable, short- and long-term debt, 
deposits from customers, and preferred stock subject to mandatory 
redemption) are not materially different from the carrying amounts, 
except for long-term debt. The carrying amounts and fair value of long-
term debt are $2.1 billion and $2.2 billion, respectively, at December 
31, 1997, and $1.5 billion and $1.5 billion, respectively, at December 
31, 1996. The fair values of SDG&E's first mortgage bonds are estimated 
based on quoted market prices for them or for similar issues. The fair 
values of long-term notes payable are based on the present values of the 
future cash flows, discounted at rates available for similar notes with 
comparable maturities. The fair values of the rate-reduction bonds 
issued in December 1997 are estimated to approximate carrying value due 
to the relatively short period of time between the issuance date and the 
valuation date, and the relative market stability during those periods.

Off-Balance-Sheet Financial Instruments   Enova's policy is to use 
derivative financial instruments to reduce its exposure to fluctuations 
in interest rates, foreign-currency exchange rates and natural gas 
prices. These financial instruments expose Enova to market and credit 
risks which may at times be concentrated with certain counterparties, 
although counterparty nonperformance is not anticipated.
 
Interest-Rate-Swap Agreements   SDG&E periodically enters into interest-
rate-swap agreements to moderate its exposure to interest-rate changes 
and to lower its overall cost of borrowing. These swap agreements 
generally remain off the balance sheet as they involve the exchange of 
fixed- and variable-rate interest payments without the exchange of the 
underlying principal amounts. The related gains or losses are reflected 
in the income statement as part of interest expense. At December 31, 
1997, SDG&E had one interest-rate-swap agreement: a floating-to-fixed-
rate swap associated with $45 million of variable-rate bonds maturing in 
2002. SDG&E expects to hold this derivative financial instrument to its 
maturity. This swap agreement has effectively fixed the interest rate on 
the underlying variable-rate debt at 5.4 percent. SDG&E would be exposed 
to interest-rate fluctuations on the underlying debt should the 
counterparty to the agreement not perform. Such nonperformance is not 
anticipated. This agreement, if terminated, would result in an 
obligation of $2 million at December 31, 1997, and at December 31, 1996. 

Foreign-Currency Forward Exchange Contracts   SDG&E's pension fund 
periodically uses foreign-currency forward contracts to reduce its 
exposure to exchange-rate fluctuations associated with certain 
investments in foreign equity securities. These contracts generally have 
maturities ranging from three to six months. At December 31, 1997, there 
were no foreign-currency forward contracts outstanding. 

                                      67

<PAGE>

Energy Derivatives   SDG&E uses energy derivatives for both hedging and 
trading purposes within certain limitations imposed by company policies. 
These derivative financial instruments include forward contracts, swaps, 
options and other contracts which have maturities ranging from 30 days 
to nine months. SDG&E's accounting policy is to adjust the book value of 
these derivatives to market each month with gains and losses recognized 
in earnings. These instruments are included in other current assets on 
the Consolidated Balance Sheet. Certain instruments such as swaps are 
entered into and closed out within the same month and, therefore, do not 
have any balance-sheet impact. Gains and losses are included in electric 
or gas revenue or expense, whichever is appropriate, on the Consolidated 
Income Statement.
    	As of December 31, 1997, the net fair value of open positions was 
$5.9 million. The net unrealized profit of these open positions was $0.3 
million. These positions hedge approximately 6 percent of SDG&E's annual 
total purchased-gas volumes. The average fair value of derivative 
financial instruments during 1997 was an obligation of $0.2 million. The 
net gains arising from these activities during 1997 were $2.5 million. 
Information on derivative financial instruments of Sempra Energy Trading 
is provided in Note 3.

Market and Credit Risk   SDG&E and Sempra Energy Trading utilize a 
variety of financial structures, products and terms which require the 
company to manage, on a portfolio basis, the resulting market risks 
inherent in these transactions, subject to parameters established by 
company policies. Market risks are monitored separately from the groups 
that create or actively manage these risk exposures to ensure compliance 
with the company's stated risk management policies. 
    Credit risk relates to the risk of loss that would incur as a result 
of nonperformance by counterparties pursuant to the terms of their 
contractual obligations. SDG&E and Sempra Energy Trading avoid 
concentration of counterparties and maintain credit policies with regard 
to counterparties that management believes significantly minimize 
overall credit risk.
    A Risk Management Committee, composed of Enova and Pacific 
Enterprises officers, is responsible for monitoring operating 
performance and compliance with established risk management policies for 
Sempra Energy Solutions and its subsidiaries.

NOTE 9: CONTINGENCIES AND COMMITMENTS
Purchased-Power Contracts  SDG&E buys electric power under several 
short-term and long-term contracts. Purchases are for up to 7 percent of 
plant capacity under contracts with other utilities and up to 100 
percent of plant capacity under contracts with nonutility suppliers. No 
one supplier provides more than 3 percent of SDG&E's total system 
requirements. The contracts expire on various dates between 1998 and 
2025. 

