<PAGE>

              1996 ANNUAL REPORT

MANAGEMENT'S DISCUSSION AND ANALYSIS



    INTRODUCTION

    This section includes management's analysis of Pacific Enterprises' (the
    Company or Parent) operating results for the years 1994 through 1996, as
    well as its capital resources, liquidity and financial position. This
    section also focuses on the major factors expected to influence future
    operating results and discusses future investment and financing plans.
    Management's discussion and analysis should be read in conjunction with the
    Consolidated Financial Statements.

         Pacific Enterprises is a Los Angeles based utility holding company
    whose primary subsidiary is Southern California Gas Company (SoCalGas), the
    nation's largest natural gas distribution utility, serving 4.8 million
    meters throughout most of southern and part of central California. SoCalGas
    delivers natural gas and related services to residential and small
    commercial and industrial customers and stores and transports natural gas
    for electric generation and wholesale customers. The Company's Energy
    Management Services (EMS) business unit is engaged in interstate and
    offshore natural gas transmission to serve its utility operations,
    alternate energy development, centralized heating and cooling for large
    building complexes and energy management services. Through Pacific
    Enterprises International (PEI), the Company invests in international
    energy utility operations.

         During 1996, the Company announced an agreement to combine its
    operations with Enova Corporation (Enova), the parent company of San Diego
    Gas and Electric Company. This strategic merger of equals will be a
    tax-free transaction accounted for as a pooling of interests. The
    combination was approved by the shareholders of both Companies on March 11,
    1997. Completion of the combination remains subject to approval by
    regulatory and governmental agencies including the California Public
    Utilities Commission. To pursue opportunities in unregulated energy markets
    pending the completion of the combination, the Company and Enova have
    formed a joint venture to market energy products. For further discussion
    see Note 1 of Notes to Consolidated Financial Statements.

    CAPITAL RESOURCES AND LIQUIDITY

    The Company's primary sources and uses of cash during the last three years
    are summarized in the following condensed statement of cash flows:


    SOURCES AND (USES) OF CASH


                                              Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    ------------------------------------------------------------------------
    Operating Activities          $      608     $      698     $      255
    Capital Expenditures                (204)          (240)          (249)
    Foreign Investments                  (50)
    Financing Activities:
         Long-Term Debt                  (97)          (207)           226
         Short-Term Debt                  29            (44)            11
         Sale of
              Common Stock                 8              6              7
         Repurchase of
              Common Stock               (24)
         Redemption of
              Preferred Stock           (210)           (30)           (40)
         Common and
              Preferred
              Dividends                 (123)          (121)          (116)
                                  ------------------------------------------
         Total Financing
              Activities                (417)          (396)            88
         Other                           (32)             2             41
                                  ------------------------------------------
    Increase (Decrease)
         in Cash and  Cash
         Equivalents              $      (95)    $       64     $      135
    ------------------------------------------------------------------------

    CASH FLOWS FROM OPERATING ACTIVITIES

    The decrease in cash provided from operating activities to $608 million in 
    1996 from $698 million in 1995 is primarily due to lower noncore revenues 
    and lower amounts received from undercollected regulatory balancing 
    accounts, partially offset by favorable settlements as described in SoCalGas
    operations below.

         The increase in cash provided from operating activities of $443
    million in 1995 from 1994 is primarily due to a payment of $391 million for 
    the settlement of gas contract issues made in 1994 and increased earnings of
    SoCalGas as described later.

24


<PAGE>

    CAPITAL EXPENDITURES

    Capital expenditures primarily represent rate base investment at SoCalGas.
    The table below summarizes capital expenditures by utility plant
    classification:

    [GRAPH]
                                             Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    ------------------------------------------------------------------------
    SoCalGas:
         Distribution             $      124     $      126     $      129
         Transmission                     24             19             24
         Storage                           5             19             22
         Other                            44             67             70
                                  ------------------------------------------
              Total SoCalGas             197            231            245
    Other                                  7              9              4
                                  ------------------------------------------
              Total               $      204     $      240     $      249
    ------------------------------------------------------------------------

         Capital expenditures for 1996 are $36 million lower than 1995,
    primarily due to the completion in early 1996 of a new customer information
    system which increased SoCalGas' responsiveness to customer needs and
    reduced operating costs, and less capital required for storage due to
    completion of repairs from the 1994 Northridge earthquake.

         The decrease in expenditures of $9 million in 1995 was due primarily
    to a reduction in the investment requirements for connecting new customers.

         Capital expenditures are estimated to be $210 million in 1997.


    FOREIGN INVESTMENTS

    Foreign investments include an acquisition by PEI of a 12.5% interest in two
    utility holding companies that control natural gas distribution utilities in
    Argentina, and an investment in the Mexicali natural gas distribution 
    system. The acquisition price of the Argentina investment was $48.5 million,
    and funds invested in the Mexicali project totaled $1 million through the 
    end of 1996.


    LONG-TERM DEBT

    In 1996, cash was used for a $67 million redemption of the Swiss Franc
    Bonds, and repayment of $79 million of debt issued to finance the 
    Comprehensive Settlement (see Note 4 of Notes to Consolidated Financial 
    Statements). This was partially offset by cash provided from the issuance of
    $75 million in Medium Term Notes.

         Cash was used in 1995 primarily for the repayment of short- and
    long-term debt, including $65 million of debt related to the Comprehensive 
    Settlement.

         Cash was provided in 1994 from the issuance of long-term debt for
    financing the Comprehensive Settlement.


    STOCK REDEMPTION

    The Company and SoCalGas redeemed $110 million and $100 million,
    respectively of variable dividend rate preferred stocks in 1996. The
    Company recorded a $2.4 million nonrecurring reduction to consolidated
    earnings to reflect the write-off of the original issuance underwriting 
    discount related to this preferred stock. In 1995 and 1994, $30 million and 
    $40 million, respectively, of preferred stock of the Company was redeemed.

         In 1996, the Board of Directors authorized a common share repurchase
    program of up to 4.25 million shares of the Company's common stock,
    representing approximately 5% of the then outstanding shares. As of
    December 31, 1996, the Company repurchased 816,000 shares under this
    program. An additional 74,000 shares were repurchased in January 1997.

         The Company has temporarily suspended the repurchase program during
    the solicitation of  approval by shareholders of the combination with Enova
    and expects to resume the program in 1997. Prior to the completion of the
    combination, the repurchase program will be terminated.


    DIVIDENDS

    In 1996, the Company paid dividends of $118 million on common stock and $5
    million on preferred stock for a total of $123 million. This compares to
    $121 million in 1995 and $116 million in 1994. The increase in 1996 was due
    to the increase in the weighted average of common shares outstanding during
    the year, and the increase in the quarterly common stock dividend rate in
    the second quarter of 1996 partially offset by lower preferred dividends.

         The quarterly dividend rate for common stock was increased from $.30
    per share to $.32 per share in the second quarter of 1994, to $.34 per
    share in the second quarter of 1995, and to $.36 per share in the second
    quarter of 1996.

                                                        PACIFIC ENTERPRISES   25
<PAGE>

    CAPITALIZATION

    As of the end of 1996, the debt to capitalization ratio had increased to
    52% from 50% in 1995. The increase is due to a reduction in equity from the
    redemption of the preferred stock and repurchases of common stock,
    partially offset by the repayment of debt.

         By the close of 1995, the debt to capitalization ratio had decreased
    to 50% from 55% in 1994 primarily due to increases in common equity from
    1995 income and the repayment of debt.

         During 1993, the Company completed the sale of discontinued operations
    and issued 8 million shares of common stock. The proceeds from the asset
    sales, including tax benefits, together with cash provided by continuing
    operations, were used to repay essentially all of the Parent Company's bank
    debt. As a result, the debt to capitalization ratio improved to 54% at the
    end of 1993 from 67% in 1992.


    CASH AND CASH EQUIVALENTS

    Cash and cash equivalents were $256 million at December 31, 1996, of which
    $234 million is at the Parent. This cash is available for investment in new
    energy-related domestic and international projects, repurchase of common
    and preferred stock, the retirement of debt and other corporate purposes.

         The Company anticipates that cash required in 1997 for capital
    expenditures, dividends, debt payments and merger related costs will be
    provided by cash generated from operating activities and existing cash
    balances.

         In addition to cash from ongoing operations, the Parent and SoCalGas 
    have available multi-year credit agreements. The SoCalGas agreements provide
    backing for its commercial paper program. At December 31, 1996, all bank 
    lines of credit were unused (see Note 8 of Notes to Consolidated Financial 
    Statements).


    RESULTS OF CONSOLIDATED OPERATIONS

    The following table is presented to enhance understanding of the reported 
    results:

    [GRAPH]
                                             Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    ------------------------------------------------------------------------
    Reported earnings
         per share                $     2.37     $     2.12     $     1.95
    Nonrecurring events:
         Contract
              settlement
              charges                                   .05
         Litigation
              settlement
              benefits                  (.19)
         Merger related
              expenses                   .05
         Unamortized
              discount                   .03
                                  ------------------------------------------
    Normalized
         earnings per share       $     2.26     $     2.17     $     1.95
    ------------------------------------------------------------------------



    1996 COMPARED TO 1995

    Net income for 1996 increased to $203 million, or $2.37 per share of common
    stock, compared to net income of $185 million, or $2.12 per share in 1995.

         Net income for 1996 includes net benefits of $12.1 million from
    nonrecurring items. Nonrecurring events in 1996 include favorable
    litigation settlements totaling $16.1 million, after-tax, or $.19 per
    share. One settlement is from gas producers for $5.6 million, after-tax,
    for damages to SoCalGas and customer equipment as a result of impure gas
    supplies delivered to SoCalGas and the other reflects the resolution of
    environmental insurance claims which benefited earnings by $10.5 million,
    after-tax. These were partially offset by merger related expenses of $4
    million, after tax. Also having a nonrecurring impact was a $2.4 million
    reduction to earnings per share to reflect original issuance underwriting
    discounts on redeemed preferred stock.

         Net income was also favorably impacted by lower operating and
    maintenance expenses at SoCalGas due to continued efforts to reduce costs
    of utility service and a reduction in interest expense. Interest expense
    was reduced from its 1995 level as a result of the lower long-term debt

26

<PAGE>

    balance maintained throughout the year and the redemption of $67 million of
    Swiss Franc bonds. This was partially offset by higher general and
    administrative expenses at PEI and EMS, as well as a reduction in the 
    authorized return on equity for SoCalGas to 11.6% from 12% and lower noncore
    revenues as a result of decreased UEG transportation volumes.

         Additionally, 1995 results included a nonrecurring charge of $3.8
    million, after-tax, for the resolution of certain power sales contract
    issues at EMS.

    [GRAPH]

    1995 COMPARED TO 1994

    Net income for 1995 increased to $185 million, or $2.12 per share, from
    $172 million, or $1.95 per share, in 1994. The increase of $13 million
    during 1995 is due primarily to the increase in the authorized rate of
    return on common equity at SoCalGas from 11% in 1994 to 12% in 1995 and
    lower operating expenses, which reflect savings from the Company's
    reduction in staffing levels and other expense reductions.


    SOCALGAS OPERATIONS

    To fully understand the operations and financial results of SoCalGas it is
    important to understand the ratemaking procedures that SoCalGas is required
    to follow.


    RATEMAKING PROCEDURES

    SoCalGas is regulated by the California Public Utilities Commission (CPUC).
    It is the responsibility of the CPUC to determine that utilities operate in
    the best interest of the customer with the opportunity to earn a reasonable
    return on investment.

         In a general rate case, the CPUC establishes a base margin, which is
    the amount of revenue authorized to be collected from customers to recover
    authorized operating expenses (other than the cost of gas), depreciation,
    interest, taxes and return on rate base. General rate cases are typically
    filed every three years. On June 1, 1995, SoCalGas filed a "Performance
    Based Regulation" (PBR) application with the CPUC which would replace the
    general rate case and certain other regulatory proceedings. If approved,
    PBR would be implemented during the last half of 1997. For a further
    discussion of PBR, see Factors Influencing Future Performance-Performance
    Based Regulation.

         The CPUC annually adjusts rates for years between general rate cases
    to reflect the changes in rate base and the effects of inflation as
    adjusted by a productivity improvement factor. No adjustment for inflation
    was made to rates in 1997 pending the CPUC's ruling on SoCalGas' PBR
    application. Current rates will remain in effect at SoCalGas until PBR is
    implemented. Separate proceedings are held annually to review SoCalGas'
    cost of capital, including return on common equity, interest costs and
    changes in capital structure.

         Biennial cost allocation proceedings (BCAP) adjust rates to reflect
    variances in the cost of gas and core customer demand from estimates
    adopted in a general rate case. The mechanism substantially eliminates the
    effect on core income of variances in core market demand and gas costs
    subject to the limitations of the Gas Cost Incentive Mechanism (GCIM) and
    the Comprehensive Settlement (see Note 4 of Notes to Consolidated Financial
    Statements).

         GCIM is a pilot program, which compares SoCalGas' cost of gas with the
    average market price of 30-day firm spot supplies delivered to the SoCalGas
    service area and permits full recovery of all costs within a tolerance band
    above that average. The cost of purchases above the tolerance band or
    savings from purchases below the average market price are shared equally
    between customers and shareholders.

         In the first year of the GCIM (April 1994-March 1995), SoCalGas' cost
    of gas was within the tolerance band and all gas costs were passed on to
    the customer.

         In the second year of the GCIM (April 1995-March 1996), the cost of
    gas was below the average market price. A filing has been made with the
    CPUC requesting a reward to shareholders which will be recognized in income
    when a final CPUC decision is issued.

         SoCalGas is currently in discussions with the CPUC to extend GCIM
    beyond its third year (see Note 4 of Notes to Consolidated Financial
    Statements).


                                                                              27


<PAGE>

    MARKETS

    SoCalGas markets are comprised of core customers and noncore customers.
    Core customers consist of approximately 4.8 million meters (4.6 million
    residential and 200,000 small commercial and industrial meters). The
    noncore market consists of approximately 1,600 meters which includes nine
    utility electric generation (UEG), three wholesale, and the remainder are
    large commercial and industrial customers. Most noncore customers procure
    their own gas supply (which is delivered through the SoCalGas distribution
    system) rather than purchase gas from SoCalGas. Although the revenues from
    transportation throughput are less than for gas sales, SoCalGas generally
    earns the same margin whether it buys the gas and sells it to the customer
    or transports gas already owned by the customer. For 1997, approximately
    89% of the total margin authorized is contributed by the core market, with
    11% contributed by the noncore market.

