Exhibit 13.1



|                                                                                                                                                 |                                 | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------- | 
|SEMPRA
ENERGY FINANCIAL REPORTTABLE OF CONTENTS                                                                                                  |                                
|                                                                                                                                                 | Page                           
|Management's
Discussion and Analysis of Financial Condition and Results of
Operations                                                            |                                
|Our
Business                                                                                                                                     | 2                              
|Executive
Summary                                                                                                                                | 7                              
|Business
Strategy                                                                                                                                | 7                              
|Key
Issues in 2008                                                                                                                               | 7                              
|Results
of Operations                                                                                                                            | 8                              
|Overall
Results of Operations of Sempra Energy and Factors Affecting the
Results                                                                 | 8                              
|Business
Unit Results                                                                                                                            | 10                             
|Changes
in Revenues, Costs and Earnings                                                                                                          | 15                             
|Transactions
with Affiliates                                                                                                                     | 26                             
|Book
Value Per Share                                                                                                                             | 26                             
|Capital
Resources and Liquidity                                                                                                                  | 27                             
|Cash
Flows from Operating Activities                                                                                                             | 29                             
|Cash
Flows from Investing Activities                                                                                                             | 30                             
|Cash
Flows from Financing Activities                                                                                                             | 35                             
|Factors
Influencing Future Performance                                                                                                           | 43                             
|Sempra
Energy Overview                                                                                                                           | 43                             
|Litigation                                                                                                                                       | 44                             
|Sempra
Utilities  Industry Developments and Capital Projects                                                                                    | 44                             
|Sempra
Global Investments                                                                                                                        | 44                             
|Market
Risk                                                                                                                                      | 46                             
|Critical
Accounting Policies and Estimates, and Key Noncash Performance
Indicators                                                               | 49                             
|New
Accounting Standards                                                                                                                         | 54                             
|Information
Regarding Forward-Looking Statements                                                                                                 | 55                             
|Common
Stock Data                                                                                                                                | 56                             
|Performance
Graph  Comparative Total Shareholder Returns                                                                                        | 57                             
|Five-Year
Summaries                                                                                                                              | 58                             
|Controls
and Procedures                                                                                                                          |                                
|Evaluation
of Disclosure Controls and Procedures                                                                                                 | 60                             
|Management's
Report on Internal Control over Financial Reporting                                                                                 | 60                             
|Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure                                                             | 60                             
|Reports
of Independent Registered Public Accounting Firm                                                                                         | 61                             
|Consolidated
Financial Statements                                                                                                                |                                
|Sempra
Energy                                                                                                                                    | 69                             
|San
Diego Gas & Electric Company                                                                                                                 | 75                             
|Pacific
Enterprises                                                                                                                              | 81                             
|Southern
California Gas Company                                                                                                                  | 87                             
|Notes
to Consolidated Financial Statements                                                                                                       | 93                             
|Glossary                                                                                                                                         | 190                            
|                                                                                                                                                
|This
Financial Report is a combined report for the following separate companies
(each a separate Securities and Exchange Commission
registrant):
|                                                                                                                                                 |                                
|Sempra
Energy                                                                                                                                    | Pacific
Enterprises            
|San Diego
Gas & Electric Company                                                                                                                 | Southern
California Gas Company



1







MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section of the 2008
Annual Report includes

§

A
description of our business

§

An
executive summary

§

A
discussion and analysis of our operating results for 2006 through 2008

§

Information
about our capital resources and liquidity

§

Major
factors expected to influence our future operating results

§

A
discussion of market risk affecting our businesses

§

A
table of accounting policies that we consider critical to our financial
condition and results of operations

You should read Management's
Discussion and Analysis of Financial Condition and Results of Operations in
conjunction with the Consolidated Financial Statements included in this Annual
Report.

OUR
BUSINESS

Sempra Energy is a Fortune 500
energy services holding company whose business units provide electric, natural
gas and other energy products and services to their customers. Our operations
are divided principally between the Sempra Utilities and Sempra Global. The
Sempra Utilities consist of two California regulated public utility companies,
1) San Diego Gas & Electric Company (SDG&E) and 2) Southern California
Gas Company (SoCalGas). Sempra Global consists of businesses engaged in
providing energy products and services. (See Figure 1.)

[sempra_annualreport2008002.gif]

Figure 1: Sempra Energy's Business Units





2







This
report includes information for the following separate registrants:

§

Sempra
Energy and its consolidated entities

§

SDG&E

§

Pacific
Enterprises (PE), the holding company for SoCalGas

§

SoCalGas

References in this report to
"we," "our" and "Sempra Energy Consolidated" are to Sempra Energy and its
consolidated entities, collectively, unless otherwise indicated by its
context.

PE's operations consist solely of
those of SoCalGas and additional items (e.g., cash, intercompany accounts and
equity) attributable to being a holding company for SoCalGas.

Below are thesummary
descriptions of our operating business units.

SEMPRA
BUSINESS UNITS



|                                                                                                                                                                    |                                                                                                                                  |                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|SEMPRA
UTILITIES                                                                                                                                                    |                                                                                                                                  |                                                                                                                                                                                      
|                                                                                                                                                                    | MARKET                                                                                                                           | SERVICE TERRITORY                                                                                                                                                                    
|SAN
DIEGO GAS AND ELECTRIC COMPANY (SDG&E)
A
regulated public utility; infrastructure supports electric distribution
and transmission, and natural gas distribution | §
Provides
electricity to 3.4 million consumers
§
Provides
natural gas to 3.1 million consumers                                  | Serves
the county of San Diego, CA and southern Orange County covering 4,100
square miles                                                                                            
|SOUTHERN
CALIFORNIA GAS COMPANY (SOCALGAS)
A
regulated public utility; infrastructure supports natural gas
distribution, transmission and storage                   | §
Residential,
commercial, industrial, utility electric generation and wholesale
customers
§
Covers
a population of 20.5 million | Southern
California and portions of Central California (excluding San Diego County,
the city of Long Beach and the desert area of San Bernardino County)
covering 20,000 square miles



The Sempra Utilities consist of
SDG&E and SoCalGas.

SDG&E

SDG&E provides electricity to
3.4 million consumers and natural gas to 3.1 million consumers. It delivers the
electricity through 1.4 million meters in San Diego County and an adjacent
portion of southern Orange County, California. SDG&E's electric energy is
purchased from others or generated from its Palomar and Miramar electric
generation facilities and its 20-percent ownership interest in the San Onofre
Nuclear Generating Station (SONGS). SDG&E also delivers natural gas through
840,000 meters in San Diego County and transports electricity and natural gas
for others. SDG&E's service territory encompasses 4,100 square miles.

Sempra Energy indirectly owns all
of the common stock of SDG&E. SDG&E also has issued publicly held
preferred stock. The preferred stock has liquidation preferences totaling $79
million and represents less than 3% of the ordinary voting power of SDG&E
shares.

SDG&E's financial statements
include a variable interest entity, Otay Mesa Energy Center LLC (Otay Mesa VIE),
as we discuss in Note 1 of the Notes to Consolidated Financial Statements.

SoCalGas

SoCalGas is the nation's largest
natural gas distribution utility.  SoCalGas owns and operates a natural gas
distribution, transmission, and storage system that supplies natural gas to
approximately 20,000 square miles of



3







service
territory.  Its service territory extends from San Luis Obispo, California
in the north to the Mexican border in the south, excluding San Diego County, the
city of Long Beach and the desert area of San Bernardino County. SoCalGas
provides natural gas service to residential, commercial, industrial, utility
electric generation and wholesale customers through 5.7 million meters, covering
a population of 20.5 million.