    	At December 31, 1997, the estimated future minimum payments under 
the contracts were: 

In millions of dollars
---------------------------------------------------------------------
1998                                                          $234
1999                                                           232
2000                                                           200
2001                                                           183
2002                                                           134
Thereafter                                                   2,462
---------------------------------------------------------------------
Total minimum payments                                      $3,445
=====================================================================

    These payments represent capacity charges and minimum energy 
purchases. SDG&E is required to pay additional amounts for actual 
purchases of energy that exceed the minimum energy commitments. Total 
payments, including energy payments, under the contracts were $421 
million in 1997, $296 million in 1996 

                                   68

<PAGE>

and $329 million in 1995. Payments under purchased-power contracts 
increased in 1997 due to increased sales volume and lower nuclear 
generation availability.
    In November 1997, SDG&E announced a plan to auction its power plants 
and other electric-generating resources, which include its long-term 
purchased-power contracts. Additional information on SDG&E's plan to 
divest its electric-generating assets is discussed in Note 10.

Natural Gas Contracts  SDG&E has a contract with Southern California Gas 
Company (SoCalGas) that provides SDG&E with intrastate transportation 
capacity on SoCalGas' pipelines. This contract is currently being 
renegotiated and continues on a month-to-month basis under the original 
terms until a new agreement is reached. The commitment presumes a 
contract renewal for one year. SDG&E's long-term contracts with 
interstate pipelines for transportation capacity expire on various dates 
between 2007 and 2023. SDG&E's contract with SoCalGas for 8 billion 
cubic feet of natural gas storage capacity expires in March 1998. A new 
agreement has been reached for 6 billion cubic feet of natural gas 
storage capacity from April 1998 through March 1999. SDG&E has long-term 
natural gas supply contracts (included in the table below) with four 
Canadian suppliers that expire between 2001 and 2004. SDG&E has been 
involved in negotiations and litigation with the suppliers concerning 
the contracts' terms and prices. SDG&E has settled with one supplier, 
with gas being delivered under the terms of the settlement agreement. 
The remaining suppliers have ceased deliveries pending legal resolution. 
A U.S. Court of Appeals has upheld a U.S. District Court's invalidation 
of the contracts with two of these suppliers, although the value of the 
gas delivered has not yet been determined by the court. 
    	At December 31, 1997, the future minimum payments under natural gas 
contracts were: 
                                       Transportation         Natural
In millions of dollars                    and Storage             Gas
----------------------------------------------------------------------
1998                                              $65             $19
1999                                               15              17
2000                                               14              19
2001                                               14              21
2002                                               14              24
Thereafter                                        234              25
----------------------------------------------------------------------
Total minimum payments                           $356            $125
======================================================================

    	Total payments under the contracts were $125 million in 1997, $100 
million in 1996 and $95 million in 1995. 

                                       69


<PAGE>

Leases  SDG&E has nuclear fuel, office buildings, a generating facility 
and other properties that are financed by long-term capital leases. 
Utility plant includes $198 million at December 31, 1997, and $200 
million at December 31, 1996, related to these leases. The associated 
accumulated amortization is $102 million and $95 million, respectively. 
SDG&E and nonutility subsidiaries also lease office facilities, computer 
equipment and vehicles under operating leases. Certain leases on office 
facilities contain escalation clauses requiring annual increases in rent 
ranging from 2 percent to 7 percent. 
    	The minimum rental commitments payable in future years under all 
noncancellable leases are: 

                                  Operating           Capitalized
                                    Leases               Leases
In millions of dollars           Enova  SDG&E             SDG&E
---------------------------------------------------------------------
1998                              $35    $13               $26
1999                               12     12                26
2000                               12     12                20
2001                                8      8                12
2002                                8      8                12
Thereafter                         36     36                20
---------------------------------------------------------------------
Total future rental commitment   $111    $89               116
---------------------------------------------------------------------
Imputed interest (6% to 9%)                                (21)
---------------------------------------------------------------------
Net commitment                                             $95
=====================================================================

    Enova's rental payments totaled $81 million in 1997, $88 million in 
1996 and $85 million in 1995. Included in these amounts are SDG&E 
payments of $43 million, $46 million and $44 million, respectively.