         Under current utility ratemaking policies, the return that SoCalGas is
    authorized to earn is the product of an authorized rate of return on rate
    base and the amount of rate base. Rate base consists primarily of net
    investment in utility plant. Thus, SoCalGas' earnings are affected by
    changes in the authorized rate of return on rate base, the change in the
    authorized rate base and by SoCalGas' ability to control expenses and
    investment in rate base within the amounts authorized by the CPUC in
    setting rates. SoCalGas refunds or collects in the future the amounts by
    which certain defined costs vary from the amounts authorized by the CPUC in
    the rate case or other regulatory proceedings. Also, variations in core
    revenues from estimates adopted by the CPUC in establishing rates are
    refunded or collected through a balancing account mechanism. Through
    balancing account treatment,  SoCalGas is allowed to fully recover amounts
    recorded as core deferred costs or core revenue shortfalls currently or in
    the future. Under terms of the Comprehensive Settlement, SoCalGas is at
    risk for deliveries to the noncore market.

    1994-1996 RESULTS

    Key financial and operating data for SoCalGas are highlighted in the
    following table.

    [GRAPH]
                                         Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    -------------------------------------------------------------------------
    Operating revenues            $    2,422     $    2,279     $    2,587
    Cost of gas                   $      923     $      737     $      992
    Operating expenses            $      725     $      760     $      827
    Income from
         operations before
         interest and taxes       $      431     $      451     $      424
    Net income
         (after preferred
         dividends)               $      193     $      203     $      180
    Authorized return
         on rate base                   9.42%          9.67%          9.22%
    Authorized return
         on common
         equity                        11.60%         12.00%         11.00%
    Weighted average
         rate base                $    2,777     $    2,766     $    2,862
    Growth (decline)
         in weighted
         average rate base
         over prior period                .4%          (3.4)%          3.4%
    -------------------------------------------------------------------------

-   1996 COMPARED TO 1995   SoCalGas' operating revenues increased $143 million
    in 1996 compared to 1995. The increase is primarily due to an increase in
    the average unit cost of gas in 1996 compared to 1995. Since this cost is
    recoverable in rates (subject to GCIM), it is also recorded as revenues,
    and resulted in increased revenues in 1996 (see Note 2 of Notes to
    Consolidated Financial Statements for a discussion of related accounting
    policies).

         The increase in revenue was also generated by demand from refinery
    customers who required 21 Bcf more gas in 1996 than 1995. The increase in
    revenue was partially offset by a decrease in UEG revenues due to a
    reduction in volumes transported for UEG's as a result of an abundance of
    less expensive hydro-electricity resulting from high levels of rain and
    snowfall last winter.

         SoCalGas' cost of gas distributed increased $186 million in 1996
    compared to 1995 due primarily to an increase in the average unit cost of
    gas. The average commodity cost of gas purchased by SoCalGas, excluding
    fixed charges for 1996, was $1.88 per thousand cubic feet, compared to
    $1.42 per thousand cubic feet in 1995.

28


<PAGE>

    [GRAPH]

         SoCalGas' operating expenses decreased $35 million in 1996 compared to
    1995. The decrease is primarily due to the nonrecurring favorable
    settlements from gas producers and environmental insurance claims totaling
    $28 million and reflects savings as a result of SoCalGas' continued
    improvements in efficiency and management's close control of expenses.

         Net income after preferred dividends was $193 million in 1996 compared
    to $203 million in 1995. The decline in earnings at SoCalGas was primarily
    due to a nonrecurring non-cash charge of $26.6 million resulting from
    continuing developments in the CPUC's restructuring of the electric utility
    industry. The charge was needed because SoCalGas anticipates throughput to
    noncore UEG customers will be below the levels projected in 1993 at the
    time of the Comprehensive Settlement (see Note 4 of Notes to Consolidated
    Financial Statements). Consequently, SoCalGas believes it will not realize
    the remaining revenue enhancements that were applied to offset the costs of
    the Comprehensive Settlement. In connection with the 1992
    quasi-reorganization, the Company established a reserve for this issue and
    therefore this charge had no effect on consolidated net income. The decline
    in 1996 earnings was partially offset by the effects of the nonrecurring
    favorable settlements and lower operating costs.

 -  1995 COMPARED TO 1994    The decrease in operating revenue of $308 million
    in 1995 reflects a reduction in the average unit cost of gas and a decrease
    in noncore volumes transported. SoCalGas cost of gas distributed decreased
    $255 million in 1995. The average commodity cost of gas purchased by
    SoCalGas, excluding fixed charges, for 1995 was $1.42 per thousand cubic
    feet, compared to $1.68 per thousand cubic feet in 1994.

         SoCalGas' operating expenses decreased $67 million in 1995. The
    decrease primarily reflects savings from cost reduction efforts in 1995 and
    nonrecurring expenses in 1994. Operating costs for 1994 included expenses
    resulting from the January 1994 earthquake and expenses related to a
    discontinued capital project.

         Net income after preferred dividends increased to $203 million in 1995
    from $180 million in 1994. The increase was primarily due to the increase
    in the authorized return on equity to 12% from 11% in 1994 and lower
    operating expenses from cost reduction efforts.


 -  ACHIEVED AND AUTHORIZED RATE OF RETURN   SoCalGas has achieved or exceeded
    the rate of return on rate base authorized by the CPUC for 14 consecutive
    years. In 1996, SoCalGas achieved a 10.31% return on rate base compared to
    a 9.42% authorized return and a 13.59% return on equity compared to a 11.6%
    authorized return. The improved returns were primarily due to lower
    operating costs as a result of increased operating efficiencies and the
    favorable settlements.

         In 1995, SoCalGas achieved a 10.84% return on rate base compared to a
    9.67% authorized return and a 13.89% return on equity compared to an 12%
    authorized return. The improved returns were primarily due to lower
    operating costs as a result of reduced staffing levels and other cost
    reduction efforts.

         In 1997, SoCalGas is authorized to earn a 9.49% return on rate base
    and 11.6% on equity. Rate base is expected to remain at approximately the
    same level as 1996.

    OPERATING RESULTS

    The table on the following page summarizes the components of SoCalGas'
    throughput and rates charged to customers for the past three years. Rates
    include the customer portion of the Comprehensive Settlement (see Note 4 of
    Notes to Consolidated Financial Statements). The amount included in rates
    for 1996, 1995, and 1994 was $90 million, $84 million, and $119 million,
    respectively.

         Throughput, the total gas sales and transportation volumes moved
    through SoCalGas' system, decreased in 1996 as a result of lower demands,
    primarily by UEG customers. This was as a result of an abundance of
    inexpensive hydro-electricity resulting from high levels of precipitation
    last winter reducing the gas demands of UEG's. The decrease in throughput
    in 1995 from 1994 levels was also the result of lower demands, primarily by
    UEG customers. As previously described under ratemaking procedures,
    SoCalGas is not at risk for variances in volumes delivered to the core
    market. Variances in volumes delivered to the noncore market directly
    impact the company's results of operations.


                                                                              29


<PAGE>

[GRAPH]

<TABLE>
<CAPTION>
     (Dollars in millions,                     Gas Sales        Transportation & Exchange           Total
                                        ----------------------  -------------------------  ----------------------
     volume in billion cubic feet)      Throughput    Revenue     Throughput     Revenue   Throughput     Revenue
     ------------------------------------------------------------------------------------------------------------
     <S>                                <C>          <C>        <C>            <C>         <C>          <C>
     1996:
         Residential                          233   $  1,603             3     $     10         236     $  1,613
         Commercial/Industrial                 82        473           297          236         379          709
         Utility Electric Generation                                   139           70         139           70
         Wholesale                                                     130           70         130           70
                                       --------------------------------------------------------------------------
         Total in Rates                       315   $  2,076           569     $    386         884        2,462
                                                                                                      -----------
         Balancing and Other                                                                                 (40)
                                       --------------------------------------------------------------------------
             Total Operating Revenues                                                                   $  2,422
     ------------------------------------------------------------------------------------------------------------
     1995:
         Residential                          237   $  1,547             2     $      7         239     $  1,554
         Commercial/Industrial                 97        546           267          206         364          752
         Utility Electric Generation                                   205          104         205          104
         Wholesale                              4          7           125           55         129           62
                                       --------------------------------------------------------------------------
         Total in Rates                       338   $  2,100           599     $    372         937        2,472
                                                                                                      -----------
         Balancing and Other                                                                                (193)
                                       -------------------------------------------------------------------------
             Total Operating Revenues                                                                   $  2,279
     ------------------------------------------------------------------------------------------------------------
     1994:
         Residential                          254   $  1,704             2     $      9         256     $  1,713
         Commercial/Industrial                100        592           258          207         358          799
         Utility Electric Generation                                   260          118         260          118
         Wholesale                              8         21           138           77         146           98
                                       -------------------------------------------------------------------------
         Total in Rates                       362   $  2,317           658     $    411       1,020        2,728
         Balancing and Other                                                                                (141)
                                                                                                      -----------
             Total Operating Revenues                                                                   $  2,587
     ------------------------------------------------------------------------------------------------------------
</TABLE>

    FACTORS INFLUENCING FUTURE PERFORMANCE
    Performance of the Company in the near future will primarily depend on the
    results of SoCalGas. Because of the ratemaking and regulatory process as
    well as the changing energy marketplace, there are several factors that
    will influence future financial performance. These factors are summarized
    below.

 -  ALLOWED RATE OF RETURN  For 1997, SoCalGas is authorized to earn a rate of
    return on rate base of 9.49% and a rate of return on common equity of
    11.6%, compared to 9.42% and 11.6%, respectively, in 1996. The CPUC also
    authorized an increase in the common equity component of SoCalGas  capital
    structure to 48.0% in 1997 from 47.4% in 1996. The 60 basis point increase
    in the equity component could potentially add $2 million to earnings in
    1997. Rate base is expected to remain at approximately the same level as in
    1996.

 -  PERFORMANCE BASED REGULATION   Under current ratemaking policies, SoCalGas
    net income and cash flow will be determined primarily by the allowed rate
    of return on common equity, changes to authorized rate base, noncore market
    pricing, the variance in gas volumes delivered to noncore customers from
    CPUC-adopted forecast deliveries and the ability of management to control
    expenses and investment in line with the amounts authorized by the CPUC to
    be collected in rates.

         SoCalGas has filed a PBR application with the CPUC to replace the
    general rate case and certain other traditional regulatory proceedings.
    PBR, if approved, would allow SoCalGas to be more responsive to consumer
    interests and compete more effectively in contestable markets. Key elements
    of this proposal included a permanent reduction in base rates of $62
    million. As a result of discussions in late 1996, SoCalGas has agreed with
    the staff of the CPUC to a rate reduction of $110 million. Other elements
    of PBR include an indexing mechanism that would limit future rate increases
    to the inflation rate less a productivity factor and rate refunds to
    customers if service


30


<PAGE>


    quality were to deteriorate. This new approach would maintain cost based
    rates but would link financial performance with changes in productivity.
    Although PBR in the near term could result in increased earnings
    volatility, SoCalGas would have the opportunity to improve financial
    performance over the long-term to the extent it is able to reduce expenses,
    increase gas deliveries and generate profits from new products and
    services.

         Under the PBR proposal, SoCalGas would be at risk for certain changes
    in interest rates and cost of capital, variances in core volumes not caused
    by weather, and achievement of productivity improvements. SoCalGas believes
    PBR will permit the continued applicability of Statement of Financial
    Accounting Standards No. 71 "Accounting for the Effects of Certain Types of
    Regulation" (SFAS 71) to account for SoCalGas' operations. However, the
    terms of PBR ultimately authorized by the CPUC may contain elements that
    could result in SoCalGas not meeting all the criteria for continued
    application of SFAS 71 (see Note 2 of Notes to Consolidated Financial
    Statements).


 -  MANAGEMENT CONTROL OF EXPENSES AND INVESTMENT Over the past 14 years,
    management has been able to control operating expenses and investment
    within the amounts authorized to be collected in rates and intends to
    continue to do so.


 -  ELECTRIC INDUSTRY RESTRUCTURING   Demand for natural gas by UEG customers
    is sensitive to the price and availability of electric power generated in
    areas outside SoCalGas' service territory and available for purchase by
    customers.

         On December 20, 1995, the CPUC issued a final decision to restructure
    California electric utility regulation effective January 1, 1998. On
    September 23, 1996, California Assembly Bill 1890, a comprehensive bill
    regarding the electric restructuring, was signed into law. Implementation
    of portions of the plan are expected to need federal administrative
    approval. Future volumes of natural gas SoCalGas transports for electric
    utilities may be adversely affected by increased use of electricity
    generated by producers outside SoCalGas' service territory. The electric
    industry restructuring may also result in a reduction of electric rates to
    core customers, but it is unlikely to overcome the entire cost advantage of
    natural gas for existing uses.

         The Company has adopted Statement of Financial Accounting Standards,
    No. 121, "Accounting for the Impairment of Long-Lived Assets and for
    Long-Lived Assets to Be Disposed Of" (SFAS 121) and evaluated its impact,
    including the potential effect of the electric industry restructuring.
    Although the Company believes that the volume of gas transported by
    SoCalGas may be adversely impacted by the electric industry restructuring,
    it is not anticipated that it would result in an impairment of assets as
    defined in SFAS 121 because the expected undiscounted future cash flows
    from SoCalGas' investment in its gas transportation infrastructure is
    greater than its carrying amount.


 -  NONCORE BYPASS   SoCalGas' throughput to enhanced oil recovery (EOR)
    customers in the Kern County area decreased significantly since 1992
    because of the bypass of SoCalGas' system by competing interstate
    pipelines. The decrease in revenues from EOR customers is subject to full
    balancing account treatment, except for a 5% incentive to SoCalGas, and
    therefore, does not have a material impact on SoCalGas' earnings.

         Bypass of other markets may also occur, and SoCalGas is fully at risk
    for reduction in non-EOR, noncore volumes due to bypass. However,
    significant additional bypass would require construction of additional
    facilities by competing pipelines. SoCalGas is continuing to reduce its
    costs to maintain competitive rates to transportation customers.


 -  NONCORE THROUGHPUT   SoCalGas' earnings from noncore markets may be
    adversely impacted if gas throughput to its noncore customers varies from
    estimates adopted by the CPUC in establishing rates. There is a continuing
    risk that an unfavorable variance in noncore volumes can result from
    external factors such as weather, electric restructuring, the increased use
    of hydro-electric power, competing pipeline bypass of SoCalGas' system and
    a downturn in general economic conditions. In addition, many noncore
    customers are especially sensitive to the price relationship between
    natural gas and alternate fuels, as they are capable of readily switching
    from one fuel to another, subject to air quality regulations. SoCalGas is
    at risk for the lost revenue.