Sempra Energy owns all of the
common stock of PE and PE owns all of the common stock of SoCalGas. PE and
SoCalGas also have publicly held preferred stock, which represents less than 1%
of the ordinary voting power of each company. The PE and SoCalGas preferred
stock have liquidation preferences totaling $80 million and $22 million,
respectively.



|                                                                                                                                                                            |                                                                                                                          |                                   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------
|SEMPRA
GLOBAL                                                                                                                                                               |                                                                                                                          |                                   
|                                                                                                                                                                            | MARKET                                                                                                                   | GEOGRAPHIC REGION                 
|SEMPRA
COMMODITIES
RBS
Sempra Commodities, a joint venture with The Royal Bank of Scotland (RBS),
a commodities- marketing business                                         | §
Natural
gas; natural gas liquids
§
Power
§
Petroleum
and petroleum products
§
Coal
§
Emissions
§
Ethanol
§
Base
metals | Global                            
|SEMPRA
GENERATION
Develops,
owns and operates electric power plants                                                                                                         | §
Wholesale
electricity                                                                                                  | U.S.A.
Mexico                     
|SEMPRA
PIPELINES & STORAGE
Develops,
owns and operates, or holds interests in, natural gas pipelines and
storage facilities, and natural gas and electric service providers | §
Natural
gas
§
Electricity                                                                                              | U.S.A.
Mexico
Argentina
Chile
Peru
|SEMPRA
LNG
Develops,
owns and operates receipt terminals for importing liquefied natural gas
(LNG)                                                                          | §
Natural
gas                                                                                                            | U.S.A.
Mexico                     



Sempra Global is a holding
company for most of our subsidiaries that are not subject to California utility
regulation. Sempra Global's principal business units, which provide
energy-related products and services, are

§

Sempra
Commodities

§

Sempra
Generation

§

Sempra
Pipelines & Storage

§

Sempra
LNG

A description of each business
unit follows.

Sempra
Commodities

Sempra Commodities holds our
investment in RBS Sempra Commodities LLP (RBS Sempra Commodities), a joint
venture with The Royal Bank of Scotland (RBS). The partnership was formed on
April 1, 2008 from our commodities-marketing businesses previously reported in
this business unit. The partnership's commodities-trading businesses serve
customers in the global markets for natural gas, natural gas liquids, power,
petroleum and



4







petroleum
products, coal, emissions, ethanol and base metals. We provide further
discussion about the joint venture in Notes 3, 4 and 6 of the Notes to
Consolidated Financial Statements. Sempra Commodities also includes the
operating results of Sempra Rockies Marketing, which holds firm service capacity
on the Rockies Express Pipeline.

Sempra
Generation

Sempra Generation develops, owns
and operates electric power plants serving wholesale electricity markets in
North America. It sells electricity under long-term contracts and into the spot
market and other competitive markets. Sempra Generation purchases natural gas to
fuel its natural gas-fired power plants and may also purchase electricity in the
open market to satisfy its contractual obligations. Sempra Generation also
develops renewable energy generation projects.

The following table provides
information about each of Sempra Generation's power plants. Approximately 75%
and 60% of this generating capacity is under long-term contracts with the
California Department of Water Resources (DWR) and other parties through 2010
and 2011, respectively.



|                               |                                             |       |                  |  |                                   | 
|------------------------------ | ------------------------------------------- | ----- | ---------------- |  | --------------------------------- | 
|SEMPRA
GENERATION POWER PLANTS
|Capacity
in Megawatts (MW)    
|Power
Plant                    | Maximum Generating Capacity                 |       | First
In Service |  | Location                         
|Mesquite
Power                 | 1,250                                       |       | 2003             |  | Arlington,
AZ                    
|Termoeléctrica
de Mexicali     | 625                                         |       | 2003             |  | Mexicali,
Baja California, Mexico
|El
Dorado                      | 490                                         | *     | 2000             |  | Boulder
City, NV                 
|Elk
Hills (50% owned)          | 275                                         | **    | 2003             |  | Bakersfield,
CA                  
|                               | Total
MW in operation                       | 2,640 |                  |  |                                   | 
|*                              | Includes
10 MW of solar generating capacity
|**                             | Sempra
Generation's share                  



Sempra Generations three
100%-owned facilities, Mesquite Power, Termoeléctrica de Mexicali, and El
Dorado, sell the majority of their output under long-term contracts and a
purchased-power contract. The largest contract is with the DWR and provides for
1,200 MW to be supplied during all hours and an additional 400 MW during peak
hours. This contract ends September 30, 2011. Sempra Generation also has other
purchased-power contracts, primarily with RBS Sempra Commodities, to sell
varying amounts of power through 2012. In addition to these contracts, Sempra
Generation has a purchased-power contract expiring in 2010 that permits the call
for delivery of up to 300 MW of power, both peak and off peak hours, at a
predetermined price. Combined, including the DWR contract, these contracts are
expected to utilize approximately 85% to 90% of the Sempra Generation 100%-owned
fleet capacity output through September 30, 2011; the remaining output is
expected to be sold into the California market on a daily basis.

The El Dorado facility (excluding
the solar facility) is expected to be transferred to SDG&E on October 1,
2011, which coincides with the end of the DWR contract. Note 14 of the Notes to
Consolidated Financial Statements provides information on this transfer.

Sempra Generation also has a 50%
equity interest in Elk Hills, a merchant plant located in Bakersfield,
California. Elk Hills sells its output into the California market on a daily
basis.

Subject to approval by the
California Public Utilities Commission, Sempra Generation has a 20-year power
purchase agreement with Pacific Gas and Electric for all of the output of its
10-MW solar facility.

Sempra Pipelines &
Storage

Sempra Pipelines & Storage
develops, owns and operates, or holds interests in, natural gas pipelines and
storage facilities in the United States and Mexico, and in companies that
provide natural gas or electric services in Argentina, Chile, Mexico and Peru.
Sempra Pipelines & Storage is currently pursuing the sale of its interests
in the Argentine utilities, which we discuss further in Note 4 of the Notes to
Consolidated Financial Statements.

The natural gas distribution
utility that operates in three separate areas in Mexico had a customer count of
94,650 and sales volume of 52 million cubic feet per day in 2008, which is
comparable to amounts in 2007. The pipeline



5







system
in Mexico was recently expanded and had a contracted capacity for up to 2,600
million cubic feet per day in 2008 and 450 million cubic feet per day in 2007.
The increase in 2008 was due to the start of commercial operations of the
pipeline expansion in connection with Sempra LNG's Energía Costa Azul LNG
receipt terminal, which uses these pipelines to transport its regasified natural
gas and began operations in May 2008.

Sempra Pipelines & Storage
also includes the operations of EnergySouth, which it acquired in October 2008.
EnergySouth owns and operates, or holds interests in, natural gas underground
storage and related pipeline facilities in Alabama and Mississippi (now Sempra
Midstream), and owns Mobile Gas Service Corporation (Mobile Gas), a small
regulated natural gas distribution utility in Southwest Alabama.

Sempra Pipelines & Storage,
Kinder Morgan Energy Partners, L.P. (KMP) and ConocoPhillips are, through
Rockies Express, jointly developing a natural gas pipeline, the Rockies Express
Pipeline (REX), that will link producing areas in the Rocky Mountain region to
the upper Midwest and the eastern United States. Our participation in the
project is 25%. Sempra Rockies Marketing, part of the Sempra Commodities
segment, has an agreement with Rockies Express for 200 million cubic feet per
day of capacity on the REX, which will have capacity of 1.8 billion cubic feet
(Bcf) per day.  Sempra Rockies Marketing has released a portion of this
capacity to RBS Sempra Commodities, and RBS Sempra Commodities has assisted
Sempra Rockies Marketing with marketing remaining capacity.

REX-West, the segment of the
pipeline which extends 713 miles from the Cheyenne Hub to Audrain County in
Missouri, began interim service in January and full service in May 2008.
Construction began in July 2008 on REX-East, which will extend the pipeline from
Audrain County to Clarington in Ohio. Subject to receipt of regulatory
approvals, REX-East is expected to be fully operational in late 2009, with
service to delivering points in Illinois, Indiana and Ohio during 2009.