Environmental Issues  SDG&E's operations are conducted in accordance 
with federal, state and local environmental laws and regulations 
governing hazardous wastes, air and water quality, land use, and solid-
waste disposal. SDG&E incurs significant costs to operate its facilities 
in compliance with these laws and regulations. The costs of compliance 
with environmental laws and regulations have been recovered in customer 
rates. Capital expenditures to comply with environmental laws and 
regulations were $4 million in 1997, $6 million in 1996 and $4 million 
in 1995, and are expected to be $38 million over the next five years. 
These expenditures primarily include the estimated cost of retrofitting 
SDG&E's power plants to reduce air emissions. 
    SDG&E has been associated with various sites which may require 
remediation under federal, state or local environmental laws. SDG&E is 
unable to determine the extent of its responsibility for remediation of 
these sites until assessments are completed. Furthermore, the number of 
others that also may be responsible, and their ability to share in the 
cost of the cleanup, is not known. Environmental liabilities that may 
arise from these assessments are recorded when remedial efforts are 
probable, and the costs can be estimated. In 1994 the CPUC approved the 
Hazardous Waste Collaborative Memorandum account allowing utilities to 
recover their hazardous waste costs, including those related to 
Superfund sites or similar sites requiring cleanup. The decision allows 
recovery of 90 percent of cleanup costs and related third-party 
litigation costs and 70 percent of the related insurance-litigation 
expenses. As discussed in Note 10, restructuring of the California 
electric-utility industry will change the way utility rates are set and 
costs are recovered. Both the CPUC and state legislation have indicated 
that the California utilities will be allowed an opportunity to recover 
existing utility plant and regulatory assets over a transition period 
that ends in 2001. SDG&E has asked the CPUC that beginning on January 1, 
1998, the collaborative account be modified, and that electric-
generation-related cleanup costs be eligible for transition cost 
recovery. A CPUC decision is still pending. Depending on the final 
outcome of industry restructuring and the impact of competition, the 

                                     70

<PAGE>

costs of compliance with environmental regulations may not be fully 
recoverable. 

Nuclear Insurance  SDG&E and the co-owners of SONGS have purchased 
primary insurance of $200 million, the maximum amount available, for 
public-liability claims. An additional $8.7 billion of coverage is 
provided by secondary financial protection required by the Nuclear 
Regulatory Commission and provides for loss sharing among utilities 
owning nuclear reactors if a costly accident occurs. SDG&E could be 
assessed retrospective premium adjustments of up to $32 million in the 
event of a nuclear incident involving any of the licensed, commercial 
reactors in the United States, if the amount of the loss exceeds $200 
million. In the event the public-liability limit stated above is 
insufficient, the Price-Anderson Act provides for Congress to enact 
further revenue-raising measures to pay claims, which could include an 
additional assessment on all licensed reactor operators. 
    Insurance coverage is provided for up to $2.8 billion of property 
damage and decontamination liability. Coverage is also provided for the 
cost of replacement power, which includes indemnity payments for up to 
three years, after a waiting period of 17 weeks. Coverage is provided 
primarily through mutual insurance companies owned by utilities with 
nuclear facilities. If losses at any of the nuclear facilities covered 
by the risk-sharing arrangements were to exceed the accumulated funds 
available from these insurance programs, SDG&E could be assessed 
retrospective premium adjustments of up to $6 million. 

Department of Energy Decommissioning  The Energy Policy Act of 1992 
established a fund for the decontamination and decommissioning of the 
Department of Energy nuclear-fuel-enrichment facilities. Utilities using 
the DOE services are contributing a total of $2.3 billion, subject to 
adjustment for inflation, over a 15-year period ending in 2006. Each 
utility's share is based on its share of enrichment services purchased 
from the DOE. SDG&E's annual contribution is $1 million, and will be 
recovered as part of decommissioning costs (see Note 10). 

Litigation  Enova and its subsidiaries, including SDG&E, are involved in 
various legal matters, including those arising out of the ordinary 
course of business. Management believes that these matters will not have 
a material adverse effect on Enova's results of operations, financial 
condition or liquidity. 

Distribution System Conversion  Under a CPUC-mandated program and 
through franchise agreements with various cities, SDG&E is committed, in 
varying amounts, to convert overhead distribution facilities to 
underground. As of December 31, 1997, the aggregate unexpended amount of 
this commitment was approximately $100 million. Capital expenditures for 
underground conversions were $17 million in 1997, $15 million in 1996 
and $12 million in 1995. 

Concentration of Credit Risk  SDG&E grants credit to its utility 
customers, substantially all of whom are located in its service 
territory, which covers all of San Diego County and an adjacent portion 
of Orange County.