         Through July 31, 1999, any favorable earnings effect of higher
    revenues resulting from higher throughput to noncore customers has been
    eliminated as a result of the Comprehensive Settlement (see Note 4 of Notes
    to Consolidated Financial Statements).


31


<PAGE>

 -  EXCESS INTERSTATE PIPELINE CAPACITY   SoCalGas has exercised its step-down
    option on both the El Paso and Transwestern Interstate Pipeline Systems by
    300 million cubic feet per day and 450 million cubic feet per day,
    respectively, thereby reducing its firm interstate capacity obligation to
    1.45 Bcf per day.  SoCalGas' requirements to meet the demand of the core
    market is approximately 1.05 Bcf per day, or 400 MMcf per day below its
    capacity obligation. SoCalGas has entered into a FERC approved settlement
    with Transwestern, and an El Paso settlement is currently pending before
    the FERC. Both settlements define the amount of the unsubscribed capacity
    costs that is to be recovered from SoCalGas and other remaining firm
    service customers, thus reducing SoCalGas exposure to higher annual
    reservation charges. Under existing regulation in California, unsubscribed
    capacity costs are included in customer rates.

         The Company believes that these settlements will not have a
    significant impact on liquidity or on results of operations as a result of
    the requirement to subsidize unsubscribed pipeline costs. The settlements
    result in a reduction in the costs that SoCalGas could possibly have had to
    pay in the future as a result of unsubscribed pipeline capacity. The
    inclusion of the unsubscribed pipeline cost in rates may impact SoCalGas'
    ability to compete in highly contested markets. However, SoCalGas does not
    believe it will have a significant impact on volumes transported.


 -  ENVIRONMENTAL MATTERS   SoCalGas' operations and those of its customers are
    affected by a growing number of environmental laws and regulations. These
    laws and regulations affect current operations as well as future expansion.
    Increasingly complex administrative and reporting requirements of
    environmental agencies applicable to commercial and industrial customers
    utilizing natural gas are not generally required by those using
    electricity. However, anticipated advancement in natural gas technologies
    should enable gas equipment to remain competitive with alternate energy
    sources.  Environmental laws also require clean up of facilities no longer
    in use. Because of current and expected rate recovery, SoCalGas believes
    that compliance with these laws will not have a significant impact on the
    Company's consolidated results of operations or financial position (see
    Note 6 of Notes to Consolidated Financial Statements).


 -  CALIFORNIA ECONOMY   Growth in SoCalGas markets is largely dependent on the
    health and expansion of the California economy. SoCalGas added
    approximately 44,000 new meters in 1996. This represents a growth rate of
    approximately 1%, which is expected to continue for 1997.


    ENERGY MANAGEMENT SERVICES
    EMS, consists of a number of operations including an interstate pipeline
    subsidiary, a subsidiary which operates and develops alternate energy
    facilities as well as centralized heating and cooling plants, an
    unregulated subsidiary which markets natural gas, and a subsidiary which
    provides energy products and services.

         Key financial data for the EMS business unit are highlighted in the
    following table.


                                              Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)             1996           1995           1994
    ------------------------------------------------------------------------
    Operating revenue             $      291     $      212     $      463
    Operating expenses            $      292     $      213     $      452
    Income (loss) from
         operations before
         interest and taxes       $       (1)    $       (1)    $       11
    Net income                    $        6     $        8     $       10
    ------------------------------------------------------------------------

         Pacific Energy (PEn) develops and operates alternate energy facilities
    including geothermal, hydro-power, biogas, and woodburning plants. It also
    operates centralized heating and cooling plants for large building
    complexes.

         Ensource, which was established in 1996, buys and arranges
    transportation, storage and delivery of natural gas for large-volume
    customers.

         Pacific Enterprises Energy Services (PEES), which also was established
    in 1996, provides energy related products and services to both commercial
    and residential customers. The New Product Development (NPD) group was
    consolidated into EMS in 1996 to support design and launch of new products.
    Five new residential consumer products were launched in 1996 as well as
    four commercial customer services.

         Pacific Interstate Company (PIC), which is regulated by the FERC,
    purchases gas from producers in Canada and from federal waters offshore
    California and transports it for sale to SoCalGas and others. Of gas
    purchased by PIC in 1996, 96% was sold to SoCalGas. These deliveries
    accounted for approximately 30% of the total volume of gas purchased by
    SoCalGas and approximately 11% of SoCalGas' throughput.


32


<PAGE>

         Operating revenues increased to $291 million in 1996 from $212 million
    in 1995 due primarily from revenues of Ensource, the Company's subsidiary
    which markets natural gas. Ensource began operations in 1996 and had
    revenues of $48 million. The net margin after operating expenses from gas
    marketing operations is not significant. Revenues also increased due to the
    higher commodity cost for gas delivered by PIC to SoCalGas. Partially
    offsetting the increase were lower revenues from power sales as some
    contracts converted from fixed rates to market-based rates. Operating
    revenues declined in 1995 by $251 million primarily due to Comprehensive
    Settlement payments received by PIC in 1994 of $210 million, lower
    commodity cost for gas delivered to SoCalGas and decreased revenues from
    alternate energy facilities due to lower amounts paid for electric
    generation according to the terms of the contracts.

         Operating expenses increased to $292 million in 1996 from $213 million
    in 1995 due to operating expenses of Ensource, higher gas commodity costs
    at PIC and start up costs incurred by PEES. In 1995 operating expenses
    decreased by $239 million from the 1994 level due primarily from the costs
    incurred by PIC in 1994 for the Comprehensive Settlement partially offset
    by a $7 million nonrecurring charge for certain power sales contract
    restructuring issues.

         Operating income declined by $12 million in 1995 primarily due to
    lower revenue from power sales contracts and the $7 million nonrecurring
    charge.

         The primary difference between net income and income (loss) from
    operations before interest and taxes consists of intercompany interest
    income which is eliminated in the consolidated financial statements of the
    Company.

         EMS owns indirect interests in several small electric generation
    facilities which are "qualifying facilities" under the Public Utility
    Regulatory Policies Act.

         Qualifying facilities are entitled to a mandatory purchase obligation
    and exemption from regulation in connection with their sale of electricity.
    Qualifying facility status is not available to any facilities that are more
    than 50% owned by an electric utility or an electric utility holding
    company.

         Upon the completion of the proposed business combination of Pacific
    Enterprises and Enova (see Note 1 of Notes to Consolidated Financial
    Statements), the new holding company by reason of its indirect ownership of
    SDG&E will become an electric utility holding company. Consequently, in
    order to avoid the loss of qualifying facility status the Company must
    cause its ownership in these facilities to be not more than 50% prior to
    the completion of the business combination. The Company is considering
    several alternatives to accomplish this result including the sale of all or
    part of these facilities. Income before interest and taxes earned from
    these assets was $1 million for the year ended December 31, 1996. The
    Company does not expect that the sale of these facilities will have a
    material adverse effect on its consolidated results of operations or
    financial position.


    PACIFIC ENTERPRISES INTERNATIONAL

    PEI was established in late 1994 to participate in the international
    natural gas infrastructure market and began operations in March 1995.

         Net loss was $4.6 million in 1996 compared to $2.1 million in 1995.
    The increase in net loss was primarily the result of higher general and
    administrative expenses from a full year of operations in 1996 compared to
    a partial year in 1995. The increase in general and administrative expenses
    was partially offset by a $2.1 million, pre-tax, cash dividend received
    from its investment in two Argentine holding companies. A second dividend
    of $2.5 million, pre-tax, was received in January 1997.

         On April 10, 1996, PEI completed an acquisition of a 12.5% interest in
    two utility holding companies that control natural gas distribution
    utilities in Argentina. The acquisition price was $48.5 million. These
    utilities in central and southern Argentina deliver about 625 million cubic
    feet of gas per day to 1.1 million customers.  PEI has a role in actively
    managing the utility operations by providing expertise in areas such as
    underground storage, marketing gas usage, and technology applications.

         On August 12, 1996, PEI, and two partners were awarded Mexico's first
    privatization license allowing the consortium to build and operate a
    natural gas distribution system in Mexicali, Baja California. The franchise
    was awarded to


                                                                              33


<PAGE>

    Distribuidora de Gas Natural de Mexicali S. de R.L. de C.V. (DGN), a
    Mexican company formed by PEI, Enova International and Proxima Gas. DGN of
    which PEI has a 30% interest, will invest approximately $20 million to $25
    million during an initial five-year period to provide service to more than
    25,000 commercial, industrial and residential users. PEI invested
    approximately $1 million in the Mexicali project during 1996.

         Other international projects are currently under evaluation.


    OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES

    OTHER INCOME

    Other income, which primarily consists of interest income from short-term
    investments and interest income on regulatory accounts receivable balances,
    decreased in 1996 to $25 million from $34 million in 1995.

         The decrease in 1996 is primarily due to a decrease in investment
    income from lower investment balances caused by unusually high short-term
    investments in 1995 as a result of overcollected gas costs that were
    refunded to customers in the fourth quarter of 1995 and cash used to redeem
    $210 million of preferred stock in 1996. The decrease was also due to cash
    outflows for the $48.5 million investment by PEI.

         Other income decreased slightly to $34 million in 1995 from $38
    million in 1994.


    INTEREST EXPENSE

    Interest expense for 1996 decreased to $97 million from $108 million in
    1995. Interest expense was reduced from its 1995 level as a result of the
    lower long-term debt balance maintained throughout the year and the
    redemption of $67 million of Swiss Franc bonds.

         Interest expense for 1995 decreased to $108 million from $128 million
    in 1994. Interest expense was reduced in 1995 as a result of the repayment
    of nonutility debt and refinancing of SoCalGas' debt at lower interest
    rates. The Company had two interest rate swap agreements which effectively
    set $200 million of variable rate debt to fixed rates. The swap agreements
    expired in September 1995 (see Note 9 of Notes to Consolidated Financial
    Statements).


    INCOME TAXES

    Income taxes for 1996 increased to $151 million from $129 million in 1995.
    The increase of $22 million is primarily due to an increase in earnings
    before taxes to $354 million in 1996 from $314 million in 1995 (see Note 5
    of Notes to Consolidated Financial Statements).

         Income taxes for 1995 decreased to $129 million from $139 million in
    1994.  The decrease of $10 million in 1995 was primarily due to capitalized
    information systems costs which are deductible for tax purposes.


    INFORMATION REGARDING FORWARD LOOKING STATEMENTS

    This Annual Report contains forward-looking statements with respect to
    matters inherently involving numerous risks and uncertainties. These
    statements are identified by the words "estimates", "expects",
    "anticipates", "plans", "believes", and similar expressions.

         The analysis employed to develop these statements are necessarily
    based upon various assumptions involving judgments with respect to the
    future including, among other factors, national, regional, and local
    economic, competitive and regulatory conditions, legislative developments,
    technological developments, inflation rates, weather conditions, financial
    market conditions, future business decisions, and other uncertainties, all
    of which are difficult to predict, and many of which are beyond the control
    of the Company. Accordingly, while the Company believes that the
    assumptions upon which the forward-looking statements are based, are
    reasonable for purposes of making these statements, there can be no
    assurance that these assumptions will approximate actual experience, or
    that the expectations set forth in the forward-looking statements derived
    from these assumptions will be realized.


34


<PAGE>


CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                                        Year Ended December 31
                                                            ----------------------------------------
    (Dollars in millions, except per share amounts)            1996           1995           1994
    -----------------------------------------------------------------------------------------------
    <S>                                                    <C>            <C>            <C>
    REVENUES AND OTHER INCOME
    Operating Revenues                                     $    2,563     $    2,343     $    2,664
    Other                                                          25             34             38
                                                            ----------------------------------------
         Total                                                  2,588          2,377          2,702
                                                            ----------------------------------------

    EXPENSES
    Cost of Gas Distributed                                       866            682            924
    Operating Expenses                                            910            920            977
    Depreciation and Amortization                                 255            243            239
    Franchise Payments and Other Taxes                             98             98            113
    Preferred Dividends of a Subsidiary                             8             12             10
                                                            ----------------------------------------
         Total                                                  2,137          1,955          2,263
                                                            ----------------------------------------
    Income from Operations Before
         Interest and Income Taxes                                451            422            439
    Interest                                                       97            108            128
                                                            ----------------------------------------
    Income from Operations Before Income Taxes                    354            314            311
    Income Taxes                                                  151            129            139
                                                            ----------------------------------------
    Net Income                                                    203            185            172
    Dividends on Preferred Stock                                    5             10             12
    Preferred Stock Original Issue Discount                         2
                                                            ----------------------------------------
    Net Income Applicable to Common Stock                  $      196     $      175     $      160
                                                            ----------------------------------------
                                                            ----------------------------------------

    Net Income Per Share of Common Stock                   $     2.37     $     2.12     $     1.95
                                                            ----------------------------------------
                                                            ----------------------------------------
    Common Dividends Declared Per Share                    $     1.42     $     1.34     $     1.26
                                                            ----------------------------------------
                                                            ----------------------------------------
    WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
         OUTSTANDING (IN THOUSANDS)                            82,626         82,265         81,939
    -----------------------------------------------------------------------------------------------
    -----------------------------------------------------------------------------------------------
</TABLE>
    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                                                              35
<PAGE>
 

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                   December 31
                                                           -------------------------
    (Dollars in millions)                                      1996           1995
    --------------------------------------------------------------------------------
<S>                                                        <C>            <C>
    ASSETS
    Current Assets:
         Cash and cash equivalents                         $      256     $      351
         Accounts receivable--trade
              (less allowance for doubtful receivables
              of $19 in 1996 and $16 in 1995)                     401            356
         Accounts and notes receivable--other                      80             67
         Income taxes receivable                                   58             18
         Deferred income taxes                                      9             17
         Gas in storage                                            28             55
         Other inventories                                         22             22
         Regulatory accounts receivable--net                      285            246
         Prepaid expenses                                          22             38
                                                           -------------------------
              Total current assets                              1,161          1,170
                                                           -------------------------
    Investments and Other Assets:
         Other investments                                        115             53
         Other receivables                                         16             18
         Regulatory assets                                        552            645
         Other assets                                             105             91
                                                           -------------------------
              Total investments and other assets                  788            807
                                                           -------------------------
    Property, Plant and Equipment                               6,080          5,909
         Less accumulated depreciation and amortization         2,843          2,627
                                                           -------------------------
              Total property, plant and equipment--net          3,237          3,282
                                                           -------------------------
              Total assets                                 $    5,186     $    5,259
    --------------------------------------------------------------------------------
    --------------------------------------------------------------------------------
</TABLE>
    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