Sempra LNG

Sempra LNG develops, owns and
operates receipt terminals for importing liquefied natural gas (LNG), and has
supply and marketing agreements to provide natural gas. Sempra LNG utilizes its
regasification terminals by entering into long-term firm capacity service
agreements when able to do so. Under these agreements, customers pay Sempra LNG
fees to use its facilities to regasify the customer's LNG. Sempra LNG also may
enter into long-term supply agreements to purchase LNG, which is regasified at
its terminals for sale to other parties. Sempra LNG may also fill capacity and
purchase LNG supplies under short-term contracts.

Sempra LNGs Energía Costa Azul
LNG receipt terminal in Baja California, Mexico began commercial operations in
May 2008 and has a sendout capacity of 1 Bcf of natural gas per day. The Energía
Costa Azul facility currently generates revenue under an agreement with Shell
México Gas Natural, using one-half of the terminals capacity. Sempra LNG has a
purchase agreement with Tangguh PSC Contractors (Tangguh PSC) for the supply of
500 million cubic feet of natural gas per day from Indonesias Tangguh
liquefaction facility to Sempra LNGs Energía Costa Azul regasification terminal
at a price based on the Southern California border index price for natural gas.
Sempra LNG has a contract to sell a portion of the volumes purchased from
Tangguh PSC to Mexicos national electric company, Comisión Federal de
Electricidad (CFE) at prices that are based on the Southern California border
index price. Sempra LNG also has an agreement with RBS Sempra Commodities for
RBS Sempra Commodities to market any volumes purchased from Tangguh PSC that are
not sold to the CFE.

A nitrogen-injection facility
currently under construction will allow the terminal to process LNG cargoes from
a wider variety of sources and will provide additional revenue from payments for
the injection service.

Sempra LNGs Cameron LNG receipt
terminal is currently under construction in Hackberry, Louisiana. In the second
half of 2009, we expect to complete construction and begin receiving capacity
revenues.  The facility will have a capacity of 1.5 Bcf per day, and 40% of
the capacity is contracted for twenty years following the start of facility
operations.

Sempra LNG also owns property in
Port Arthur, Texas, that we are evaluating for potential development.



6







REGULATION
OF SEMPRA UTILITIES AND OTHER BUSINESS UNITS

The Sempra Utilities are
regulated by federal, state and local governmental agencies. The primary
regulatory agency is the California Public Utilities Commission (CPUC). The CPUC
regulates the Sempra Utilities' rates and operations in California, except for
SDG&E's electric transmission operations. The Federal Energy Regulatory
Commission (FERC) regulates SDG&E's electric transmission operations. The
FERC also regulates interstate transportation of natural gas and various related
matters.

The Nuclear Regulatory Commission
regulates the San Onofre nuclear generating plant, in which SDG&E owns a 20%
interest. Municipalities and other local authorities regulate the location of
utility assets, including natural gas pipelines and electric lines. Sempra
Energy's other business units are also regulated by the FERC, various state
commissions, local governmental entities, and various similar authorities in
countries other than the United States.

EXECUTIVE
SUMMARY

BUSINESS
STRATEGY

Our ongoing focus is to enhance
shareholder value and meet customer needs by sustaining the financial strength,
operational flexibility and skilled workforce needed to succeed in rapidly
changing market conditions. To accomplish these goals, we evaluate market
opportunities with our extensive industry expertise combined with rigorous risk
management.

The key components of our
strategy include the following:

§

Continue
investment in North American natural gas infrastructure and the Sempra
Utilities;

§

Expand
our commodities-marketing business with reduced risk through our joint venture
with RBS;

§

Focus
on renewable-energy development in both the Sempra Utilities and Sempra Global;
and

§

Continue
the Sempra Utilities' long-term energy plan that encompasses a balance of energy
conservation, renewable resources, power plants and transmission lines.

As we execute our strategy, we
remain focused on the escalating concerns about global warming and the future
regulation of greenhouse gases. Because natural gas is the cleanest of all
fossil fuels, we expect it will play a critical role as a bridge to a "greener"
future as renewable sources, such as solar, wind and biomass, become a growing
part of North America's energy mix. Our power-generating facilities at Sempra
Generation and SDG&E employ the latest clean-burning natural gas technology
to keep emissions low. In addition, our utilities have been recognized
nationally for their leadership in energy efficiency, and SDG&E is working
aggressively to contract for new renewable resources. Upon completion,
SDG&E's Sunrise Powerlink will serve as a key transmission gateway to import
energy from renewable sources into the San Diego region.

KEY
ISSUES IN 2008

Below are the key issues that
affected our business in 2008; some of these issues may continue to affect our
results in the future. Each issue includes the page number you may reference for
additional details:

§

We
entered into a joint venture creating RBS Sempra Commodities (116).

§

We
completed a $1 billion common stock repurchase program (166).

§

We
increased quarterly dividends on our common shares to $0.35 per share ($1.40
annually) (28).

§

The
Sempra Utilities completed the 2008 General Rate Case with the CPUC which set
rates for 2008 through 2011 effective January 1, 2008 (169).

§

The
CPUC approved SDG&E's proposed Sunrise Powerlink electric transmission line
(167).

§

We
acquired EnergySouth (117).



7







§

Sempra
LNG's Energía Costa Azul LNG receipt terminal began commercial operations in May
2008 (6).

§

Sempra
Pipelines & Storage completed the expansion of its pipeline system in
Mexico, which connects to the Energía Costa Azul LNG receipt terminal (6).

§

The
Rockies Express-West pipeline began full-service operations in May 2008 (6).

§

Construction
began on the Rockies Express-East pipeline in July 2008 (6).

§

We
completed our first solar energy project, a 10-MW photovoltaic power-generation
facility and the largest operational thin-film solar power project in North
America (44).

§

SDG&E
completed the initial installation of 4,500 advanced meters and is on schedule
to complete the full installation of 1.4 million electric meters and 900,000
natural gas meters by the end of 2011 (172).

§

SoCalGas
requested approval from the CPUC to upgrade approximately 6 million natural gas
meters with advanced metering infrastructure at an estimated cost of $1.1
billion (172).

§

There
was increased litigation and investigation related to the 2007 California
wildfires (173).

RESULTS
OF OPERATIONS

We discuss the following in
Results of Operations:

§

Overall
results of our operations and factors affecting those results

§

Our
business unit results

§

Significant
changes in revenues, costs and earnings between periods

OVERALL
RESULTS OF OPERATIONS OF SEMPRA ENERGY AND FACTORS AFFECTING THE RESULTS

The graphs below show our overall
operations from 2004 to 2008. Our 2008 income from continuing operations
decreased due to

§

lower
earnings at Sempra Commodities due to our reduced ownership interest in the
business; and

§

higher
net losses at Parent and Other, offset by

§

improved
results at the Sempra Utilities, Sempra Generation and Sempra Pipelines &
Storage.

Our net income in 2007 included
losses from discontinued operations of $26 million.

Diluted earnings per share
increased by $0.27 per share, primarily as a result of the reduction in shares
outstanding from our $1 billion share repurchase and increased net income. The
impact from the share repurchase was a positive $0.20 per share.



8









|                                                          
|----------------------------------------------------------
|OVERALL
OPERATIONS OF SEMPRA ENERGY FROM 2004 TO 2008     
|(Dollars
and shares in millions, except per share
amounts)

[sempra_annualreport2008004.gif]



[sempra_annualreport2008006.gif][sempra_annualreport2008008.gif]



Our income from continuing
operations increased in 2007 due to higher earnings at SDG&E. Also, results
in 2006 included a $221 million after-tax impairment of Sempra Pipelines &
Storage's Argentine investments, offset by a $204 million after-tax gain in 2006
from Sempra Generation's sale of its investment in Topaz Power Partners (Topaz).