NOTE 10: INDUSTRY RESTRUCTURING
In September 1996, the state of California enacted a law restructuring 
California's electric-utility industry (AB 1890). The legislation adopts 
the December 1995 CPUC policy decision restructuring the industry to 
stimulate competition and reduce rates. The new law supersedes the CPUC 
policy decision when in conflict. 
    Beginning on March 31, 1998, customers will be able to buy their 
electricity through a power exchange that will obtain power from 
qualifying facilities, nuclear units and, lastly, from the lowest-
bidding suppliers. The power exchange will serve as a wholesale power 
pool allowing all energy producers to participate competitively. An 
Independent System Operator will schedule power transactions and access 
to the transmission system. Consumers also may choose either to continue 
to purchase from their local utility under 

                                     71

<PAGE>

regulated tariffs or to enter into private contracts with generators, 
brokers or others. The local utility will continue to provide 
distribution service regardless of which source the consumer chooses.
    Utilities are allowed a reasonable opportunity to recover their 
stranded costs through December 31, 2001. Stranded costs, such as those 
related to reasonable employee-related costs directly caused by 
restructuring and purchased-power contracts (including those with 
qualifying facilities), may be recovered beyond December 31, 2001. 
Outside of those exceptions, stranded costs not recovered through 2001 
will not be collected from customers. Such costs, if any, would be 
written off as a charge against earnings. 
    SDG&E's transition cost application filed in October 1996 identifies 
costs totaling $2 billion (net present value in 1998 dollars). These 
identified transition costs were determined to be reasonable by 
independent auditors selected by the CPUC, with $73 million requiring 
further action before being deemed recoverable transition costs. Of this 
amount, the CPUC has excluded from transition cost recovery $39 million 
in fixed costs relating to gas transportation to power plants, which 
SDG&E believes will be recovered through contracts with the ISO. Total 
transition costs include sunk costs, as well as ongoing costs the CPUC 
finds reasonable and necessary to maintain generation facilities through 
December 31, 2001. Both the CPUC policy decision and AB 1890 provide 
that above-market costs for existing purchased-power contracts may be 
recovered over the terms of the contracts or sooner. Qualifying 
facilities purchases include approximately 100 existing contracts, which 
extend as far as 2025. Other power purchases consist of two long-term 
contracts expiring in 2001 and 2013. Transition costs also include other 
items SDG&E has accrued under cost-of-service regulation. Nuclear 
decommissioning costs are nonbypassable until fully recovered, but are 
not included as part of transition costs. 
    Through December 31, 1997, SDG&E has recovered transition costs of 
$0.2 billion for nuclear generation and $0.1 billion for nonnuclear 
generation. Additionally, overcollections of $0.1 billion recorded in 
the ECAC and ERAM balancing accounts as of December 31, 1997, have been 
applied to transition cost recovery, leaving approximately $1.6 billion 
for future recovery. Included therein is $0.4 billion for post-2001 
purchased-power-contract payments that may be recovered after 2001, 
subject to an annual reasonableness review. SDG&E has announced a plan 
to auction its power plants and other electric-generating assets. This 
plan includes the divestiture of SDG&E's fossil power plants and 
combustion turbines, its 20-percent interest in SONGS and its portfolio 
of long-term purchased-power contracts. The power plants, including the 
interest in SONGS, have a net book value as of December 31, 1997, of 
$800 million ($200 million for fossil and $600 million for SONGS). The 
proceeds from the auction will be applied directly to SDG&E's transition 
costs. In December 1997, SDG&E filed with the CPUC for its approval of 
the auction plan. The sale of the nonnuclear-generating assets is 
expected to be completed by the end of the first quarter of 1999. During 
the 1998-2001 period, recovery of transition costs is limited by the 
rate freeze (discussed below). Management believes that the rates within 
the rate cap and the proceeds from the sale of electric-generating 
assets will be sufficient to recover all of SDG&E's approved transition 
costs by December 31, 2001.
    The California legislation provides for a 10-percent reduction of 
residential and small commercial customers' rates, which began in 
January 1998, as a result of the utilities' receiving the proceeds of 
rate-reduction bonds issued by an agency of the state of California. In 
December 1997, $658 million of rate-reduction bonds were issued on 
behalf of SDG&E at an average interest rate of 6.26 percent. These bonds 
are being repaid over 10 years by SDG&E's residential and small-
commercial customers via a nonbypassable charge on their electric bills. 
    In addition, the California legislation includes a rate freeze for 
all customers. Until the earlier of March 31, 2002, or when transition 
cost recovery is complete, SDG&E's system-average rate will be frozen at 
June 1996 levels (9.64 cents per kwh), except for the impact of fuel 
cost changes and the 10-percent rate reduction described above. 
Beginning in 1998 system-average rates cannot be increased above 9.43 
cents per kwh, which includes the mandatory rate reduction and any 
impact of fuel cost changes. 

                                       72

<PAGE>

    As discussed in Note 2, SDG&E has been accounting for the economic 
effects of regulation in accordance with SFAS No. 71. The SEC indicated 
a concern that the California investor-owned utilities may not meet the 
criteria of SFAS No. 71 with respect to their electric-generation net 
regulatory assets. SDG&E has ceased the application of SFAS No. 71 to 
its generation business, in accordance with the conclusion by the 
Emerging Issues Task Force of the Financial Accounting Standards Board 
that the application of SFAS 71 should be discontinued when deregulatory 
legislation is issued that determines that a portion of an entity's 
business will no longer be regulated. The discontinuance of SFAS No. 71 
applied to the utilities' generation business did not result in a write-
off of their net regulatory assets, since the CPUC has approved the 
recovery of these assets by the distribution portion of their business, 
subject to the rate cap.