36


<PAGE>

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                   December 31
                                                           ---------------------------
    (Dollars in millions)                                      1996           1995
    ----------------------------------------------------------------------------------
    <S>                                                    <C>            <C>
    LIABILITIES
    Current Liabilities:
         Short-term debt                                     $    262       $    234
         Accounts payable--trade                                  241            177
         Accounts payable--other                                  336            299
         Other taxes payable                                       29             47
         Long-term debt due within one year                       149            100
         Accrued interest                                          41             44
         Other                                                     80             64
                                                           ---------------------------
              Total current liabilities                         1,138            965
                                                           ---------------------------
    Long-Term Debt:
         Long-term debt                                         1,095          1,241
         Debt of Employee Stock Ownership Plan                    130            130
                                                           ---------------------------
              Total long-term debt                              1,225          1,371
                                                           ---------------------------
    Deferred Credits and Other Liabilities:
         Long-term liabilities                                    166            232
         Customer advances for construction                        42             47
         Postretirement benefits other than pensions              224            235
         Deferred income taxes                                    321            246
         Deferred investment tax credits                           64             67
         Other deferred credits                                   471            418
    Commitments and Contingent Liabilities
                                                           ---------------------------
              Total deferred credits and other liabilities      1,288          1,245
                                                           ---------------------------
    Preferred Stocks of a Subsidiary                               95            195
                                                           ---------------------------
    SHAREHOLDERS' EQUITY
    Capital Stock:
         Remarketed Preferred, Series A                                          108
         Preferred                                                 80             80
         Common                                                 1,095          1,111
                                                           ---------------------------
              Total capital stock                               1,175          1,299
    Retained Earnings, after elimination of
         accumulated deficit of $452 against
         common stock at December 31, 1992 as part
         of the quasi-reorganization                              314            236
    Less deferred compensation relating to
         Employee Stock Ownership Plan                            (49)           (52)
                                                           ---------------------------
              Total shareholders' equity                        1,440          1,483
                                                           ---------------------------
              Total liabilities and shareholders' equity     $  5,186       $  5,259
    ----------------------------------------------------------------------------------
    ----------------------------------------------------------------------------------
</TABLE>
    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                             37


<PAGE>


STATEMENT OF CONSOLIDATED CASH FLOWS


<TABLE>
<CAPTION>
                                                                      Year Ended December 31
                                                           ------------------------------------------
    (Dollars in millions)                                      1996           1995          1994
    -------------------------------------------------------------------------------------------------
    <S>                                                    <C>            <C>            <C>
    CASH FLOWS FROM OPERATING ACTIVITIES
    Net Income                                             $      203     $      185     $      172
    Adjustments to Reconcile Net Income to
       Net Cash Provided by (Used in)
       Operating Activities:
         Depreciation and amortization                            255            243            239
         Deferred income taxes                                     33             71            (37)
         Other--net                                                13             (3)           (31)
         Net change in other working
            capital components                                    104            202           (153)
         Changes in operating assets and liabilities
            of discontinued operations                                                           65
                                                           ------------------------------------------
            Net cash provided by operating activities             608            698            255
                                                           ------------------------------------------

    CASH FLOWS FROM INVESTING ACTIVITIES
    Expenditures for Property, Plant and Equipment               (204)          (240)          (249)
    Increase in Foreign Investments                               (50)
    Increase in Other Investments                                 (12)            (2)
    Proceeds from Disposition of Properties                                        2              1
    (Increase) Decrease in Other Receivables,
       Regulatory Assets and Other Assets                         (20)             2             40
                                                           ------------------------------------------
         Net cash used in investing activities                   (286)          (238)          (208)
                                                           ------------------------------------------

    CASH FLOWS FROM FINANCING ACTIVITIES
    Sale of Common Stock                                            8              6              7
    Repurchase of Common Stock                                    (24)
    Redemption of Preferred Stock                                (110)           (30)           (40)
    Redemption of Preferred Stock of a Subsidiary                (100)
    Increase in Long-Term Debt                                     75                           246
    Decrease in Long-Term Debt                                   (172)          (207)           (20)
    Increase (Decrease) in Short-Term Debt                         29            (44)            11
    Common and Preferred Dividends                               (123)          (121)          (116)
                                                           ------------------------------------------
         Net cash provided by (used in)
            financing activities                                 (417)          (396)            88
                                                           ------------------------------------------
    Increase (Decrease) in Cash and Cash Equivalents              (95)            64            135
    Cash and Cash Equivalents, January 1                          351            287            152
                                                           ------------------------------------------
    Cash and Cash Equivalents, December 31                 $      256     $      351     $      287
    -------------------------------------------------------------------------------------------------
    -------------------------------------------------------------------------------------------------
</TABLE>
    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

38


<PAGE>

    STATEMENT OF CONSOLIDATED CASH FLOWS


<TABLE>
<CAPTION>
                                                                    Year Ended December 31
                                                           -----------------------------------------
    (Dollars in millions)                                       1996         1995          1994
    ------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>
    CHANGES IN OTHER WORKING CAPITAL COMPONENTS
       (Excluding cash and cash equivalents, short-term
       debt and long-term debt due within one year)
    Current Assets:
       Receivables                                         $      (58)    $      114     $      (18)
       Income taxes receivable                                     12            (30)            32
       Inventories                                                 27             22            (13)
       Regulatory accounts receivable-net                          46            198            237
       Deferred income taxes                                       11
       Other                                                       16              2            (10)
                                                           -----------------------------------------
         Total                                                     54            306            228
                                                           -----------------------------------------

    Current Liabilities:
       Accounts payable                                            53              7           (454)
       Deferred income taxes                                                     (42)            46
       Other taxes payable                                        (18)            (6)             1
       Other                                                       15            (63)            26
                                                           -----------------------------------------
         Total                                                     50           (104)          (381)
                                                           -----------------------------------------
         Net change in other working
            capital components                             $      104     $      202     $     (153)
                                                           -----------------------------------------

    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash Paid During the Year for:
       Interest (net of amount capitalized)                $      100     $      101     $      130
       Income taxes                                        $       92     $      129     $       98
    ------------------------------------------------------------------------------------------------
    ------------------------------------------------------------------------------------------------
</TABLE>
    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                             39


<PAGE>

STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                            Deferred
                                                      Preferred Stock      Common Stock                 Compensation
                                                      ----------------- --------------------             Relating to          Total
    Years Ended December 31, 1996, 1995, and 1994    Number of  No par   Number of  No par  Retained  Employee Stock  Shareholders'
    (Dollars in millions, except share amounts)       shares    value     shares    value   Earnings  Ownership Plan         Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>    <C>         <C>      <C>       <C>             <C>
    BALANCES AT DECEMBER 31, 1993                    1,101,853   $258  84,194,215  $1,048      $116          $(138)         $1,284
    Net Income                                                                                  172                            172
    Cash Dividends Declared:
       Preferred stock                                                                          (12)                           (12)
       Common stock                                                                            (104)                          (104)
    Common Stock Sold                                                     337,577       7                                        7
    Quasi-Reorganization
       Adjustment                                                                      37                       77             114
    Redemption of
       Preferred Stock                                    (400)   (40)                                                         (40)
    Adoption of SOP 93-6                                               (2,575,690)                  
    Common Stock Released from ESOP                                       155,161                                7               7
------------------------------------------------------------------------------------------------------------------------------------
    BALANCES AT DECEMBER 31, 1994                    1,101,453    218  82,111,263   1,092       172            (54)          1,428
    Net Income                                                                                                 185             185
    Cash Dividends Declared:
       Preferred stock                                                                          (10)                           (10)
       Common stock                                                                            (111)                          (111)
    Common Stock Sold                                                     232,310       6                                        6
    Quasi-Reorganization
       Adjustment                                                                      13                                       13
    Redemption of Preferred Stock                     (300,100)   (30)                                                         (30)
    Common Stock Released from ESOP                                       103,098                                2               2
------------------------------------------------------------------------------------------------------------------------------------
    BALANCES AT DECEMBER 31, 1995                      801,353    188  82,446,671   1,111       236            (52)          1,483
    Net Income                                                                                  203                            203
    Cash Dividends Declared:
       Preferred stock                                                                           (5)                            (5)
       Common stock                                                                            (118)                          (118)
    Common Stock Sold                                                     292,108       8                                        8
    Common Stock Repurchased                                             (816,000)    (24)                                     (24)
    Redemption of Preferred Stock                       (1,100)  (108)                           (2)                          (110)
    Common Stock Released from ESOP                                        90,690                                3               3
------------------------------------------------------------------------------------------------------------------------------------
    BALANCES AT DECEMBER 31, 1996                      800,253   $ 80  82,013,469  $1,095      $314           $(49)         $1,440

------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
 
    THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED AT DECEMBER 31, 1996 AND
    1995 IS 600,000,000. THE NUMBER OF SHARES OF PREFERRED STOCK AND CLASS A
    PREFERRED STOCK AUTHORIZED AND OUTSTANDING AT DECEMBER 31, 1996 AND 1995 IS
    SET FORTH IN NOTE 12 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

    SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


40


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    1. MERGER AGREEMENT WITH ENOVA CORPORATION

    On October 14, 1996, Pacific Enterprises (the Company) and Enova
    Corporation (Enova), the parent company of San Diego Gas and Electric
    Company (SDG&E), announced an agreement, which both Boards of Directors
    unanimously approved, for the combination of the two companies, tax-free,
    in a strategic merger of equals to be accounted for as a pooling of
    interests. The combination was approved by the shareholders of both
    companies on March 11, 1997. Completion of the combination remains subject
    to approval by regulatory and governmental agencies.

         As a result of the combination, the Company and Enova will become
    subsidiaries of a new holding company and their common shareholders will
    become common shareholders of the new holding company. Pacific Enterprises'
    common shareholders will receive 1.5038 shares of the new holding company's
    common stock for each of their shares of the Company's common stock, and
    Enova common shareholders will receive one share of the new holding
    company's common stock for each of their shares of Enova common stock.
    Preferred stock of Pacific Enterprises, Southern California Gas Company
    (SoCalGas), and SDG&E will remain outstanding.

         The new holding company will be incorporated in California and will be
    exempt from the Public Utility Holding Company Act as an intrastate holding
    company.

         The merger is subject to approval by certain regulatory and
    governmental agencies including the California Public Utilities Commission
    (CPUC), the Securities and Exchange Commission, and the Department of
    Justice. In addition, approval or a disclaimer of jurisdiction by the
    Federal Energy Regulatory Commission is required. Required approvals of the
    merger are expected to occur in late 1997. In the interim, the Company and
    Enova have formed a joint venture to provide integrated energy and energy
    related products and services.

         The Company owns indirect interests in several small electric
    generation facilities which are "qualifying facilities" under the Public
    Utility Regulatory Policies Act. Qualifying facility status is not
    available to any facilities that are more than 50% owned by an electric
    utility or an electric utility holding company.

         Upon the completion of the proposed business combination, the new
    holding company will become an electric utility holding company.
    Consequently, in order to avoid the loss of qualifying facility status the
    Company must cause its ownership in these facilities to be not more than
    50% prior to the completion of the business combination. The Company is
    considering several alternatives to accomplish this result including the
    sale of all or part of these facilities and the Company believes a sale or
    other disposition will not have a material adverse effect on the Company's
    consolidated results of operations or financial position.

         In connection with the merger, $7 million of merger costs and expenses
    ($4 million,  after-tax, or $.05 per share) were incurred and have been
    charged to expense in the fourth quarter of 1996. These costs consisted of
    legal, accounting, and investment banking fees.

    2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    PRINCIPLES OF CONSOLIDATION
    The consolidated financial statements include the accounts of all
    subsidiaries of Pacific Enterprises. Investments in 50%-or-less owned joint
    ventures and partnerships are accounted for by the equity method or cost
    method, as appropriate.

    RECLASSIFICATIONS

    Certain changes in account classification have been made in the prior
    years' consolidated financial statements to conform to the 1996 financial
    statement presentation.


                                                                              41


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    REGULATION

    In conformity with generally accepted accounting principles, SoCalGas'
    accounting policies reflect the financial effects of rate regulation
    authorized by the CPUC, and interstate natural gas transmission
    subsidiaries follow accounting policies authorized by the Federal Energy
    Regulatory Commission.

         The regulated subsidiaries apply the provisions of Statement of
    Financial Accounting Standards No. 71, "Accounting for the Effects of
    Certain Types of Regulation" (SFAS 71). This statement requires cost-based
    rate regulated entities that meet certain criteria to reflect the
    authorized recovery of costs due to regulatory decisions in their financial
    statements.

         The Company records Regulatory Assets which represent assets which are
    being recovered through customer rates or are probable of being recovered
    through customer rates. As of December 31, 1996, the Company had $552
    million of regulatory assets which included the following: costs of
    reacquiring debt--$47 million; postretirement benefit costs (see Note
    13)--$206 million; Comprehensive Settlement costs (see Note 4)--$101
    million; deferred income taxes--$93 million (see Note 5); and other costs--
    $105 million.

         Maintenance of the regulatory accounts and regulatory accounts
    receivable represent the only difference in the application of generally
    accepted accounting principles for the utility versus non-regulated
    entities.

    REGULATORY ACCOUNTS RECEIVABLE--NET

    Authorized regulatory balancing accounts are maintained to accumulate
    undercollections and overcollections from the revenue and cost estimates
    adopted by the CPUC in setting rates. SoCalGas makes periodic filings with
    the CPUC to adjust future gas rates to account for such variances.

    INVENTORIES

    Gas in storage inventory is stated at last-in, first-out (LIFO) cost. As a
    result of a regulatory accounting procedure, the pricing of gas in storage
    does not have any effect on net income. If the first-in, first-out (FIFO)
    method of accounting for gas in storage inventory had been used by
    SoCalGas, inventory would have been higher than reported at December 31,
    1996 and 1995 by $43 million and $21 million, respectively. Other
    inventories are generally stated at the lower of cost, determined on an
    average cost basis, or market.

    PROPERTY, PLANT AND EQUIPMENT

    The costs of additions, renewals and improvements to utility plant are
    charged to the appropriate plant accounts. These costs include labor,
    material, other direct costs, indirect charges, and an allowance for funds
    used during construction. The cost of utility plant retired or otherwise
    disposed of, plus removal costs and less salvage, is charged to accumulated
    depreciation. Depreciation is recorded on the straight-line remaining-life
    basis. The depreciation methods are consistent with those used by
    non-regulated entities.

    ALLOWANCE FOR FUNDS USED DURING 
    CONSTRUCTION (AFUDC)

    AFUDC represents the cost of funds used to finance the construction of
    utility plant and is added to its cost. Interest expense of $6 million in
    1996, $9 million in 1995, and $4 million in 1994 was capitalized.


42


<PAGE>

    OTHER

    Cash equivalents include short-term investments purchased with maturities
    of less than 90 days.

         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.