Our net income decreased in 2007
because our results for 2006 included $315 million in after-tax income from
discontinued operations primarily due to asset sales. We discuss these asset
sales in more detail in Note 5 of the Notes to Consolidated Financial
Statements.



9







The
following table shows our net income (loss) by business unit, which we discuss
below in "Business Unit Results."



|                                                           |                                                                                                                                                                                                                                                                                                                                                                                    |       |      |     |      |   |   |       |     |     |    |   |   |       |      |     |     |   | 
|---------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ---- | --- | ---- | - | - | ----- | --- | --- | -- | - | - | ----- | ---- | --- | --- | - | 
|SEMPRA
ENERGY NET INCOME (LOSS) BY BUSINESS UNIT 2006-2008
|(Dollars
in millions)                                      |                                                                                                                                                                                                                                                                                                                                                                                   
|                                                           | Years ended December 31,                                                                                                                                                                                                                                                                                                                                                          
|                                                           | 2008                                                                                                                                                                                                                                                                                                                                                                               |       | 2007 |     | 2006
|Sempra
Utilities:                                          |                                                                                                                                                                                                                                                                                                                                                                                    |       |      |     |      |   |   |       |     |     |    |   |   |       |      |     |    
|                                                           | San
Diego Gas & Electric Company*                                                                                                                                                                                                                                                                                                                                                  | $     | 339  |     | 31   | % |   | $     | 283 |     | 25 | % |   | $     | 237  |     | 17  | %
|                                                           | Southern
California Gas Company*                                                                                                                                                                                                                                                                                                                                                   |       | 244  |     | 22   |   |   |       | 230 |     | 21 |   |   |       | 223  |     | 16  |  
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                    |       |      |     |      |   |   |       |     |     |    |   |   |       |      |     |     |  
|Sempra
Global:                                             |                                                                                                                                                                                                                                                                                                                                                                                    |       |      |     |      |   |   |       |     |     |    |   |   |       |      |     |    
|                                                           | Sempra
Commodities**                                                                                                                                                                                                                                                                                                                                                               |       | 345  |     | 31   |   |   |       | 499 |     | 45 |   |   |       | 504  |     | 36  |  
|                                                           | Sempra
Generation                                                                                                                                                                                                                                                                                                                                                                  |       | 222  |     | 20   |   |   |       | 162 |     | 15 |   |   |       | 375  |     | 27  |  
|                                                           | Sempra
Pipelines & Storage                                                                                                                                                                                                                                                                                                                                                         |       | 106  |     | 9    |   |   |       | 64  |     | 6  |   |   |       | (165 | )   | (12 | )
|                                                           | Sempra
LNG                                                                                                                                                                                                                                                                                                                                                                         |       | (46  | )   | (4   | ) |   |       | (46 | )   | (4 | ) |   |       | (42  | )   | (3  | )
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                    |       |      |     |      |   |   |       |     |     |    |   |   |       |      |     |     |  
|Parent
and other***                                        |                                                                                                                                                                                                                                                                                                                                                                                    | (97   | )    | (9  | )    |   |   | (67   | )   | (6  | )  |   |   | (41   | )    | (3  | )  
|Income
from continuing operations                          |                                                                                                                                                                                                                                                                                                                                                                                    | 1,113 |      | 100 |      |   |   | 1,125 |     | 102 |    |   |   | 1,091 |      | 78  |    
|Discontinued
operations, net of income tax                 |                                                                                                                                                                                                                                                                                                                                                                                    | --    |      | --  |      |   |   | (26   | )   | (2  | )  |   |   | 315   |      | 22  |    
|Consolidated
net income                                    | $                                                                                                                                                                                                                                                                                                                                                                                  | 1,113 |      | 100 | %    |   | $ | 1,099 |     | 100 | %  |   | $ | 1,406 |      | 100 | %  
|*                                                          | After
preferred dividends.                                                                                                                                                                                                                                                                                                                                                        
|**                                                         | Includes
our portion of RBS Sempra Commodities' joint venture earnings since the
formation of the joint venture on April 1, 2008, and 100% of the
commodities-marketing businesses prior to April 1, 2008. Also includes the
operating results of Sempra Rockies Marketing, as well as interest, income
taxes, cost allocations and other items associated with the joint
venture.
|***                                                        | Includes
after-tax interest expense ($85 million in 2008, $82 million in 2007 and
$101 million in 2006), intercompany eliminations recorded in consolidation
and certain corporate costs incurred at Sempra
Global.                                                                                                                                                               

BUSINESS
UNIT RESULTS

The following section is a
discussion of net income by Sempra Energy business unit, as it appears in the
table above.



|                                              
|----------------------------------------------
|NET INCOME
BY BUSINESS UNIT  SEMPRA UTILITIES
|(Dollars
in millions)                         



[sempra_annualreport2008010.gif]





10







SDG&E

Our SDG&E business unit
recorded net income of:

§

$339
million in 2008 ($344 million before preferred dividends)

§

$283
million in 2007 ($288 million before preferred dividends)

§

$237
million in 2006 ($242 million before preferred dividends)

In 2008, the increase of $56
million (20%) was due to

§

$62
million increased CPUC authorized margin in excess of higher operation and
maintenance expenses;

§

$14
million favorable effect from lower income tax rates on current operating
activity in 2008 from an increase in tax deductions, as we discuss in "Income
Taxes" below;

§

$8
million higher regulatory awards in 2008; and

§

$6
million higher electric transmission earnings in 2008 due to a higher rate base;
offset by

§

$19
million lower favorable resolution of regulatory matters in 2008 ($7 million in
2008 compared to $26 million in 2007); and

§

$18
million due to higher litigation expenses in 2008 ($25 million in 2008 compared
to $7 million in 2007).

The increase in 2007 of $46
million (19%) was due to

§

$15
million higher electric transmission earnings due to a higher rate base;

§

$7
million due to the Palomar electric generation facility operating for twelve
months in 2007 as compared to nine months in 2006;

§

$18
million higher favorable resolution of prior years' income tax issues in 2007;
and

§

$26
million from the resolution of a regulatory item associated with the disposition
of a power plant in a prior year.

These increases in 2007 were
offset by the favorable resolution of regulatory items recorded in 2006,
including:

§

$13
million resolution of a prior-year cost recovery issue

§

$8
million due to CPUC authorization of retroactive recovery on SONGS revenues
related to a computational error in the 2004 Cost of Service

§

$4
million due to FERC approval to recover prior-year Independent System Operator
(ISO) charges in 2006

SoCalGas

Our SoCalGas business unit
recorded net income of:

§

$244
million in 2008 ($245 million before preferred dividends)

§

$230
million in 2007 ($231 million before preferred dividends)

§

$223
million in 2006 ($224 million before preferred dividends)

In 2008, the increase of $14
million (6%) was due to

§

$18
million due to a lower effective tax rate, as we discuss in "Income Taxes"
below;

§

$7
million favorable resolution of a regulatory matter in 2008;

§

$7
million from increased CPUC authorized margin in excess of higher operation and
maintenance expenses; and

§

$3
million higher regulatory awards ($9 million in 2008 compared to $6 million in
2007), offset by

§

$8
million increase in litigation expenses;



11







§

$7
million lower noncore natural gas storage revenue in 2008 due to the new
earnings sharing mechanism in effect for 2008 associated with the 2008 Biennial
Cost Allocation Proceeding (BCAP) decision ($9 million in 2008 compared to $16
million in 2007); and

§

$5
million higher bad debt expense in 2008.