                                        73


<PAGE>

Item 8. Financial Statements and Supplementary Data - San Diego Gas & Electric
        Company


<TABLE> 
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME 
In thousands except per share amounts 
<CAPTION> 
                                                      
For the years ended December 31                        1997          1996          1995 
                                                   ------------  ------------  ------------ 
<S>                                                 <C>          <C>           <C> 
Operating Revenues   
  Electric                                          $1,769,421    $1,590,882    $1,503,926  
  Gas                                                  398,127       348,035       310,142  
                                                   ------------  ------------  ------------ 
Total operating revenues                             2,167,548     1,938,917     1,814,068  
                                                   ------------  ------------  ------------ 
Operating Expenses   
  Electric fuel                                        163,765       134,350       100,256  
  Purchased power                                      441,400       310,731       341,727  
  Gas purchased for resale                             183,078       152,151       113,355
  Maintenance                                           87,597        57,652        91,740
  Depreciation and decommissioning                     323,882       314,278       260,841
  Property and other taxes                              43,261        44,764        45,566
  General and administrative                           212,634       247,653       207,078
  Other                                                177,760       166,391       166,303
  Income taxes                                         217,083       202,185       172,202
                                                   ------------  ------------  ------------ 
Total operating expenses                             1,850,460     1,630,155     1,499,068
                                                   ------------  ------------  ------------ 
Operating Income                                       317,088       308,762       315,000
                                                   ------------  ------------  ------------ 
Other Income and (Deductions) 
  Allowance for equity funds used                              
    during construction                                  5,192         5,898         6,435
  Taxes on nonoperating income                          (2,073)        4,227          (827)
  Other - net                                            4,243        (5,431)          923
                                                   ------------  ------------  ------------ 
    Total other income and (deductions)                  7,362         4,694         6,531
                                                   ------------  ------------  ------------ 
Income Before Interest Charges                         324,450       313,456       321,531
                                                   ------------  ------------  ------------ 
Interest Charges                                                                           
 Long-term debt                                         69,545        76,463        82,591
 Short-term debt and other                              13,825        12,635        17,886
 Amortization of debt discount and
   expense, less premium                                 5,154         4,881         4,870
 Allowance for borrowed funds                                                               
   used during construction                             (2,306)       (3,288)       (2,865)
                                                   ------------  ------------  ------------ 
    Net interest charges                                86,218        90,691       102,482
                                                   ------------  ------------  ------------ 
Income From Continuing Operations                      238,232       222,765       219,049
Discontinued Operations, Net of
   Income Taxes                                           --            --          14,408
                                                   ------------  ------------  ------------ 
Net Income (before preferred                                                             
  dividend requirements)                               238,232       222,765       233,457
Preferred Dividend Requirements                          6,582         6,582         7,663
                                                   ------------  ------------  ------------ 
Earnings Applicable to Common Shares                $  231,650    $  216,183    $  225,794     
                                                   ============  ============  ============ 

 
See notes to consolidated financial statements. 

</TABLE> 
                                          74

<PAGE>

<TABLE> 
SAN DIEGO GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS    
In thousands of dollars        
<CAPTION> 
Balance at December 31                                        1997            1996 
                                                         --------------  -------------- 
<S>                                                       <C>             <C> 
ASSETS 
Utility plant - at original cost                            $5,888,539     $5,704,464
Accumulated depreciation and decommissioning                (2,952,455)    (2,630,093)
                                                         --------------   ------------- 
   Utility plant - net                                       2,936,084      3,074,371
                                                         --------------   ------------- 
Nuclear decommissioning trust                                  399,143        328,042
                                                        --------------   ------------- 
Current assets                                             
   Cash and temporary investments                              536,050         81,409
   Accounts receivable                                         229,148        187,986
   Due from affiliates                                         125,417           --
   Inventories                                                  65,390         63,078
   Other                                                        51,840         33,227
                                                         --------------   ------------- 
     Total current assets                                    1,007,845        365,700
                                                         --------------   ------------- 
Deferred taxes recoverable in rates                            184,837        189,193
                                                         --------------   ------------- 
Deferred charges and other assets                              126,584        203,210
                                                         --------------   ------------- 
     Total                                                  $4,654,493     $4,160,516
                                                         ==============   ============= 
CAPITALIZATION AND LIABILITIES 
Capitalization
   Common equity                                            $1,387,363     $1,404,136
   Preferred stock not subject to mandatory redemption          78,475         78,475 
   Preferred stock subject to mandatory redemption              25,000         25,000 
   Long-term debt                                            1,787,823      1,284,816
                                                         --------------   ------------- 
     Total capitalization                                    3,278,661      2,792,427
                                                         --------------   ------------- 
Current liabilities 
   Current portion of long-term debt                            72,575         33,639
   Accounts payable                                            161,039        174,884
   Due to affiliates                                              --            7,214
   Dividends payable                                            45,968         47,131
   Interest accrued                                             10,468         12,824
   Regulatory balancing accounts overcollected-net              58,063         35,338
   Other                                                       114,388        110,743
                                                         --------------   ------------- 
     Total current liabilities                                 462,501        421,773
                                                         --------------   ------------- 
Customer advances for construction                              37,661         34,666
Accumulated deferred income taxes - net                        471,890        487,119
Accumulated deferred investment tax credits                     62,332         64,410
Deferred credits and other liabilities                         341,448        360,121
Contingencies and commitments (Notes 9 and 10)                   --             --    
                                                         --------------   ------------- 
     Total                                                  $4,654,493     $4,160,516
                                                         ==============   ============= 
 