    3. DISCONTINUED OPERATIONS AND QUASI-REORGANIZATION

    During 1993, the Company completed a strategic plan to refocus on its
    natural gas utility and related businesses. The strategy included the
    divestiture of its retailing operations and substantially all of its oil
    and gas exploration and production business. In connection with the
    divestitures, the Company effected a quasi-reorganization for financial
    reporting purposes, effective December 31, 1992. Fair value adjustments
    charged to common stock totaled $190 million. Additionally, the accumulated
    deficit in retained earnings of $452 million at December 31, 1992 was
    eliminated by a reduction in the common stock account.

         In connection with the sale of its retailing operations, the Company
    assumed the retailing group's Employee Stock Ownership Plan (ESOP) and
    related indebtedness (see Notes 9 and 13). In addition, the retailing
    group's buyer agreed to reimburse the Company for a portion of the ESOP
    quarterly debt service. In April 1994, the Company received a $65 million
    payment from the buyer. This payment primarily reflected the settlement of
    the buyer's remaining debt service obligation. It also canceled a warrant
    granted to the Company in connection with the sale of retailing operations
    to purchase approximately 10% of the buyer's common stock. Since the sale
    of the retailing operations was recorded prior to the quasi-reorganization,
    the settlement and resolution of other contingencies related to the ESOP
    resulted in a $114 million increase to shareholders' equity, of which $37
    million was to common stock.

         The receipt of $65 million is reflected in changes in operating assets
    and liabilities from discontinued operations in the consolidated statement
    of cash flows.

         Certain of the liabilities established in connection with discontinued
    operations and the quasi-reorganization were favorably resolved in 1995,
    including the sale of ownership in the Company's headquarters building and
    settlement of certain lawsuits remaining from the oil and gas operations.
    Excess liabilities of $13 million resulting from the favorable resolution
    of these issues were added to shareholders' equity. Other liabilities will
    be resolved in future years. As of December 31, 1996, the provisions for
    these matters are adequate.

    4. REGULATORY MATTERS

    RESTRUCTURING OF GAS SUPPLY CONTRACTS

    In 1993, SoCalGas and the Company's gas supply subsidiaries restructured
    long-term gas supply contracts with suppliers of California offshore and
    Canadian gas. In the past, SoCalGas' cost of these supplies had been
    substantially in excess of its average delivered cost of gas for all gas
    supplies.

         The restructured contracts substantially reduced the ongoing delivered
    costs of these gas supplies and provided lump sum payments totaling $391
    million to the suppliers. The expiration date for the Canadian gas supply
    contract was shortened from 2012 to 2003.

    COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES

    On July 20, 1994, the CPUC approved a comprehensive settlement
    (Comprehensive Settlement) of a number of pending regulatory issues
    including rate recovery of a significant portion of the

                                                                              43


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    restructuring costs associated with long-term gas supply contracts
    discussed above.  The Comprehensive Settlement permits SoCalGas to recover
    in utility rates approximately 80% of the contract restructuring costs of
    $391 million and accelerated amortization of related pipeline assets of
    approximately $140 million, together with interest, over a period of
    approximately five years. In addition to the gas supply issues, the
    Comprehensive Settlement addresses certain of the following
    regulatory issues:

 -  NONCORE CUSTOMER RATES   The Comprehensive Settlement changed the
    procedures for determining noncore rates to be charged by SoCalGas to its
    customers for the five-year period commencing August 1, 1994. Rates charged
    to the customers are established based upon SoCalGas' recorded throughput
    to these customers for 1991. SoCalGas will bear the full risk of any
    declines in noncore deliveries from 1991 levels. Any revenue enhancement
    from deliveries in excess of 1991 levels will be limited by a crediting
    account mechanism that will require a credit to customers of 87.5% of
    revenues in excess of certain limits. These annual limits above which the
    credit is applicable increase from $11 million to $19 million over the
    five-year period from August 1, 1994 through July 31, 1999.  The Company's
    ability to report as earnings the results from revenues in excess of
    SoCalGas' authorized levels from noncore customers due to volume increases
    has been eliminated for the five years beginning August 1, 1994 as a
    consequence of the Comprehensive Settlement.

 -  REASONABLENESS REVIEWS   The Comprehensive Settlement includes settlement
    of all pending reasonableness reviews with respect to SoCalGas' gas
    purchases from April, 1989 through March, 1992, as well as certain other
    future reasonableness review issues.


 -  GAS COST INCENTIVE MECHANISM   In 1994, the CPUC approved a new process for
    evaluating SoCalGas' gas purchases, substantially replacing the previous
    process of reasonableness reviews. The Gas Cost Incentive Mechanism (GCIM)
    is a three-year pilot program which began April 1, 1994. The GCIM
    essentially compares SoCalGas' cost of gas with a benchmark level, which is
    the average price of 30-day firm spot supplies delivered to the SoCalGas
    market area.

         SoCalGas can recover costs of gas purchased in excess of the benchmark
    to the extent they fall within a tolerance band, which extends to 4% above
    the benchmark. If SoCalGas' cost of gas exceeds the tolerance level, then
    the excess cost will be shared equally between customers and shareholders.
    All savings from gas purchased below the benchmark are shared equally
    between customers and shareholders.

         SoCalGas is currently in discussion with the CPUC to determine the
    amount of gas purchases for the second year of the program which were below
    the benchmark and to extend GCIM beyond its third year.

 -  ATTRITION ALLOWANCES   The Comprehensive Settlement authorized SoCalGas an
    annual allowance for increases in operating and maintenance expenses for
    1996 to the extent that the projected annual inflation rate exceeded 3%. In
    1995 attrition was calculated on the inflation rate in excess of 2%. The
    rate base attrition was based upon a three-year rolling average of recorded
    net utility plant additions. This was a departure from past regulatory
    practice of allowing recovery in rates of the full effect of inflation on
    operating and maintenance expenses. SoCalGas intends to continue to attempt
    to control operating expenses and investment to amounts authorized in rates
    to


44

<PAGE>

    offset the effect of this regulatory change. The most recent decision
    issued by the CPUC in December 1995, authorized SoCalGas to collect $12
    million in rates for the 1996 attrition allowance. Under an agreement
    reached as part of the Performance Based Regulation (PBR) application, no
    attrition adjustment was authorized for 1997. The attrition allowance
    mechanism will be superceded by PBR.

         The Company recorded the impact of the Comprehensive Settlement in
    1993 and, upon giving effect to liabilities previously recognized at the
    Company and SoCalGas, the costs of the Comprehensive Settlement, including
    the restructuring of gas supply contracts, did not result in any additional
    charge to the Company's consolidated earnings.

         Regulatory Accounts Receivable and Regulatory Assets include a total
    of approximately $191 million and $259 million at December 31, 1996 and
    1995, respectively, for the recovery of costs as provided in the
    Comprehensive Settlement. The CPUC authorized the borrowing of $425 million
    primarily to provide for funds needed under the Comprehensive Settlement.
    As of December 31, 1996, SoCalGas has $186 million in commercial paper
    remaining outstanding related to the Comprehensive Settlement (see Note 8).

    PERFORMANCE BASED REGULATION

    SoCalGas has filed a PBR application with the CPUC which would maintain
    cost based rates and link financial performance with productivity. The
    company believes PBR will permit the continued applicability of SFAS 71 to
    account for SoCalGas' operations. However, the terms of PBR ultimately
    authorized by the CPUC may contain elements that could result in SoCalGas
    not meeting all the criteria for continued application of SFAS 71 (see Note
    2).

    5.  INCOME TAXES

    A reconciliation of the difference between computed statutory federal
    income tax expense and actual income tax expense for operations is as
    follows:


                                              Year Ended December 31
                                  ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    ------------------------------------------------------------------------
    Computed statutory
         federal income tax
         expense                  $      124     $      110     $      109
    Increases (reductions)
         resulting from:
         Depreciation and
              other items not
              deferred
              --SoCalGas                  23             20             17
         Capitalized expenses
              not deferred
              --SoCalGas                 (11)           (10)            (6)
         State income taxes
              --net of federal
              income tax benefit          20             20             17
         Investment tax credits           (3)            (3)            (3)
         Other--net                       (2)            (8)             5
                                  ----------------------------------------
    Income tax expense
         from operations          $      151     $      129     $      139
    ------------------------------------------------------------------------
    ------------------------------------------------------------------------

         The components of income tax expense for operations are as follows:

                                            Year Ended December 31
                                  ----------------------------------------
    (Dollars in millions)             1996           1995           1994
    ------------------------------------------------------------------------
    Federal
         Current                   $      68     $       70     $       79
         Deferred                         51             28             34
                                  ----------------------------------------
                                         119             98            113
                                  ----------------------------------------
    State
         Current                          25             32             26
         Deferred                          7             (1)
                                  ----------------------------------------
                                          32             31             26
                                  ----------------------------------------
    Total
         Current                          93            102            105
         Deferred                         58             27             34
                                  ----------------------------------------
                                  $      151     $      129     $      139
    ------------------------------------------------------------------------
    ------------------------------------------------------------------------



                                                                           45


<PAGE>

         The principal components of net deferred tax liabilities are as
    follows:

                                                 December 31, 1996
                                  --------------------------------------------
    (Dollars in millions)           Assets       Liabilities         Total
    --------------------------------------------------------------------------
    Accelerated depreciation
         for tax purposes                        $     (541)    $     (541)
    Comprehensive
         Settlement                 $    137            (47)            90
    Regulatory accounts
         receivable                                    (132)          (132)
    Postretirement benefits               87                            87
    Restructuring costs
         deferred for tax
         purposes                         46                            46
    Deferred investment
         tax credits                      28                            28
    Partnership income                                  (35)           (35)
    Customer advances
         for construction                 20                            20
    Regulatory asset                                   (109)          (109)
    Other regulatory                     143            (50)            93
    AMT carryforward                      24                            24
    Other                                123             (6)           117
                                  --------------------------------------------
    Total deferred income
         tax assets (liabilities)   $    608     $     (920)    $     (312)
    --------------------------------------------------------------------------


                                             December 31, 1995
                                  ------------------------------------------
    (Dollars in millions)             Assets     Liabilities         Total
    ------------------------------------------------------------------------
    Accelerated depreciation
      for tax purposes                           $     (489)    $     (489)
    Comprehensive
      Settlement                  $      159            (77)            82
    Regulatory accounts
      receivable                                       (104)          (104)
    Postretirement benefits               90                            90
    Restructuring
      costs deferred
      for tax purposes                    58                            58
    Deferred investment
      tax credits                         30                            30
    Partnership income                                  (45)           (45)
    Customer advances
      for construction                    21                            21
    Regulatory asset                                   (120)          (120)
    Other regulatory                     119            (46)            73
    AMT carryforward                      74                            74
    Other                                134            (33)           101
                                  ------------------------------------------
    Total deferred income
      tax assets (liabilities)    $      685     $     (914)    $     (229)
    ------------------------------------------------------------------------

         Income tax expense recognized for a period is the amount of tax
    currently payable adjusted by the change in aggregate deferred tax assets
    and liabilities. Deferred taxes are recorded to recognize the future tax
    consequences of events that have been recognized in the financial
    statements or tax returns. No valuation allowance has been provided for
    deferred tax assets since they are expected to be realized through either
    reversal of existing temporary differences or future taxable income.

         SoCalGas generally provides for income taxes on the basis of amounts
    expected to be paid currently, except for the provision for deferred taxes



46


<PAGE>

    on regulatory accounts, customer advances for construction and accelerated
    depreciation of property placed in service after 1980. In addition,
    SoCalGas recognizes certain other deferred tax liabilities (primarily
    accelerated depreciation of property placed in service prior to 1981 and
    deferred investment tax credits) which are expected to be recovered through
    future rates. At December 31, 1996 and 1995, $93 million and $109 million,
    respectively, of deferred income taxes have been offset by an equivalent
    amount in regulatory assets.

    6.    COMMITMENTS AND CONTINGENT LIABILITIES

    ENVIRONMENTAL OBLIGATIONS

    SoCalGas has identified and reported to California environmental
    authorities 42 former manufactured gas plant sites for which it (together
    with other utilities as to 21 of these sites) may have remedial obligations
    under environmental laws. As of December 31, 1996, ten of these sites have
    been remediated, of which six have received certification from the
    California Environmental Protection Agency. One site remedy is in process.
    Preliminary investigations, at a minimum, have been completed on 39 of the
    gas plant sites, including those sites at which the remediations described
    above have been completed. In addition, the Company and its subsidiaries
    have been named as potentially responsible parties for two landfill sites
    and three industrial waste disposal sites.

         In 1994, the CPUC approved a collaborative settlement which provides
    for rate recovery of 90% of environmental investigation and remediation
    costs without reasonableness review. In addition, SoCalGas has the
    opportunity to retain a percentage of any insurance recoveries to offset
    the 10% of costs not recovered in rates.

         At December 31, 1996, SoCalGas' estimated remaining investigation and
    remediation liability was $77 million, of which 90% is authorized to be
    recovered through the mechanism discussed above. The Company believes that
    any costs not ultimately recovered through rates, insurance or other means,
    upon giving effect to previously established liabilities, will not have a
    material adverse effect on the Company's consolidated results of operations
    or financial position.

         Estimated liabilities for environmental remediation are recorded when
    amounts are probable and estimable. Amounts authorized to be recovered in
    rates under the mechanism described above are recorded as a regulatory
    asset. Possible recoveries of environmental remediation liabilities from
    third parties are not deducted from the liability.

    LITIGATION

    The Company is a defendant in various lawsuits arising in the normal course
    of business. The Company believes that the resolution of these pending
    claims and legal proceedings will not have a material adverse effect on the
    Company's consolidated results of operations or financial position.

    OBLIGATIONS UNDER FIRM COMMITMENTS

    The Company has commitments for firm pipeline capacity under contracts with
    pipeline companies that expire at various dates through the year 2006.
    These agreements provide for payments of an annual reservation charge. The
    Company recovers such fixed charges in rates. Estimated minimum commitments
    as of December 31, 1996 are as follows: 1997 - $214 million, 1998 - $209
    million, 1999 - $174 million, 2000 - $176 million, 2001 - $176 million,
    after 2001 - $815 million.


                                                                            47

<PAGE>

    OTHER COMMITMENTS AND CONTINGENCIES

    At December 31, 1996 commitments for capital expenditures were
    approximately $30 million.

    7. LEASES

    The Company and its subsidiaries have leases on real and personal property
    expiring at various dates from 1997 to 2011. The rentals payable under
    these leases are determined on both fixed and percentage bases and most
    leases contain options to extend which are exercisable by the Company or
    the subsidiaries.

         Rental expense under space operating leases was $58 million, $66
    million and $63 million in 1996, 1995 and 1994, respectively.