The increase of $7 million (3%)
in 2007 was due primarily to

§

$9
million higher authorized base margins, net of higher operation and maintenance
expenses; and

§

$10
million lower income tax expense due to a lower effective tax rate in 2007,
offset by

§

$7
million from the favorable resolution of a natural gas royalty matter in
2006.



|                                                  
|--------------------------------------------------
|NET
INCOME (LOSS) BY BUSINESS UNIT  SEMPRA GLOBAL
|(Dollars
in millions)                             



[sempra_annualreport2008012.gif]





*   2006
included $204 million gain from the sale of Topaz power plants.

**  2006
included $221 million of impairment losses from Argentine investments.



Sempra
Commodities

Our Sempra Commodities business
unit recorded net income of:

§

$345
million in 2008

§

$499
million in 2007

§

$504
million in 2006

Results for the second through
the fourth quarters of 2008 primarily represent our equity earnings from RBS
Sempra Commodities, formed on April 1, 2008, as well as other items discussed
below. Results for 2006, 2007 and the first quarter of 2008 represent 100% of
the commodities-marketing businesses' earnings until the formation of the joint
venture.

The decrease in 2008 of $154
million (31%) was due to our decreased ownership interest in the business,
offset by a $67 million gain on the transaction with RBS.

The decrease in 2007 of $5
million (1%) was due to

§

$19
million net income effect of an increase in reserves related to energy crisis
litigation;

§

$25
million reduction due to the phase-out of synthetic fuels tax credits; and

§

decreased
earnings in the natural gas market, largely offset by

§

increased
earnings, primarily for metals and power;



12







§

$32
million recorded in 2007 in the power product line margin representing the value
of preferred stock received for services rendered; and

§

$18
million gain (after related costs) on the sale of equity method investments in
2007.

A portion of the decrease in
earnings in 2007 was also the result of

§

earnings
variability associated with certain commodity inventories; and

§

storage
and transportation capacity contracts that were not being marked to market
although the corresponding hedges qualified as derivative instruments and were
marked to market.

Sempra
Generation

Sempra Generation recorded net
income of:

§

$222
million in 2008

§

$162
million in 2007

§

$375
million in 2006

The increase in 2008 of $60
million (37%) was due to

§

$37
million higher earnings primarily due to plant scheduled major maintenance and
associated down time in 2007;

§

$16
million lower income tax expense related to Mexican currency translation and
inflation adjustments; and

§

$9
million lower income tax expense due to tax credits on Sempra Generation's solar
generating facility.

The decrease of $213 million
(57%) in 2007 was due to the following in 2006:

§

$204
million gain from the sale of the Topaz power plants;

§

$6
million of Topaz operational earnings prior to the sale; and

§

$16
million of earnings related to construction of the Palomar generating facility
for SDG&E, offset by

§

$18
million of litigation expense primarily related to the April 2006 DWR
arbitration decision (discussed in Note 16 of the Notes to Consolidated
Financial Statements).

Sempra
Pipelines & Storage

Our Sempra Pipelines &
Storage business unit recorded net income (loss) of:

§

$106
million in 2008

§

$64
million in 2007

§

$(165)
million in 2006

The increase of $42 million (66%)
in 2008 was due to:

§

$30
million from Rockies Express-West, which began operations in the first quarter
of 2008

§

$18
million of higher earnings from the commencement of LNG-related pipeline
operations in Mexico in the second quarter of 2008

In 2006, Sempra Pipelines &
Storage recorded a $221 million impairment loss associated with the decision to
sell its Argentine investments and $24 million of income tax expense related to
repatriation of foreign earnings.



13







Sempra
LNG

Sempra LNG recorded net losses
of:

§

$(46)
million in 2008

§

$(46)
million in 2007

§

$(42)
million in 2006

Although net loss remained
unchanged in 2008, the current year included the following items compared to
2007:

§

$15
million lower mark-to-market losses related to a natural gas marketing agreement
with RBS Sempra Commodities; and

§

a
$10 million after-tax cash payment received for the early termination of a
capacity agreement with Merrill Lynch Commodities Inc. for the Cameron LNG
receipt terminal; offset by

§

$22
million higher general and administrative and operating expenses, including $13
million of costs for LNG supplies for the Energía Costa Azul LNG receipt
terminal.

The increased loss in 2007 was
due to a $2 million increase in mark-to-market loss related to a natural gas
marketing agreement with Sempra Commodities and higher development and general
and administrative expenses.

Parent
and Other

Net losses for Parent and Other
were

§

$(97)
million in 2008

§

$(67)
million in 2007

§

$(41)
million in 2006

The increase in net loss in 2008
of $30 million (45%) was primarily due to

§

$23
million of investment losses in 2008
compared to $6 million of gains in 2007 on dedicated assets in support of our
executive retirement and deferred compensation plans due to the market declines
in 2008. This amount is net of the reduction in deferred compensation liability
associated with the investments;

§

$14
million gain from interest-rate swaps in 2007; and

§

$8
million Mexican peso exchange losses, net of lower Mexican currency translation
and inflation tax adjustments;offset by

§

$13
million lower income tax expense primarily from the higher favorable resolution
of prior years' income tax issues in 2008; and

§

$10
million lower interest expense related to litigation reserves in 2008.

The increase in net loss in 2007
of $26 million (63%) was primarily due to

§

$38
million favorable resolution of a state income tax matter in 2006;

§

$12
million for contributions to fund the newly-formed Sempra Energy Foundation (a
private charitable foundation) in 2007; and

§

$8
million in interest income related to an insurance claim in 2006, offset
by

§

$26
million lower net interest expense in 2007 primarily due to the 2006 Sempra
Generation asset sales; and

§

$14
million net gain from interest-rate swaps.



14







CHANGES
IN REVENUES, COSTS AND EARNINGS

This section contains a
discussion of the differences between periods in the specific line items of the
Statements of Consolidated Income for Sempra Energy, SDG&E, PE and
SoCalGas.

Sempra
Utilities Revenues

Sempra Utilities revenues are
comprised of natural gas revenues at SDG&E and SoCalGas, and electric
revenues at SDG&E. Intercompany revenues included in the separate revenues
of each utility are eliminated in the Sempra Energy Statements of Consolidated
Income.

The current regulatory framework
permits the cost of natural gas purchased for core customers (primarily
residential and small commercial and industrial customers) to be passed on to
customers substantially as incurred. However, SoCalGas' Gas Cost Incentive
Mechanism (GCIM) provides SoCalGas the opportunity to share in the savings
and/or costs from buying natural gas for its core customers at prices below or
above market-based monthly benchmarks. The mechanism permits full recovery of
costs incurred when average purchase costs are within a price range around a
monthly benchmark price. Any higher costs or savings realized outside this range
are shared between the core customers and SoCalGas. Through March 31, 2008, when
SoCalGas assumed the purchasing for SDG&E's core customer natural gas
requirements on a combined portfolio basis, SDG&E had a similar incentive
mechanism that allowed cost sharing. We provide further discussion in Notes 1
and 15 of the Notes to Consolidated Financial Statements.