See notes to consolidated financial statements. 
 
                                            75
</TABLE> 


<PAGE>

<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY 
STATEMENTS OF CONSOLIDATED CASH FLOWS 
<CAPTION> 
 
In thousands of dollars 
For the years ended December 31                            1997        1996          1995
                                                     ------------  ------------  ------------ 
<S>                                                   <C>           <C>           <C> 
Cash Flows from Operating Activities      
  Income from continuing operations                   $   238,232   $  222,765   $   219,049
  Adjustments to reconcile income from continuing     
    operations to net cash provided by operating activities   
      Depreciation and decommissioning                    323,882      314,278       260,841
      Amortization of deferred charges and other assets     6,247        5,926        12,068
      Amortization of deferred credits and other        
        liabilities                                        (4,238)      (3,901)       (1,169)
      Allowance for equity funds used during construction  (5,192)      (5,898)       (6,435)
      Deferred income taxes and investment tax credits     10,713      (16,369)      (42,046)
      Other - net                                          19,416       25,570        21,108   
      Changes in working capital components      
        Accounts and notes receivable                     (41,162)      19,573         9,159
        Inventories                                        (2,312)       4,881         7,648
        Other current assets                               (4,464)     (14,119)       (5,550)
        Interest and taxes accrued                        (40,169)     (24,897)       15,737
        Accounts payable and other current liabilities   (142,831)      50,235        25,288
        Regulatory balancing accounts                      22,725      (37,313)       59,030
  Cash flows provided(used) by discontinued operations       --        (11,544)       49,188
                                                     -----------  -------------  ------------ 
        Net cash provided by operating activities         380,847      529,187       623,916
                                                     -----------  -------------  ------------ 
Cash Flows from Financing Activities                 
  Dividends paid                                         (256,168)    (188,700)     (188,288)
  Issuances of long-term debt                             677,850      226,646       123,734
  Repayment of long-term debt                            (133,267)    (257,772)     (126,164)
  Short-term borrowings-net                                  --           --         (58,325)
  Repurchase of common stock                                 --           --            (241)
  Redemption of preferred stock                              --        (15,155)          (18)
                                                     ------------  ------------  ------------ 
        Net cash provided (used) by financing activities  288,415     (234,981)     (249,302)
                                                     ------------  ------------  ------------ 
Cash Flows from Investing Activities              
  Utility construction expenditures                      (197,184)    (208,850)     (220,748)
  Contributions to decommissioning funds                  (22,038)     (22,038)      (22,038)
  Other - net                                               4,601       (2,664)       (2,456)
  Discontinued operations                                    --           --        (120,222)
                                                     ------------  ------------  ------------ 
        Net cash used by investing activities            (214,621)    (233,552)     (365,464)
                                                     ------------  ------------  ------------ 
Net increase                                              454,641       60,654         9,150
Cash and temporary investments, beginning of year          81,409       20,755        11,605
                                                     ------------  ------------  ------------ 
Cash and temporary investments, end of year           $   536,050   $   81,409   $    20,755
                                                     ============  ============  ============ 
Supplemental Disclosure of Cash Flow Information
   Interest payments, net of amounts capitalized      $    88,574   $   93,652   $   104,373
                                                     ============  ============  ============ 
   Net assets of affiliates transferred to parent     $      --     $  150,095   $      --
                                                     ============  ============  ============ 



See notes to consolidated financial statements. 
</TABLE>
                                                 76



<PAGE>

<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED CHANGES IN
CAPITAL STOCK AND RETAINED EARNINGS 
 
<CAPTION>
In thousands of dollars 
For the years ended December 31, 1995, 1996, 1997 
 
                                       Preferred  Stock 
                                ----------------------------- 
                                  Not Subject    Subject to             Premium on 
                                  to Mandatory   Mandatory    Common     Capital   Retained 
                                  Redemption    Redemption   Stock       Stock     Earnings 
                                  ---------     ---------   ---------   ---------  -------- 
<S>                               <C>           <C>         <C>         <C>        <C> 
       