         The following is a schedule of future minimum operating lease
    commitments as of December 31, 1996:

                                                            Future Minimum
    (Dollars in millions)                                   Lease Payments
    ----------------------------------------------------------------------
    Year Ended December 31:
    1997                                                        $       38
    1998                                                                35
    1999                                                                35
    2000                                                                35
    2001                                                                35
    Later years                                                        260
                                                                  --------
         Total                                                  $      438
    ----------------------------------------------------------------------

         In connection with the quasi-reorganization and loss on disposal of
    discontinued operations (see Note 3), the Company established reserves of
    $102 million to fair value operating leases related to its headquarters and
    other leases at December 31, 1992. The remaining amount of these reserves
    was $82 million at December 31, 1996.

    8.    COMPENSATING BALANCES AND SHORT-TERM BORROWING ARRANGEMENTS

    The Company has a $300 million multi-year credit agreement requiring annual
    fees of .07%. SoCalGas has an additional $650 million multi-year credit
    agreement requiring annual fees of .07%. The interest rates on these lines
    vary and are derived from formulas based on market rates and the companies'
    credit ratings. The multi-year credit agreements expire in February 2001.
    At December 31, 1996 all bank lines of credit were unused. SoCalGas' lines
    of credit provide backing for its commercial paper program.

         At December 31, 1996 and 1995, SoCalGas had $358 million and $415
    million, respectively, of commercial paper obligations outstanding.  A
    portion of the outstanding commercial paper relates to the restructuring
    costs associated with certain long-term gas supply contracts under the
    Comprehensive Settlement (see Note 4). The weighted average annual interest
    rate of commercial paper obligations outstanding was 5.36% and 5.66% at
    December 31, 1996 and 1995, respectively.

         At December 31, 1996, the Company has classified $96 million of the
    commercial paper as long-term debt since it is the Company's intent to
    continue to refinance that portion of the debt on a long-term basis. The
    Company intends to utilize the SoCalGas $650 million multi-year credit
    agreement to refinance the debt on a long-term basis if short-term
    financing is not available.


48


<PAGE>

    9.   LONG-TERM DEBT

                                                         December 31
                                                 --------------------------
    (Dollars in millions)                            1996           1995
    -----------------------------------------------------------------------
    SOUTHERN CALIFORNIA GAS COMPANY
    First Mortgage Bonds:
    6 1/2% December 15, 1997                     $      125     $      125
    5 1/4% March 1, 1998                                100            100
    6 7/8% August 15, 2002                              100            100
    5 3/4% November 15, 2003                            100            100
    8 3/4% October 1, 2021                              150            150
    7 3/8% March 1, 2023                                100            100
    7 1/2% June 15, 2023                                125            125
    6 7/8% November 1, 2025                             175            175

    Other Long-Term Debt:
    5.98% Notes, August 28, 1997                         22             22
    6.21% Notes, November 7, 1999                        75
    8 3/4% Notes, July 6, 2000                              30             30
    SFr. 150,000,000 7 1/2%
         Foreign Interest Payment
         Securities, May 14, 1996                                       75
    SFr. 15,695,000, 6 3/8%
         Foreign Interest Payment
         Securities, May 14, 2006                         8
     SFr. 100,000,000 5 1/8% Bonds,
         February 6, 1998 (Foreign
         currency exposure hedged
         through currency swap at an
         interest rate of 9.725%)                        47             47
    5.33% Commercial Paper,
         February 8, 2001                                96            181
                                                 --------------------------
                                                      1,253          1,330

    OTHER
         8% - 9.5% 1997-2001                              7             26
                                                 --------------------------

    Total                                             1,260          1,356
                                                 --------------------------

    Less:
    Long-term debt due within
         one year                                       149            100
    Unamortized debt discount
         less premium                                    16             15
                                                 --------------------------
                                                        165            115
                                                 --------------------------
    Long-Term Debt                               $    1,095     $    1,241
    -----------------------------------------------------------------------

         The annual principal payment requirements of long-term debt, including
    debt of the ESOP, for the years 1997 through 2001 are $149 million, $149
    million, $207 million, $31 million, and $97 million, respectively.
    Substantially all of utility plant serves as collateral for the First
    Mortgage Bonds, and certain assets of the nonutility subsidiaries are
    pledged as collateral for their obligations.

    DEBT OF EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (TRUST) (SEE NOTE 13)

    The TRUST covers substantially all employees and is used to partially fund
    the Company's retirement savings program. It has an ESOP feature and holds
    approximately 2.2 million shares of common stock of the Company. The
    variable rate ESOP debt held by the TRUST bears interest at a rate
    necessary to place or remarket the notes at par. Principal is due on
    November 30, 1999 and interest is payable monthly through 1999. The Company
    is obligated to make contributions to the TRUST sufficient to satisfy debt
    service requirements. As the Company makes contributions to the TRUST,
    these contributions, plus any dividends paid on the unallocated shares of
    the Company's common stock held by the TRUST, will be used to repay the
    debt. As dividends are increased or decreased, required contributions are
    reduced or increased, respectively. Interest on ESOP debt amounted to $6
    million in 1996, $7 million in 1995, and $5 million in 1994. Dividends used
    for debt service amounted to $3 million, in each of the years 1996, 1995
    and 1994, respectively, and are deductible for federal income tax purposes.


                                                                              49


<PAGE>

    CURRENCY RATE SWAPS

    In February 1986, SoCalGas issued SFr. 100 million of 5 1/8% bonds which 
    will mature on February 6, 1998. SoCalGas has entered into a swap 
    transaction with a major international bank to hedge the currency exposure. 
    Under the agreement with the bank, the bond issue, interest payments, and 
    other ongoing costs were swapped for fixed annual payments. The terms of the
    swap result in a U.S. dollar liability of $47 million at an interest rate of
    9.725%.

         In May 1986, SoCalGas issued SFr. 150 million of 7 1/2% Foreign 
    Interest Payment Securities which are renewable at 10-year intervals at 
    reset interest rates. Interest is payable in U.S. dollars. The principal was
    exchanged into $75 million at an exchange rate of 1.9925, which is also the
    minimum rate of exchange for determining the amount of principal repayable
    in Swiss francs.

         On April 30, 1996 investors put back $67 million (90%) of the $75
    million Foreign Interest Payment Securities outstanding. The next available
    put date for the outstanding balance is in the year 2006. The interest rate
    on the remaining balance was reset to 6 3/8%.


    10. FINANCIAL INSTRUMENTS

    The fair value of a financial instrument is the amount at which the
    instrument could be exchanged in a current transaction between willing
    parties, other than in a forced sale or liquidation. The amounts disclosed
    represent management's best estimates of fair value.

         The carrying amounts of financial instruments including cash and cash
    equivalents, accounts receivable, accounts payable and short term debt
    approximated fair value as of December 31, 1996 and 1995 because of the
    relatively short maturity of these instruments. The debt of the ESOP
    approximated fair market value as of December 31, 1996 and 1995, based upon
    quoted market prices currently available to the Company for debt with
    similar terms and maturity.

         The fair value of SoCalGas' long-term debt, 6% preferred, and 7 3/4%
    preferred stock is estimated based on the quoted market prices for the same
    or similar issues or on the current rates offered to SoCalGas for debt of
    similar remaining maturities. The fair value of these financial instruments
    is different from the carrying amount.


50


<PAGE>

         The following financial instruments have a fair value which is
    different from the carrying amount as of December 31.

                                                   Carrying         Fair
    (Dollars in millions)                           Amount         Value
    ----------------------------------------------------------------------
    1996:
    Long-Term Debt of SoCalGas                   $    1,237     $    1,248
    Preferred Stocks of SoCalGas                 $       95     $       92

    1995:
    Long-Term Debt of SoCalGas                   $    1,315     $    1,278
    Preferred Stocks of SoCalGas                 $       95     $       92
    ----------------------------------------------------------------------

         As a result of the GCIM (See Note 4), SoCalGas enters into a certain
    amount of gas futures contracts in the open market with the intent of
    reducing gas costs within the GCIM tolerance band. SoCalGas' policy is to
    use gas futures contracts to mitigate risk and better manage gas costs. The
    CPUC has approved the use of gas futures for managing risk associated with
    the GCIM. For the year ended December 31, 1996, gains or losses from gas
    futures contracts are not material to the Company's consolidated results of
    operations or financial position.

         In 1996, the Company launched Ensource, an energy marketing subsidiary
    that buys and arranges transportation, storage and delivery of natural gas
    for large-volume customers. SoCalGas is a customer of Ensource.

         Ensource utilizes a number of derivative financial instruments to
    reduce its exposure to market risks from changes in commodity prices. Its
    strategies include price hedging programs which include the use of natural
    gas futures, forwards, and swaps, all of which are over-the-counter
    instruments and involve little complexity. The Company does not hold
    financial instruments for speculative trading purposes. For the year ended
    December 31, 1996, realized and unrealized gains and losses from these
    derivative instruments are not material to the Company's consolidated
    results of operations or financial position.

    11. PREFERRED STOCKS OF A SUBSIDIARY

    The amount of preferred stocks of SoCalGas outstanding at December 31 is as
    follows:

                                                   Number         Millions
                                                  of Shares     of Dollars
    ----------------------------------------------------------------------
    1996:
    6%, $25 par value                                29,361     $        1
    6% Series A, $25 par value                      783,032             19
    Series Preferred, no par value
         7 3/4%, $25 Stated Value                 3,000,000             75
                                                                 ----------
                                                                $       95
                                                                 ----------
    1995:
    6%, $25 par value                                29,507     $        1
    6% Series A, $25 par value                      783,032             19
    Series Preferred, no par value
         Flexible Auction, Series A                     500             50
         Flexible Auction, Series C                     500             50
         7 3/4%, $25 Stated Value                 3,000,000             75
                                                                 ----------
                                                                $      195
    ----------------------------------------------------------------------

         In 1996, SoCalGas redeemed $50 million of the Flexible Auction Series
    A, and $50 million of the Flexible Auction Series C preferred stock.


                                                                              51


<PAGE>

    12. PREFERRED STOCK

    At December 31, 1995, the Company had 1,100 shares of Remarketed Preferred,
    Series A Stock (RP) outstanding with a liquidation preference of $100,000
    per share. In April 1996, the Company exercised its option to redeem the RP
    shares, in whole, at $100,000 per share plus accumulated dividends. In
    connection with the redemption of the RP, the Company recorded a $2.4
    million nonrecurring deduction to income applicable to common stock to
    reflect the write-off of the original issuance underwriting discount.

         All or any part of every series of presently outstanding preferred
    stock is subject to redemption at the Company's option at any time upon not
    less than 30 days notice, at the applicable redemption prices for each
    series, together with the accrued and accumulated dividends to the date of
    redemption. None of the outstanding issues of preferred stock has any
    conversion rights.  The weighted average dividend rates were 4.5% in 1996,
    and 4.9% in 1995.

    The number of shares of preferred stock and class A preferred stock
authorized and outstanding is as follows:
 
<TABLE>
<CAPTION>
                                                                               December 31, 1996           December 31, 1995
                                                            Redemption     -------------------------    --------------------------
                                                                Price         Shares         Shares         Shares         Shares
                                                            Per Share     Authorized    Outstanding     Authorized    Outstanding
    -----------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>            <C>            <C>            <C>
    Preferred stock-cumulative, no par value:
       Remarketed, Series A                               $100,000.00              0              0          1,500          1,100
       $7.64 Dividend                                          101.00              0              0        300,000              0
       $4.75 Dividend                                          100.00        200,000        200,000        200,000        200,000
       $4.50 Dividend                                          100.00        300,000        300,000        300,000        300,000
       $4.40 Dividend                                          101.50        100,000        100,000        100,000        100,000
       $4.36 Dividend                                          101.00        200,000        200,000        200,000        200,000
       $4.75 Dividend                                          101.00            253            253            353            253
       Unclassified                                                        9,199,147                     8,898,147

                                                                          -------------------------------------------------------
          Total                                                           10,000,000        800,253     10,000,000        801,353
                                                                           -------------------------     -------------------------
    Class A preferred stock-cumulative,
       no par value                                                        5,000,000              0      5,000,000              0
    -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
52


<PAGE>

    13. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

    PENSION PLANS

    The Company and certain subsidiaries have noncontributory defined benefit
    pension plans covering substantially all of their employees. Over 90% of
    the employees covered by the plans are employed by SoCalGas. Benefits are
    based on an employee's years of service and compensation during his or her
    last years of employment. The Company's policy is to fund the plans
    annually at a level which is fully deductible for federal income tax
    purposes and as necessary on an actuarial basis to provide assets
    sufficient to meet the benefits to be paid to plan  members.

       Pension expense was as follows:

                                       Year Ended December 31
                                 ------------------------------------------
    (Dollars in millions)               1996           1995           1994
    ------------------------------------------------------------------------
    Service cost-benefits
         earned during
         the period               $       39     $       27     $       36
    Interest cost on
         projected
         benefit obligation              103             91             87
    Actual return on
         plan assets                    (220)          (333)            (1)
    Net amortization
         and deferral                    107            223           (102)
                                  ------------------------------------------
    Net periodic
         pension cost                     29              8             20
    Special early
         retirement
         program                                         18             12
    Regulatory
         adjustment                        3              2             (3)
                                  ------------------------------------------
    Total pension
         expense                  $       32     $       28     $       29
    ------------------------------------------------------------------------


         A reconciliation of the plans' funded status to the pension liability
    recognized in the Consolidated Balance Sheet is as follows:

                                                          December 31
                                                 --------------------------
    (Dollars in millions)                              1996           1995
    -----------------------------------------------------------------------
    Actuarial present value of
         pension benefit obligations:
    Accumulated benefit obligation,
         including $1,168 and $1,060 in
         vested benefits at December 31,
         1996 and 1995, respectively             $    1,205     $    1,195
    Effect of future salary increases                   231            298
                                                 --------------------------
    Projected benefit obligation                      1,436          1,493
    Less: Plan assets at fair value,
         primarily publicly traded
         common stocks
         and pooled equity funds                     (1,774)        (1,603)
    Unrecognized net gain                               415            191
    Unrecognized prior service cost                     (35)           (44)
    Unrecognized transition
         obligation                                      (5)            (5)
                                                 --------------------------
    Accrued pension liability
         included in
         the Consolidated
         Balance Sheet                           $       37     $       32
    -----------------------------------------------------------------------

         The plans' major actuarial assumptions include:

    Weighted average discount rate                    7.50%          6.85%
    Rate of increase in future
         compensation levels                          5.00%          5.00%
    Expected long-term rate of
         return on plan assets                        8.00%          8.00%
    -----------------------------------------------------------------------

    POSTRETIREMENT BENEFIT PLAN
    The Company's postretirement benefit plan currently provides medical and
    life insurance benefits to qualified retirees. In the past, employee
    cost-sharing provisions have been implemented to control the increasing
    costs of these benefits. Other changes could occur in the future. The
    Company's policy is to fund these benefits at a level which is fully
    deductible for federal income tax purposes,


                                                                              53


<PAGE>

    not to exceed amounts recoverable in rates for regulated companies, and as
    necessary on an actuarial basis to provide assets sufficient to be paid to
    plan participants.