15







Sempra
Utilities: Natural Gas Revenues and Cost of Natural Gas

The tables below show natural gas
revenues for Sempra Energy, SDG&E and SoCalGas. The Sempra Energy amounts
reflect SDG&E and SoCalGas revenues, net of intercompany transactions.
Because the cost of natural gas is recovered in rates, changes in the cost are
reflected in the changes in revenues.



|                                                         |                                                                                                              |         |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  |   |       |  |  | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------- | ------- | ------- | ------- | ----------------- | ------------ | ----- | - | ----- | -------------- | --- | --- | - | --- | ----- | --- |  | - | ----- |  |  | 
|SEMPRA
ENERGY CONSOLIDATED:                             
|NATURAL
GAS SALES, TRANSPORTATION AND EXCHANGE 2006-2008
|(Volumes
in billion cubic feet, dollars in millions)    
|                                                         |                                                                                                              |         |         |         |         |                   |              |       |   |       | Transportation |     |     |   |     |      
|                                                         |                                                                                                              |         |         |         |         | Natural Gas
Sales | and
Exchange | Total
|Customer
Class                                           | Volumes                                                                                                      | Revenue | Volumes | Revenue | Volumes | Revenue          
|2008:                                                    |                                                                                                              |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                         | Residential                                                                                                  |         | 271     |         | $       | 3,385             |              | 1     |   | $     | 4              |     | 272 |   | $   | 3,389
|                                                         | Commercial
and industrial                                                                                    |         | 120     |         |         | 1,318             |              | 282   |   |       | 198            |     | 402 |   |     | 1,516
|                                                         | Electric
generation plants                                                                                   |         | --      |         |         | --                |              | 300   |   |       | 106            |     | 300 |   |     | 106  
|                                                         | Wholesale                                                                                                    |         | --      |         |         | --                |              | 18    |   |       | 6              |     | 18  |   |     | 6    
|                                                         |                                                                                                              |         |         |         |         |                   | 391          |       | $ | 4,703 |                | 601 |     | $ | 314 |       | 992 |  |   | 5,017
|                                                         | Other
revenues                                                                                               |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 146  
|                                                         | Balancing
accounts*                                                                                          |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 256  
|                                                         |                                                                                                              | Total   |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 5,419
|2007:                                                    |                                                                                                              |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                         | Residential                                                                                                  |         | 277     |         | $       | 3,065             |              | 1     |   | $     | 5              |     | 278 |   | $   | 3,070
|                                                         | Commercial
and industrial                                                                                    |         | 127     |         |         | 1,159             |              | 282   |   |       | 215            |     | 409 |   |     | 1,374
|                                                         | Electric
generation plants                                                                                   |         | --      |         |         | 1                 |              | 264   |   |       | 112            |     | 264 |   |     | 113  
|                                                         | Wholesale                                                                                                    |         | --      |         |         | --                |              | 19    |   |       | 8              |     | 19  |   |     | 8    
|                                                         |                                                                                                              |         |         |         |         |                   | 404          |       | $ | 4,225 |                | 566 |     | $ | 340 |       | 970 |  |   | 4,565
|                                                         | Other
revenues                                                                                               |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 90   
|                                                         | Balancing
accounts*                                                                                          |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 214  
|                                                         |                                                                                                              | Total   |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 4,869
|2006:                                                    |                                                                                                              |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                         | Residential                                                                                                  |         | 278     |         | $       | 3,124             |              | 1     |   | $     | 5              |     | 279 |   | $   | 3,129
|                                                         | Commercial
and industrial                                                                                    |         | 124     |         |         | 1,157             |              | 276   |   |       | 223            |     | 400 |   |     | 1,380
|                                                         | Electric
generation plants                                                                                   |         | --      |         |         | 2                 |              | 248   |   |       | 118            |     | 248 |   |     | 120  
|                                                         | Wholesale                                                                                                    |         | --      |         |         | --                |              | 21    |   |       | 8              |     | 21  |   |     | 8    
|                                                         |                                                                                                              |         |         |         |         |                   | 402          |       | $ | 4,283 |                | 546 |     | $ | 354 |       | 948 |  |   | 4,637
|                                                         | Other
revenues                                                                                               |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 75   
|                                                         | Balancing
accounts*                                                                                          |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 51   
|                                                         |                                                                                                              | Total   |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 4,763
|*                                                        | We
discuss balancing accounts and their effects in Note 1 of the Notes to
Consolidated Financial Statements.



In 2008, our natural gas revenues
increased by $550 million (11%) to $5.4 billion, and the cost of natural gas
increased by $481 million (17%) to $3.2 billion. The increase in revenues was
primarily due to

§

$481
million increase in cost of natural gas resulting from higher natural gas
prices;

§

$27
million higher authorized base margin;

§

$24
million due to revenue sharing in 2007 at SoCalGas. Effective with the adoption
of the 2008 General Rate Case (GRC), the Sempra Utilities are no longer subject
to the performance-based regulation that required this revenue sharing;

§

$12
million favorable resolution of a regulatory matter in 2008, offset
by

§

$11
million lower noncore natural gas storage revenue in 2008.

In 2007, our natural gas revenues
increased by $106 million (2%) to $4.9 billion. The cost of natural gas remained
unchanged at $2.8 billion. The increase in revenues in 2007 was primarily due to
a $71 million increase in authorized base margin. In addition, our revenue
increased by $34 million from recoverable expenses that are fully offset in
operation and maintenance expenses.



16







Our
weighted average cost (including transportation charges) per million British
thermal units (MMBtu) of natural gas was $7.78 in 2008, $6.49 in 2007 and $6.54
in 2006.



|                                                                |                                                                                                |         |         |         |         |                   |              |       |   |     |                |    |    |   |    |     |     |  |   |    
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------- | ------- | ------- | ------- | ----------------- | ------------ | ----- | - | --- | -------------- | -- | -- | - | -- | --- | --- |  | - | ---
|SDG&E:
NATURAL GAS SALES, TRANSPORTATION AND EXCHANGE 2006-2008
|(Volumes
in billion cubic feet, dollars in millions)           
|                                                                |                                                                                                |         |         |         |         |                   |              |       |   |     | Transportation |    |    |   |    |    
|                                                                |                                                                                                |         |         |         |         | Natural Gas
Sales | and
Exchange | Total
|Customer
Class                                                  | Volumes                                                                                        | Revenue | Volumes | Revenue | Volumes | Revenue          
|2008:                                                           |                                                                                                |         |         |         |         |                   |              |       |   |     |                |    |    |   |   
|                                                                | Residential                                                                                    |         | 31      |         | $       | 428               |              | --    |   | $   | --             |    | 31 |   | $  | 428
|                                                                | Commercial
and industrial                                                                      |         | 16      |         |         | 174               |              | 7     |   |     | 9              |    | 23 |   |    | 183
|                                                                | Electric
generation plants                                                                     |         | --      |         |         | --                |              | 68    |   |     | 26             |    | 68 |   |    | 26 
|                                                                |                                                                                                |         |         |         |         |                   | 47           |       | $ | 602 |                | 75 |    | $ | 35 |     | 122 |  |   | 637
|                                                                | Other
revenues                                                                                 |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 26 
|                                                                | Balancing
accounts                                                                             |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 26 
|                                                                |                                                                                                | Total*  |         |         |         |                   |              |       |   |     |                |    |    |   |    |     |     |  | $ | 689
|2007:                                                           |                                                                                                |         |         |         |         |                   |              |       |   |     |                |    |    |   |   
|                                                                | Residential                                                                                    |         | 32      |         | $       | 405               |              | --    |   | $   | --             |    | 32 |   | $  | 405
|                                                                | Commercial
and industrial                                                                      |         | 16      |         |         | 160               |              | 5     |   |     | 7              |    | 21 |   |    | 167
|                                                                | Electric
generation plants                                                                     |         | --      |         |         | 1                 |              | 60    |   |     | 40             |    | 60 |   |    | 41 
|                                                                |                                                                                                |         |         |         |         |                   | 48           |       | $ | 566 |                | 65 |    | $ | 47 |     | 113 |  |   | 613
|                                                                | Other
revenues                                                                                 |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 13 
|                                                                | Balancing
accounts                                                                             |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 32 
|                                                                |                                                                                                | Total*  |         |         |         |                   |              |       |   |     |                |    |    |   |    |     |     |  | $ | 658
|2006:                                                           |                                                                                                |         |         |         |         |                   |              |       |   |     |                |    |    |   |   
|                                                                | Residential                                                                                    |         | 31      |         | $       | 397               |              | --    |   | $   | --             |    | 31 |   | $  | 397
|                                                                | Commercial
and industrial                                                                      |         | 17      |         |         | 169               |              | 5     |   |     | 7              |    | 22 |   |    | 176
|                                                                | Electric
generation plants                                                                     |         | --      |         |         | 2                 |              | 65    |   |     | 44             |    | 65 |   |    | 46 
|                                                                |                                                                                                |         |         |         |         |                   | 48           |       | $ | 568 |                | 70 |    | $ | 51 |     | 118 |  |   | 619
|                                                                | Other
revenues                                                                                 |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 15 
|                                                                | Balancing
accounts                                                                             |         |         |         |         |                   |              |       |   |     |                |    |    |   |    | 4  
|                                                                |                                                                                                | Total*  |         |         |         |                   |              |       |   |     |                |    |    |   |    |     |     |  | $ | 638
|*                                                               | Includes
sales to affiliates of $2 million in 2008, $3 million in 2007 and $4
million in 2006.