Balance, January 1, 1995          $ 93,493      $ 25,000    $ 291,341   $ 564,508  $ 618,581 
  Earnings applicable to common shares                                               225,794 
  Long-term incentive plan activity-net                           117       1,530             
  Preferred stock retired (880 shares) (18)                                     8
  Common stock dividends declared                                                   (181,809)
----------------------------      ---------     ---------   ---------   ---------   --------- 
Balance, December 31, 1995          93,475        25,000      291,458     566,046    662,566 
  Earnings applicable to common shares                                               216,183 
  Transfer to Enova Corporation                                               342   (150,437)
  Preferred stock retired 
     (150,000 shares)              (15,000)                                  (155)            
  Common stock dividends declared                                                   (181,867) 
----------------------------      ---------     ---------   ---------   ---------   --------- 
Balance, December 31, 1996          78,475        25,000      291,458     566,233    546,445 
  Earnings applicable to common shares                                               231,650
  Special dividend to Enova Corporation                                             ( 70,000)
  Common stock dividends declared                                                   (178,423)
----------------------------      ---------     ---------   ---------   ---------   --------- 
Balance, December 31, 1997        $ 78,475      $ 25,000    $ 291,458   $ 566,233  $ 529,672 
============================      =========     =========   =========   =========   =========  
 

See notes to consolidated financial statements. 
                                                  77
</TABLE>




<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors of San Diego Gas & 
Electric Company:

We have audited the accompanying consolidated balance sheets of San 
Diego Gas & Electric Company and subsidiary as of December 31, 1997 
and 1996, and the related statements of consolidated income, 
consolidated changes in capital stock and retained earnings, and 
consolidated cash flows for each of the three years in the period 
ended December 31, 1997. These financial statements are the 
responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted 
auditing standards. Those standards require that we plan and perform 
the audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates 
made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present 
fairly, in all material respects, the financial position of San Diego 
Gas & Electric Company and subsidiary of December 31, 1997 and 1996, 
and the results of their operations and their cash flows for each of 
the three years in the period ended December 31, 1997 in conformity 
with generally accepted accounting principles.


/S/ DELOITTE & TOUCHE LLP


DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1998

                                       78


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SAN DIEGO GAS & ELECTRIC COMPANY

Except as modified below, the Notes to Consolidated Financial Statements 
of Enova Corporation are incorporated herein by reference insofar as 
they relate to San Diego Gas & Electric Company:

     Note 1  -- Business Combination
     Note 2  -- Significant Accounting Policies
     Note 4  -- Long-Term Debt
     Note 5  -- Facilities Under Joint Ownership
     Note 6  -- Employee Benefit Plans
     Note 8  -- Financial Instruments
     Note 9  -- Contingencies and Commitments
     Note 10 -- Industry Restructuring

Note 3: Significant Affiliate Transactions

In January 1996 Enova Corporation (Enova) became the parent of San Diego 
Gas & Electric (SDG&E) and its subsidiaries. At that time SDG&E's 
ownership interests in its subsidiaries were transferred to Enova at 
book value. SDG&E's financial statements for periods prior to 1996 
reflect the results of these subsidiaries as discontinued operations in 
accordance with Accounting Principles Board Opinion No. 30 "Reporting 
the Effects of a Disposal of a Segment of Business." Discontinued 
operations are summarized in the table below:

                                       Year Ended   
                                      December 31, 
                                           1995          
------------------------------------------------------
                                 (millions of dollars)
                                
Revenues                                   $81          
Loss from operations before 
  income taxes                             (24)      
Loss on disposal before income                                   
  taxes                                    (12)          
Income tax benefits                         32        
------------------------------------------------------

In December 1997 SDG&E and Enova signed a promissory note agreement for 
an amount not to exceed $400 million to be loaned by SDG&E to Enova due 
within one year. Interest on the outstanding balance under the note is 
accrued monthly at the current three-month commercial paper rate. As of 
December 31, 1997 $130 million had been issued and was outstanding under 
the promissory note agreement. 

In March 1997 SDG&E paid to Enova a special dividend of $70 million to 
be used for the repurchase of three million shares of Enova common 
stock.

Note 4: Long-Term Debt

The information contained in Enova Corporation's Statements of 
Consolidated Long-Term Debt is incorporated herein by reference. 

                                    79

<PAGE>

Note 7: Income Taxes 
 
SDG&E's income tax payments totaled $217 million in 1997, $245 million 
in 
1996 and $200 million in 1995. 
      