         The net periodic postretirement benefit expense was as follows:

                                             Year Ended December 31
                                  -----------------------------------------
    (Dollars in millions)               1996           1995           1994
    -----------------------------------------------------------------------
    Service cost-benefits
         earned during the
         period                   $       17     $       13     $       14
    Interest cost on
         projected benefit
         obligation                       33             31             28
    Actual return on
         plan assets                     (32)           (37)            (1)
    Net amortization
         and deferral                     13             23            (10)
                                  -----------------------------------------
    Net periodic
         postretirement
         benefit cost                     31             30             31
    Regulatory adjustment                 13             13             13
                                  -----------------------------------------
    Net postretirement
         benefit expense          $       44     $       43     $       44
    -----------------------------------------------------------------------

         A reconciliation of the plan's funded status to the postretirement
    liability recognized in the Consolidated Balance Sheet is as follows:

                                                          December 31
                                                 --------------------------
    (Dollars in millions)                              1996           1995
    -----------------------------------------------------------------------
    Accumulated postretirement
         benefit obligation:
         Retirees                                $      209     $      193
         Fully eligible active plan
              participants                              171            255
         Other active plan
              participants                               21             24
                                                 --------------------------
                                                        401            472
    Less: Plan assets at fair
         value, primarily
         publicly traded common
         stocks and pooled equity
         funds                                         (274)          (217)
    Unrecognized prior
         service cost                                    78             15
    Unrecognized net
         gain/(loss)                                     19            (35)
                                                 --------------------------
    Net postretirement
         benefit liability included in
         the Consolidated
         Balance Sheet                           $      224     $      235
    -----------------------------------------------------------------------

         The plan's major actuarial assumptions include:

    Health care cost trend rate                       7.00%          7.50%
    Weighted average discount rate                    7.50%          6.85%
    Rate of increase in future
         compensation levels                          5.00%          5.00%
    Expected long-term rate of return
         on plan assets                               8.00%          8.00%
    -----------------------------------------------------------------------

         The assumed health care cost trend rate is 7.0% for 1997. The trend
    rate is expected to decrease from 1997 to 1998 with a 6.5% ultimate trend
    rate thereafter. The effect of a one-percentage-point increase in the
    assumed health care cost trend rate for each future year is $10.9 million
    on the aggregate of the service and interest cost components of net
    periodic postretirement cost for 1996 and $86.3 million on the accumulated
    postretirement


54


<PAGE>

    benefit obligation at December 31, 1996. The estimated income tax rate used
    in the return on plan assets is zero since the assets are invested in tax
    exempt funds.

    POSTEMPLOYMENT BENEFITS
    The Company accrues its obligation to provide benefits to former or
    inactive employees after employment but before retirement. There was no
    impact on earnings since these costs are currently recovered in rates as
    paid, and as such, have been reflected as a regulatory asset. At December
    31, 1996 and 1995 the liability was $41 million and $45 million,
    respectively, and represents primarily workers compensation and disability
    benefits.

    RETIREMENT SAVINGS PLAN
    Upon completion of one year of service, all employees of the Company and
    certain subsidiaries are eligible to participate in the Company's
    retirement savings plan administered by bank trustees. Employees may
    contribute from 1% to 14% of their regular earnings. The Company generally
    contributes an amount of cash or a number of shares of the Company's common
    stock of equivalent fair market value which, when added to prior
    forfeitures, will equal 50% of the first 6% of eligible base salary
    contributed by employees. The employees' contributions, at the direction of
    the employees, are primarily invested in the Company's common stock, mutual
    funds or guaranteed investment contracts. In 1994, 1995 and 1996 the
    Company's contributions were partially funded by the Pacific Enterprises
    Employee Stock Ownership Plan and Trust. The Company's compensation expense
    was $8 million in 1996 and 1995, and $9 million in 1994.

    EMPLOYEE STOCK OWNERSHIP PLAN
    The Company retained Pacific Enterprises Employee Stock Ownership Plan and
    Trust (TRUST) subsequent to the sale of the retailing operations in 1992
    (See Notes 3 and 9). The TRUST covers substantially all employees and is
    used to partially fund the Company's retirement savings plan program. All
    contributions to the TRUST are made by the Company, and there are no
    contributions by the participants. As the Company makes contributions to
    the ESOP, the ESOP debt service is paid and shares are released
    proportionately to the total expected debt service.

         Compensation expense is charged and equity is credited for the market
    value of the shares released. However, tax deductions are allowed based on
    the cost of the shares. Dividends on unallocated shares are used to pay
    debt service and are charged against liabilities. The TRUST held 2.2
    million and 2.3 million shares of common stock with fair values of $67.6
    million and $65.5 million at December 31, 1996 and 1995, respectively.

    14.  STOCK BASED COMPENSATION

    The Company accounts for stock options issued to employees under the
    provisions described in Accounting Principles Board Opinion No. 25,
    "Accounting for Stock Issued to Employees" (APB 25). In October 1995,
    Statement of Financial Accounting Standards No. 123, "Accounting for Stock
    Based Compensation" (SFAS 123) was issued. This statement establishes a
    fair-value-based method of accounting for employee stock options or
    similar equity instruments and encourages, but does not require, all
    companies to adopt that method of accounting for all of their employee
    stock compensation plans.


                                                                              55


<PAGE>

         SFAS 123 allows companies to continue to measure compensation cost for
    employee stock options or similar equity instruments using the intrinsic
    value method of accounting described in APB 25. The Company has elected to
    remain with this method and is required to make pro forma disclosures of
    net income and earnings per share as if SFAS 123 accounting had been
    applied.

         The Company's Employee Stock Option Plan provides for the granting of
    stock options to officers and other employees of the Company and its
    affiliated subsidiaries. The option price is equal to the market price of
    the Company's stock at the date of grant. The stock options expire in ten
    years from the date of grant, and options vest annually over a service
    period ranging from three to five years. In 1994, the number of shares
    authorized for grants of options was 830,000. The authorized number of
    options granted each year subsequent to 1994 is 1% of the outstanding
    common stock at the beginning of the year.

         The plan allows for the granting of dividend equivalents based upon
    performance goals. This feature provides grantees, upon exercise of the
    option, with the opportunity to receive all or a portion of the cash
    dividends that would have been paid on the shares if the shares had been
    outstanding since the grant date. Dividend equivalents are not payable if
    the Company does not meet the established performance goal, or if the
    exercise price exceeds the market value of the shares purchased. The
    percentage of dividends paid as dividend equivalents will depend upon the
    extent to which the performance goals are met.

         Stock option activity for the years ended December 31, 1994, 1995, and
    1996 is summarized in the following tables:


    OPTIONS WITH PERFORMANCE BASED DIVIDEND EQUIVALENTS

                                      Shares       Wtd. Avg         Exercisable
                                       Under       Exercise                  at
                                      Option         Prices            Year-End
    ---------------------------------------------------------------------------
    December 31, 1993                906,020         $27.94
         Granted                     160,000          21.50
         Exercised                    (2,000)         19.25
         Canceled                    (61,960)         33.37
    ---------------------------------------------------------------------------
    December 31, 1994              1,002,060         $26.59             412,160
         Granted                     562,700          24.40
         Exercised                  (227,400)         20.21
         Canceled                    (66,560)         41.51
    ---------------------------------------------------------------------------
    December 31, 1995              1,270,800         $25.98             366,900
         Granted                     685,200          27.00
         Exercised                   (62,500)         21.46
         Canceled                    (51,400)         39.46
    ---------------------------------------------------------------------------
    December 31, 1996              1,842,100         $26.14             588,067
    ---------------------------------------------------------------------------

    OPTIONS WITHOUT DIVIDEND EQUIVALENTS

                                      Shares       Wtd. Avg         Exercisable
                                       Under       Exercise                  at
                                      Option         Prices            Year-End
    ---------------------------------------------------------------------------
    December 31, 1993                875,270         $29.40
         Granted                     376,500          21.50
         Exercised                    (4,600)          8.14
         Canceled                   (144,620)         30.55
    ---------------------------------------------------------------------------
    December 31, 1994              1,102,550         $26.64             413,950
         Granted                           0           0.00
         Exercised                  (160,080)         22.49
         Canceled                   (119,770)         27.63
    ---------------------------------------------------------------------------
    December 31, 1995                822,700         $27.30             431,200
         Granted                           0           0.00
         Exercised                  (140,000)         23.04
         Canceled                    (32,000)         38.72
    ---------------------------------------------------------------------------
    December 31, 1996                650,700         $27.66             395,940
    ---------------------------------------------------------------------------



56

<PAGE>

         Information on options outstanding and
    exercisable at December 31, 1996 is as follows:

    OUTSTANDING OPTIONS

                                                       Wtd.                Wtd.
    Range of                Number                  Average             Average
    Exercise                    of                Remaining            Exercise
    Prices                  Shares                     Life               Price
    ---------------------------------------------------------------------------
    $ 19.25-27.00        2,153,400                     7.67             $ 24.10
    $ 36.25-53.00          339,400                     3.20             $ 41.99
                         ---------
                         2,492,800                     7.06             $ 26.53

-------------------------------------------------------------------------------

    EXERCISABLE OPTIONS

    Range of                         Number                         Wtd Average
    Exercise Prices                of Shares                     Exercise Price
    ---------------------------------------------------------------------------
    $ 19.25-27.00                    644,607                            $ 22.75
    $ 36.25-53.00                    339,400                            $ 41.99
                                     -------
                                     984,007                            $ 29.39
    ---------------------------------------------------------------------------

         Under terms of the plan, all outstanding options granted became
    immediately exercisable upon approval of the business combination with
    Enova by the Company's shareholders.

         The fair value of each option grant (including the dividend
    equivalent) was estimated on the date of grant using the Black-Scholes
    option-pricing model. Weighted average fair values for options granted in
    1996 and 1995 were $7.52 and $7.32, respectively.

         The assumptions that were used to determine these fair values are as
    follows:

                                                     Year Ended December 31
                                             -----------------------------------
                                                  1996                     1995
    ---------------------------------------------------------------------------
    Stock price volatility                         19%                      19%
    Risk-free rate of return                      6.1%                     7.1%
    Annual dividend yield                           0%                       0%
    Expected life                            4.3 years                4.3 years
    ---------------------------------------------------------------------------

         No compensation expense has been recognized for the Company's stock
    based compensation plans except for the performance based options. The
    Company recorded compensation expense of $5.5 million and $3.4 million in
    1996 and 1995, respectively.

         If compensation expense for the Company's stock based compensation
    plans had been determined based on the fair value of the stock options at
    the grant dates consistent with the method outlined in SFAS 123, net income
    and earnings per share would have been adjusted to the pro forma amounts
    indicated below:

                                                    Year Ended December 31
     (Dollars in millions,                   -----------------------------------
    except per share amounts)                   1996                     1995
    ---------------------------------------------------------------------------
    Net income:
         As reported                        $      203               $      185
         Pro forma                          $      203               $      185
    Earnings per share:
         As reported                        $     2.37               $     2.12
         Pro forma                          $     2.38               $     2.13
    ---------------------------------------------------------------------------


57


<PAGE>

STATEMENT OF MANAGEMENT RESPONSIBILITY FOR
CONSOLIDATED FINANCIAL STATEMENTS

    The consolidated financial statements have been prepared by management. The
    integrity and objectivity of these financial statements and the other
    financial information in the Annual Report, including the estimates and
    judgments on which they are based, are the responsibility of management.
    The financial statements have been audited by Deloitte & Touche, LLP,
    independent certified public accountants, appointed by the Board of
    Directors. Their report is shown on page 59. Management has made available
    to Deloitte & Touche, LLP all of the Company's financial records and
    related data, as well as the minutes of shareholders' and directors'
    meetings.

         Management maintains a system of internal accounting control which it
    believes is adequate to provide reasonable, but not absolute, assurance
    that assets are properly safeguarded and accounted for, that transactions
    are executed in accordance with management's authorization and are properly
    recorded and reported, and for the prevention and detection of fraudulent
    financial reporting. Management monitors the system of internal control for
    compliance through its own review and a strong internal auditing program
    which also independently assesses the effectiveness of the internal
    controls. In establishing and maintaining internal controls, the Company
    must exercise judgment in determining whether the benefits derived justify
    the costs of such controls.

         Management acknowledges its responsibility to provide financial
    information (both audited and unaudited) that is representative of the
    Company's operations, reliable on a consistent basis, and relevant for a
    meaningful financial assessment of the Company. Management believes that
    the control process enables them to meet this responsibility.

         Management also recognizes its responsibility for fostering a strong
    ethical climate so that the Company's affairs are conducted according to
    the highest standards of personal and corporate conduct. This
    responsibility is characterized and reflected in the Company's code of
    corporate conduct, which is publicized throughout the Company. The Company
    maintains a systematic program to assess compliance with this policy.

         The Board of Directors has an Audit Committee composed solely of
    directors who are not officers or employees. The Committee recommends for
    approval by the full Board the appointment of the independent auditors. The
    Committee meets regularly with management, with the Company's internal
    auditors, and with the independent auditors.  The independent auditors and
    the internal auditors periodically meet alone with the Audit Committee and
    have free access to the Audit Committee at any time.





    Willis B. Wood, Jr.
    Chairman and Chief Executive Officer





    Larry J. Dagley
    Senior Vice President and Chief Financial Officer

58


<PAGE>

INDEPENDENT AUDITORS' REPORT

    PACIFIC ENTERPRISES:
    We have audited the consolidated financial statements of Pacific
    Enterprises and subsidiaries (pages 35 to 57) as of December 31, 1996 and
    1995, and for each of the three years in the period ended December 31,
    1996. 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, the consolidated financial statements referred to
    above present fairly, in all material respects, the financial position of
    Pacific Enterprises and subsidiaries as of December 31, 1996 and 1995, and
    the results of their operations and their cash flows for each of the three
    years in the period ended December 31, 1996 in conformity with generally
    accepted accounting principles.