In 2008, SDG&E's natural gas
revenues increased by $31 million (5%) to $689 million, and the cost of natural
gas increased by $23 million (6%) to $415 million. The increases were primarily
due to higher natural gas prices. In 2007, SDG&E's natural gas revenues
increased by $20 million (3%) to $658 million, and the cost of natural gas
increased $12 million (3%) to $392 million.

SDG&E's weighted average cost
(including transportation charges) per MMBtu of natural gas was $7.78 in 2008,
$7.17 in 2007 and $6.94 in 2006.



17









|                                                                   |                                                                                                   |         |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  |   |       |  |  |  | 
|------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ------- | ------- | ------- | ------- | ----------------- | ------------ | ----- | - | ----- | -------------- | --- | --- | - | --- | ----- | --- |  | - | ----- |  |  |  | 
|SOCALGAS:
NATURAL GAS SALES, TRANSPORTATION AND EXCHANGE 2006-2008
|(Volumes
in billion cubic feet, dollars in millions)              
|                                                                   |                                                                                                   |         |         |         |         |                   |              |       |   |       | Transportation |     |     |   |     |      
|                                                                   |                                                                                                   |         |         |         |         | Natural Gas
Sales | and
Exchange | Total
|Customer
Class                                                     | Volumes                                                                                           | Revenue | Volumes | Revenue | Volumes | Revenue          
|2008:                                                              |                                                                                                   |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                                   | Residential                                                                                       |         | 240     |         | $       | 2,957             |              | 1     |   | $     | 4              |     | 241 |   | $   | 2,961
|                                                                   | Commercial
and industrial                                                                         |         | 104     |         |         | 1,144             |              | 275   |   |       | 189            |     | 379 |   |     | 1,333
|                                                                   | Electric
generation plants                                                                        |         | --      |         |         | --                |              | 232   |   |       | 80             |     | 232 |   |     | 80   
|                                                                   | Wholesale                                                                                         |         | --      |         |         | --                |              | 146   |   |       | 22             |     | 146 |   |     | 22   
|                                                                   |                                                                                                   |         |         |         |         |                   | 344          |       | $ | 4,101 |                | 654 |     | $ | 295 |       | 998 |  |   | 4,396
|                                                                   | Other
revenues                                                                                    |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 142  
|                                                                   | Balancing
accounts                                                                                |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 230  
|                                                                   |                                                                                                   | Total*  |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 4,768
|2007:                                                              |                                                                                                   |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                                   | Residential                                                                                       |         | 245     |         | $       | 2,660             |              | 1     |   | $     | 5              |     | 246 |   | $   | 2,665
|                                                                   | Commercial
and industrial                                                                         |         | 111     |         |         | 999               |              | 277   |   |       | 208            |     | 388 |   |     | 1,207
|                                                                   | Electric
generation plants                                                                        |         | --      |         |         | --                |              | 204   |   |       | 72             |     | 204 |   |     | 72   
|                                                                   | Wholesale                                                                                         |         | --      |         |         | --                |              | 142   |   |       | 59             |     | 142 |   |     | 59   
|                                                                   |                                                                                                   |         |         |         |         |                   | 356          |       | $ | 3,659 |                | 624 |     | $ | 344 |       | 980 |  |   | 4,003
|                                                                   | Other
revenues                                                                                    |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 97   
|                                                                   | Balancing
accounts                                                                                |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 182  
|                                                                   |                                                                                                   | Total*  |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 4,282
|2006:                                                              |                                                                                                   |         |         |         |         |                   |              |       |   |       |                |     |     |   |    
|                                                                   | Residential                                                                                       |         | 247     |         | $       | 2,727             |              | 1     |   | $     | 5              |     | 248 |   | $   | 2,732
|                                                                   | Commercial
and industrial                                                                         |         | 107     |         |         | 988               |              | 272   |   |       | 217            |     | 379 |   |     | 1,205
|                                                                   | Electric
generation plants                                                                        |         | --      |         |         | --                |              | 183   |   |       | 74             |     | 183 |   |     | 74   
|                                                                   | Wholesale                                                                                         |         | --      |         |         | --                |              | 136   |   |       | 44             |     | 136 |   |     | 44   
|                                                                   |                                                                                                   |         |         |         |         |                   | 354          |       | $ | 3,715 |                | 592 |     | $ | 340 |       | 946 |  |   | 4,055
|                                                                   | Other
revenues                                                                                    |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 79   
|                                                                   | Balancing
accounts                                                                                |         |         |         |         |                   |              |       |   |       |                |     |     |   |     | 47   
|                                                                   |                                                                                                   | Total*  |         |         |         |                   |              |       |   |       |                |     |     |   |     |       |     |  | $ | 4,181
|*                                                                  | Includes
sales to affiliates of $36 million in 2008, $68 million in 2007 and $52
million in 2006.



In 2008, SoCalGas' natural gas
revenues increased by $486 million (11%) to $4.8 billion, and the cost of
natural gas increased by $421 million (17%) to $2.8 billion. The increases in
2008 were primarily due to

§

$421
million increase in cost of natural gas resulting from higher natural gas
prices;

§

$24
million higher authorized base margin;

§

$24
million due to revenue sharing in 2007. Effective with the adoption of the 2008
GRC, SoCalGas is no longer subject to the performance-based regulation that
required this revenue sharing;

§

$12
million favorable resolution of a regulatory matter in 2008; and

§

$6
million higher regulatory awards, offset by

§

$11
million lower non-core natural gas storage revenue in 2008.

In 2007, natural gas revenues
increased by $101 million (2%) to $4.3 billion. The cost of natural gas remained
constant at $2.4 billion. The increase in revenues was primarily due to a $63
million increase in authorized base margin. In addition, revenues increased by
$41 million for recoverable expenses that are fully offset in operation and
maintenance expenses.

SoCalGas' weighted average cost
(including transportation charges) per MMBtu of natural gas was $7.78in
2008, $6.39in 2007 and $6.49 in 2006.



18







Sempra
Utilities: Electric Revenues and Cost of Electric Fuel and Purchased
Power

The table below shows electric
revenues for Sempra Energy and SDG&E. Sempra Energy amounts are net of
intercompany transactions. Because the cost of electricity is substantially
recovered in rates, changes in the cost are reflected in the changes in
revenues.