The components of accumulated deferred income taxes at December 31 are
as follows:
      
in thousands of dollars                        1997         1996 
------------------------------------------------------------------ 
Deferred tax liabilities 
  Differences in financial and 
    tax bases of utility plant               $567,804     $628,617 
  Loss on reacquired debt                      30,535       26,399 
  Other                                        65,675       63,081 
------------------------------------------------------------------ 
    Total deferred tax liabilities            664,014      718,097 
------------------------------------------------------------------ 
Deferred tax assets 
  Unamortized investment tax credits           64,873       68,239 
  Regulatory balancing accounts                27,903       37,010
  Unbilled revenue                             22,365       21,923
  Other                                        90,232      123,534 
------------------------------------------------------------------ 
    Total deferred tax assets                 205,373      250,706 
------------------------------------------------------------------ 
Net deferred income tax liability             458,641      467,391 
Current portion (net asset)                    13,249       19,728 
------------------------------------------------------------------ 
Non-current portion (net liability)          $471,890     $487,119 
================================================================== 
 
The components of income tax expense are as follows:
      
in thousands of dollars          1997       1996        1995 
--------------------------------------------------------------- 
Current 
  Federal                      $164,642    $169,309   $170,212 
  State                          43,801      45,018     44,863 
-------------------------------------------------------------- 
    Total current taxes         208,443     214,327    215,075 
-------------------------------------------------------------- 
Deferred 
  Federal                        12,922      (8,666)   (23,647) 
  State                           1,600      (1,518)   (13,464) 
-------------------------------------------------------------- 
    Total deferred taxes         14,522     (10,184)   (37,111) 
-------------------------------------------------------------- 
Deferred investment 
  tax credits - net              (3,809)     (6,185)    (4,935) 
-------------------------------------------------------------- 
    Total income tax 
      expense                  $219,156    $197,958   $173,029 
============================================================== 
 
Federal and state income taxes are allocated between operating income 
and other income. 

                                      80


<PAGE>

The reconciliation of the statutory federal income tax rate to effective 
income tax rate is as follows:
      
                                     1997     1996     1995 
------------------------------------------------------------- 
Statutory federal income tax rate    35.0%    35.0%    35.0% 
Depreciation                          7.1      5.7      5.0 
State income taxes - net of 
  federal income tax benefit          5.7      6.1      4.8 
Tax credits                          (1.3)    (2.1)    (1.8) 
Repair allowance                     (1.6)    (1.1)    (2.8) 
Other - net                           3.0      3.4      3.9 
------------------------------------------------------------- 
    Effective income tax rate        47.9%    47.0%    44.1% 
============================================================= 


Note 11: Capital Stock

The information contained in SDG&E's Statements of Changes in Capital 
Stock and Retained Earnings is incorporated herein by reference. The 
information contained in Enova Corporation's Statements of Consolidated 
Capital Stock as it relates to preferred and preference stock is 
incorporated herein by reference. 

Note 12: Segments of Business

The information contained in Enova Corporation's Statements of 
Consolidated Financial Information by Segments of Business is 
incorporated herein by reference. 

                                     81


<PAGE>

Note 13: Quarterly Financial Data (Unaudited)
SAN DIEGO GAS & ELECTRIC

<TABLE>
In thousands

<CAPTION>
Quarter ended                              March 31      June 30   September 30  December 31
<S>                                       <C>           <C>         <C>           <C>
1997
Operating revenues                        $ 494,636     $ 491,892   $ 566,297    $ 614,723
Operating expenses                          431,706       413,670     480,303      524,781
                                          ---------     ---------   ---------    ---------
Operating income                             62,930        78,222      85,994       89,942
Other income and (deductions)                   164          (444)        (17)       7,659
Net interest charges                         21,165        22,875      21,058       21,120
                                          ---------     ---------   ---------    ---------
Net income (before preferred 
   dividend requirements)                    41,929        54,903      64,919       76,481
Preferred dividend requirements               1,646         1,645       1,646        1,645
                                          ---------     ---------   ---------    ---------
Earnings applicable to common shares      $  40,283     $  53,258   $  63,273    $  74,836
                                          =========     =========   =========    =========

1996
Operating revenues                        $ 451,942     $ 458,221   $ 493,485    $ 535,269
Operating expenses                          367,772       388,379     411,657      462,347
                                          ---------     ---------   ---------    ---------
Operating income                             84,170        69,842      81,828       72,922
Other income and (deductions)                 1,396          (884)      4,372         (190)
Net interest charges                         22,994        22,786      24,073       20,838
                                          ---------     ---------   ---------    ---------
Net income (before preferred 
   dividend requirements)                    62,572        46,172      62,127       51,894
Preferred dividend requirements               1,646         1,645       1,646        1,645
                                          ---------     ---------   ---------    ---------
Earnings applicable to common shares      $  60,926     $  44,527   $  60,481    $  50,249
                                          =========     =========   =========    =========



These amounts are unaudited, but in the opinion of SDG&E reflect all adjustments necessary 
for a fair presentation.

</TABLE>
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