    Los Angeles, California
    January 28, 1997

                                                                              59
<PAGE>

SELECTED FINANCIAL DATA AND COMPARATIVE STATISTICS 1986-1996


<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts)                 1996          1995          1994            1993  
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>            <C>
CONSOLIDATED:
    Operating revenues from continuing operations          $    2,563     $    2,343     $   2,664      $    2,899
                                                           --------------------------------------------------------
    Income from continuing operations                      $      203     $      185     $     172      $      181
    Income (loss) from discontinued operations
                                                           --------------------------------------------------------
    Net income (loss)                                             203            185           172             181
    Dividends on preferred stock                                    5             10            12              15
    Preferred stock original issue discount                         2
                                                           --------------------------------------------------------
    Net income (loss) applicable to common stock           $      196     $      175     $     160      $      166
                                                           --------------------------------------------------------
    Net income (loss) per share of common stock:
       Continuing operations                               $     2.37     $     2.12     $    1.95      $     2.06
       Discontinued operations
                                                           --------------------------------------------------------
                                                           $     2.37     $     2.12     $    1.95      $     2.06
                                                           --------------------------------------------------------
    Cash dividends per share of common stock               $     1.42     $     1.34     $    1.26      $      .60
    Book value per share                                   $    16.58     $    15.71     $   14.74      $    12.19
    Capital expenditures of continuing operations          $      204     $      240     $     249      $      331
    Total assets                                           $    5,186     $    5,259     $   5,445      $    5,596
    Capitalization:
       Short-term debt                                     $      262     $      234     $     278      $      267
       Long-term debt due within one year                         149            100           128              58
       Long-term debt                                           1,095          1,241         1,420           1,262
       Long-term debt of esop                                     130            130           130             132
    Obligations under capital leases
       Preferred stocks of a subsidiary:
          Redeemable
          Nonredeemable                                            95            195           195             195
       Preferred stock                                             80            188           218             258
       Common stock                                             1,095          1,111         1,092           1,048
    Retained earnings                                             314            236           172             116
       Less deferred compensation relating to ESOP               (49)           (52)          (54)           (138)
                                                           --------------------------------------------------------
              Total capitalization                         $    3,171     $    3,383     $   3,579      $    3,198
                                                           --------------------------------------------------------
    Number of employees                                         7,643          7,860         8,484           9,200
SOCALGAS:
    Gas revenues:
       Residential                                         $    1,613     $    1,554     $   1,713      $    1,653
       Commercial/industrial                                      708            751           798             853
       Utility electric generation                                 70            104           118             147
       Wholesale                                                   70             62            98             117
       Exchange                                                     1              1             1               4
                                                           --------------------------------------------------------
          Gas revenues in rates                                 2,462          2,472         2,728           2,774
    Regulatory balancing accounts and other                       (40)          (193)         (141)             37
                                                           --------------------------------------------------------
              Total operating revenue                      $    2,422     $    2,279     $   2,587      $    2,811
                                                           --------------------------------------------------------
    Gas volumes delivered (billion cubic feet):
       Residential                                                236            239           256             248
       Commercial/industrial                                      374            351           348             339
       Utility electric generation                                139            205           260             213
       Wholesale                                                  130            129           146             148
       Exchange                                                     5             13            10              17
                                                           --------------------------------------------------------
              Total                                               884            937         1,020             965
                                                           --------------------------------------------------------
       Core                                                       314            325           341             339
       Noncore                                                    570            612           679             626
                                                           --------------------------------------------------------
              Total                                               884            937         1,020             965
                                                           --------------------------------------------------------
       Gas volumes sold                                           315            338           362             352
       Gas volumes transported or exchanged                       569            599           658             613
                                                           --------------------------------------------------------
              Total                                               884            937         1,020             965
                                                           --------------------------------------------------------
    Number of customers:
       Residential                                          4,582,553      4,526,150     4,483,324       4,459,250
       Commercial                                             184,425        184,470       187,518         187,602
       Industrial                                              22,952         22,976        23,505          23,924
       Utility electric generation/wholesale                       12             11            11              11
                                                           --------------------------------------------------------
              Total number of customers                     4,789,942      4,733,607     4,694,358       4,670,787
                                                           --------------------------------------------------------
    Gas purchased (billion cubic feet):
       Market gas:
          30-day                                                  153            133            98              85
          Other                                                    73             73           149             159
                                                           --------------------------------------------------------
              Total market gas purchased                          226            206           247             244
       Affiliates                                                  96             99           101              97
       Other long-term supplies                                    12             29            36              28
                                                           --------------------------------------------------------
              Total gas purchased                                 334            334           384             369
                                                           --------------------------------------------------------
    Average cost of gas purchased excluding fixed costs 
       (per thousand cubic feet)                           $     1.88     $     1.42     $    1.68      $     2.21
    Weighted average rate base                             $    2,777     $    2,766     $   2,862      $    2,769
    Authorized rate of return on:
       Rate base                                                9.42%          9.67%         9.22%           9.99%
       Common equity                                           11.60%         12.00%        11.00%          11.90%
    Degree days                                                 1,178          1,241         1,459           1,203


60

<PAGE>

<CAPTION>
(Dollars in millions, except per share amounts)              1992          1991           1990           1989  
---------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>            <C>
CONSOLIDATED:                                                                                                   
    Operating revenues from continuing operations       $    2,900     $    3,007     $    3,376     $    3,344 
                                                        -------------------------------------------------------
    Income from continuing operations                   $      136     $      167     $      142     $      142 
    Income (loss) from discontinued operations                (686)          (255)          (201)            64 
                                                        -------------------------------------------------------
    Net income (loss)                                         (550)           (88)           (59)           206 
    Dividends on preferred stock                                16             16             17             13 
    Preferred stock original issue discount                                                                     
                                                        -------------------------------------------------------
    Net income (loss) applicable to common stock        $     (566)    $     (104)    $      (76)    $      193 
                                                        -------------------------------------------------------
    Net income (loss) per share of common stock:                                                                
       Continuing operations                            $     1.60     $     2.09     $     1.78     $     1.98 
       Discontinued operations                               (9.17)         (3.54)         (2.87)           .99 
                                                        -------------------------------------------------------
                                                        $    (7.57)    $    (1.45)    $    (1.09)    $     2.97 
                                                        -------------------------------------------------------
    Cash dividends per share of common stock            $      .44     $     2.62     $     3.48     $     3.48 
    Book value per share                                $     9.44     $    19.74     $    23.07     $    27.10 
    Capital expenditures of continuing operations       $      329     $      335     $      386     $      340 
    Total assets                                        $    5,414     $    5,462     $    5,702     $    5,874 
    Capitalization:                                                                                             
       Short-term debt                                  $      215     $      123     $      491     $      637 
       Long-term debt due within one year                      217             25             30             30 
       Long-term debt                                        1,774          1,776          1,161          1,045 
       Long-term debt of ESOP                                  141            149            163            173 
    Obligations under capital leases                     
       Preferred stocks of a subsidiary:                                                                        
          Redeemable                                                                                         60  
          Nonredeemable                                        195            195            145             70  
       Preferred stock                                         258            258            258            258  
       Common stock                                            859          1,458          1,385          1,331  
    Retained earnings                                                         146            419            738  
       Less deferred compensation relating to ESOP            (148)          (163)          (173)          (189) 
                                                        ------------------------------------------------------- 
              Total capitalization                      $    3,511     $    3,967     $    3,879     $    4,153  
                                                        -------------------------------------------------------
    Number of employees                                      9,884         40,953         42,370         43,891  
SOCALGAS:                                                                                                        
    Gas revenues:                                                                                                
       Residential                                      $    1,484     $    1,674     $    1,548     $    1,484  
       Commercial/industrial                                   836            977          1,057          1,016  
       Utility electric generation                             195            149            235            483  
       Wholesale                                               129            145            165            192  
       Exchange                                                  6              7              8              8  
                                                        ------------------------------------------------------- 
          Gas revenues in rates                              2,650          2,952          3,013          3,183  
    Regulatory balancing accounts and other                    190            (22)           200             92  
                                                        ------------------------------------------------------- 
              Total operating revenue                   $    2,840     $    2,930     $    3,213     $    3,275  
                                                        ------------------------------------------------------- 
    Gas volumes delivered (billion cubic feet):                                                                  
       Residential                                             244            249            262            255  
       Commercial/industrial                                   363            460            436            400  
       Utility electric generation                             221            170            159            202  
       Wholesale                                               149            142            139            146  
       Exchange                                                 24             26             30             30  
                                                        ------------------------------------------------------- 
              Total                                          1,001          1,047          1,026          1,033  
                                                        ------------------------------------------------------- 
       Core                                                    335            351            372            364  
       Noncore                                                 666            696            654            669  
                                                        ------------------------------------------------------- 
              Total                                          1,001          1,047          1,026          1,033  
                                                        ------------------------------------------------------- 
       Gas volumes sold                                        355            411            515            594  
       Gas volumes transported or exchanged                    646            636            511            439  
                                                        ------------------------------------------------------- 
              Total                                          1,001          1,047          1,026          1,033  
                                                        -------------------------------------------------------- 
    Number of customers:                                  
       Residential                                       4,445,500      4,429,896      4,381,563      4,295,838  
       Commercial                                          189,364        193,051        193,409        192,269  
       Industrial                                           24,419         25,642         26,530         26,957  
       Utility electric generation/wholesale                    10             10             10              9  
                                                         ------------------------------------------------------- 
              Total number of customers                  4,659,293      4,648,599      4,601,512      4,515,073  
                                                         ------------------------------------------------------ 
    Gas purchased (billion cubic feet):                    
       Market gas:                                         
          30-day                                                21            140            149            202 
          Other                                                198            168            226            161 
                                                          ------------------------------------------------------
              Total market gas purchased                       219            308            375            363 
       Affiliates                                               99             99            103            104 
       Other long-term supplies                                 42             39             53            149 
                                                          ------------------------------------------------------
              Total gas purchased                              360            446            531            616 
                                                          ------------------------------------------------------
    Average cost of gas purchased excluding fixed costs                                                          
       (per thousand cubic feet)                          $   2.24     $     2.40     $     2.59     $     2.46 
    Weighted average rate base                            $  2,720     $    2,663     $    2,549     $    2,386 
    Authorized rate of return on:                                                                                
       Rate base                                            10.49%         10.79%         10.75%         10.96% 
       Common equity                                        12.65%         13.00%         13.00%         13.00%  
    Degree days                                              1,258          1,409          1,432          1,344  


<CAPTION>
(Dollars in millions, except per share amounts)                  1988           1987           1986  
-----------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>
CONSOLIDATED:                                            
    Operating revenues from continuing operations          $     3,301    $     3,385    $     3,691
                                                           -------------------------------------------
    Income from continuing operations                      $       142    $       148    $       138
    Income (loss) from discontinued operations                      75            101            (56)
                                                           -------------------------------------------
    Net income (loss)                                              217            249             82
    Dividends on preferred stock                                     6              6              6
    Preferred stock original issue discount              
                                                           -------------------------------------------
    Net income (loss) applicable to common stock           $       211    $       243    $        76
                                                           -------------------------------------------
    Net income (loss) per share of common stock:         
       Continuing operations                               $      2.20    $      2.40    $      2.27
       Discontinued operations                                    1.23           1.70           (.96)
                                                           -------------------------------------------
                                                           $      3.43    $      4.10    $      1.31
                                                           -------------------------------------------
    Cash dividends per share of common stock               $      3.48    $      3.48    $      3.48
    Book value per share                                   $     28.26    $     27.05    $     26.21
    Capital expenditures of continuing operations          $       351    $       328    $       332
    Total assets                                           $     5,496    $     4,374    $     4,584
    Capitalization:                                    
       Short-term debt                                     $       572    $       128    $       469
       Long-term debt due within one year                           65             72             16
       Long-term debt                                            1,220          1,067          1,194
       Long-term debt of ESOP                                       31             38             44
    Obligations under capital leases                                25             26             27
       Preferred stocks of a subsidiary:
          Redeemable                                                60             60             60 
          Nonredeemable                                             20             20             20 
       Preferred stock                                             110            110            110 
       Common stock                                              1,066            875            855 
    Retained earnings                                              770            771            734 
       Less deferred compensation relating to ESOP                 (31)           (38)           (44) 
                                                           -------------------------------------------
              Total capitalization                         $     3,908    $     3,129    $     3,485
                                                           -------------------------------------------
    Number of employees                                         40,538         27,928         26,571
SOCALGAS:                                              
    Gas revenues:                                      
       Residential                                         $     1,482    $     1,496    $     1,275
       Commercial/industrial                                     1,008          1,059          1,068
       Utility electric generation                                 554            662            610
       Wholesale                                                   252            302            362
       Exchange                                                     12             18             19
                                                           -------------------------------------------
          Gas revenues in rates                                  3,308          3,537          3,334
    Regulatory balancing accounts and other                        (86)          (225)           274
                                                           -------------------------------------------
              Total operating revenue                      $     3,222    $     3,312    $     3,608
                                                           -------------------------------------------
    Gas volumes delivered (billion cubic feet):        
       Residential                                                 253            259            234
       Commercial/industrial                                       344            269            223
       Utility electric generation                                 199            309            225
       Wholesale                                                   144            159            124
       Exchange                                                     39             55             55
                                                           -------------------------------------------
              Total                                                979          1,051            861
                                                           -------------------------------------------
       Core                                                        n/a            n/a            n/a
       Noncore                                                     n/a            n/a            n/a
                                                           -------------------------------------------
              Total                                                979          1,051            861
                                                           -------------------------------------------
       Gas volumes sold                                            654            759            767
       Gas volumes transported or exchanged                        325            292             94
                                                           -------------------------------------------
              Total                                                979          1,051            861
                                                           -------------------------------------------
    Number of customers:
       Residential                                           4,196,010      4,086,365      3,969,671
       Commercial                                              190,908        189,611        186,773
       Industrial                                               27,133         27,227         27,942
       Utility electric generation/wholesale                         9              8              8
                                                           -------------------------------------------
              Total number of customers                      4,414,060      4,303,211      4,184,394
                                                           -------------------------------------------
    Gas purchased (billion cubic feet):
       Market gas:
          30-day                                                   219            271            242
          Other                                                     87             48
                                                           -------------------------------------------
              Total market gas purchased                           306            319            242
       Affiliates                                                  118            113            113
       Other long-term supplies                                    247            343            421
                                                           -------------------------------------------
              Total gas purchased                                  671            775            776
                                                           -------------------------------------------
    Average cost of gas purchased excluding fixed costs
       (per thousand cubic feet)                           $      2.39    $      2.20    $      2.52
    Weighted average rate base                             $     2,268    $     2,167    $     2,092
    Authorized rate of return on:                      
       Rate base                                                10.93%         11.51%         12.74%
       Common equity                                            12.75%         13.90%         14.60%
    Degree days                                                  1,354          1,498          1,058

</TABLE>

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