|                                                             |                                                                                                  |         |         |         |         |         |       |   |       |      |        |       |   |       |     |        |  |   |       |  |  | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------ | ------- | ------- | ------- | ------- | ------- | ----- | - | ----- | ---- | ------ | ----- | - | ----- | --- | ------ |  | - | ----- |  |  | 
|ELECTRIC
DISTRIBUTION AND TRANSMISSION 2006-2008            
|(Volumes
in millions of kilowatt-hours, dollars in millions)
|                                                             |                                                                                                  |         |         |         | 2008    | 2007    | 2006 
|Customer
Class                                               | Volumes                                                                                          | Revenue | Volumes | Revenue | Volumes | Revenue
|Sempra
Energy Consolidated:                                  |                                                                                                  |         |         |         |         |         |       |   |       |      |        |       |   |       |    
|Residential                                                  |                                                                                                  | 7,698   |         | $       | 976     |         | 7,520 |   | $     | 980  |        | 7,501 |   | $     | 910
|Commercial                                                   |                                                                                                  | 7,254   |         |         | 843     |         | 7,154 |   |       | 852  |        | 6,983 |   |       | 723
|Industrial                                                   |                                                                                                  | 2,340   |         |         | 214     |         | 2,264 |   |       | 228  |        | 2,250 |   |       | 180
|Direct
access                                                |                                                                                                  | 3,235   |         |         | 101     |         | 3,220 |   |       | 118  |        | 3,390 |   |       | 133
|Street
and highway lighting                                  |                                                                                                  | 106     |         |         | 12      |         | 107   |   |       | 12   |        | 102   |   |       | 10 
|                                                             |                                                                                                  |         |         |         |         | 20,633  |       |   | 2,146 |      | 20,265 |       |   | 2,190 |     | 20,226 |  |   | 1,956
|Other
revenues                                               |                                                                                                  |         |         |         | 145     |         |       |   |       | 161  |        |       |   |       | 132
|Balancing
accounts                                           |                                                                                                  |         |         |         | 262     |         |       |   |       | (167 | )      |       |   |       | 48 
|                                                             | Total                                                                                            |         |         |         |         |         |       | $ | 2,553 |      |        |       | $ | 2,184 |     |        |  | $ | 2,136
|SDG&E:                                                       |                                                                                                  |         |         |         |         |         |       |   |       |      |        |       |   |       |    
|Residential                                                  |                                                                                                  | 7,698   |         | $       | 976     |         | 7,520 |   | $     | 980  |        | 7,501 |   | $     | 910
|Commercial                                                   |                                                                                                  | 7,254   |         |         | 843     |         | 7,154 |   |       | 852  |        | 6,983 |   |       | 723
|Industrial                                                   |                                                                                                  | 2,351   |         |         | 215     |         | 2,275 |   |       | 229  |        | 2,261 |   |       | 181
|Direct
access                                                |                                                                                                  | 3,235   |         |         | 101     |         | 3,220 |   |       | 118  |        | 3,390 |   |       | 133
|Street
and highway lighting                                  |                                                                                                  | 106     |         |         | 12      |         | 107   |   |       | 12   |        | 102   |   |       | 10 
|                                                             |                                                                                                  |         |         |         |         | 20,644  |       |   | 2,147 |      | 20,276 |       |   | 2,191 |     | 20,237 |  |   | 1,957
|Other
revenues                                               |                                                                                                  |         |         |         | 153     |         |       |   |       | 170  |        |       |   |       | 142
|Balancing
accounts                                           |                                                                                                  |         |         |         | 262     |         |       |   |       | (167 | )      |       |   |       | 48 
|                                                             | Total*                                                                                           |         |         |         |         |         |       | $ | 2,562 |      |        |       | $ | 2,194 |     |        |  | $ | 2,147
|*                                                            | Includes
sales to affiliates of $9 million in 2008, $10 million in 2007 and $11
million in 2006.



In 2008, electric revenues
increased by $369 million (17%) at Sempra Energy and $368 million (17%) at
SDG&E to $2.6 billion, and the cost of electric fuel and purchased power
increased by $201 million (29%) to $900 million. The increased revenues in 2008
were primarily due to

§

$201
million increase in cost of electric fuel and purchased power resulting from an
increase in power procurement costs both from higher prices and from
volumes;

§

$98
million higher authorized base margin on electric distribution;

§

$55
million higher recoverable expenses that are fully offset in operation and
maintenance expenses;

§

$17
million higher authorized transmission and electric generation margins; and

§

$12
million higher regulatory awards, offset by

§

$22
million from the favorable resolution of a regulatory matter in 2007.

In 2007, electric revenues
increased by $48 million (2%) at Sempra Energy and $47 million (2%) at SDG&E
to $2.2 billion, and the cost of electric fuel and purchased power decreased by
$22 million (3%) to $699 million in 2007. The increased revenues in 2007
included

§

$33
million from higher authorized transmission and electric generation margins;

§

$22
million from the favorable resolution of a regulatory matter;

§

$24
million increase in authorized base margin on electric distribution; and

§

$12
million of higher revenues for recoverable expenses, which are fully offset in
operation and maintenance expenses, offset by



19







§

$20
million from the favorable resolution of a prior-year cost recovery issue in
2006; and

§

$22
million lower recovery of electric fuel and purchased power costs in 2007.

We do not include in the
Statements of Consolidated Income the commodity costs (and the revenues to
recover those costs) associated with long-term contracts that are allocated to
SDG&E by the California DWR. However, we do include the associated volumes
and distribution revenues in the table above. We provide further discussion of
these contracts in Note 1 of the Notes to Consolidated Financial Statements.

Sempra
Global and Parent Revenues and Cost of Sales

The table below shows Sempra
Global and Parent's Revenues and Cost of Sales.



|                                                    |                                                                                            |                                                              |       |       |      |     |   |   |       |       |     |     |   |   |       |       |     |     |   | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | ----- | ----- | ---- | --- | - | - | ----- | ----- | --- | --- | - | - | ----- | ----- | --- | --- | - | 
|SEMPRA
GLOBAL AND PARENT REVENUES AND COST OF SALES
|(Dollars
in millions)                              
|                                                    | Years ended December 31,                                                                  
|                                                    | 2008                                                                                       |                                                              | 2007  |       | 2006
|REVENUES                                            |                                                                                            |                                                              |       |       |      |     |   |   |       |       |     |     |   |   |       |       |    
|                                                    | Sempra
Commodities                                                                         | $                                                            | 500   |       | 18   | %   |   | $ | 2,674 |       | 61  | %   |   | $ | 3,256 |       | 67  | %  
|                                                    | Sempra
Generation                                                                          |                                                              | 1,784 |       | 64   |     |   |   | 1,476 |       | 34  |     |   |   | 1,454 |       | 30  |    
|                                                    | Sempra
Pipelines & Storage                                                                 |                                                              | 457   |       | 16   |     |   |   | 314   |       | 7   |     |   |   | 295   |       | 6   |    
|                                                    | Sempra
LNG                                                                                 |                                                              | 74    |       | 3    |     |   |   | (22   | )     | (1  | )   |   |   | (21   | )     | (1  | )  
|                                                    | Parent
and other*                                                                          |                                                              | (29   | )     | (1   | )   |   |   | (57   | )     | (1  | )   |   |   | (122  | )     | (2  | )  
|                                                    |                                                                                            | Total
revenues                                               | $     | 2,786 |      | 100 | % |   | $     | 4,385 |     | 100 | % |   | $     | 4,862 |     | 100 | %
|COST
OF SALES**                                     |                                                                                            |                                                              |       |       |      |     |   |   |       |       |     |     |   |   |       |       |    
|                                                    | Sempra
Generation                                                                          | $                                                            | 1,304 |       | 78   | %   |   | $ | 1,058 |       | 81  | %   |   | $ | 996   |       | 82  | %  
|                                                    | Sempra
Pipelines & Storage                                                                 |                                                              | 348   |       | 21   |     |   |   | 255   |       | 20  |     |   |   | 233   |       | 19  |    
|                                                    | Sempra
LNG                                                                                 |                                                              | 47    |       | 3    |     |   |   | --    |       | --  |     |   |   | --    |       | --  |    
|                                                    | Parent
and other*                                                                          |                                                              | (28   | )     | (2   | )   |   |   | (11   | )     | (1  | )   |   |   | (8    | )     | (1  | )  
|                                                    |                                                                                            | Total
cost of natural gas, electric fuel and purchased power | $     | 1,671 |      | 100 | % |   | $     | 1,302 |     | 100 | % |   | $     | 1,221 |     | 100 | %
|                                                    |                                                                                            |                                                              |       |       |      |     |   |   |       |       |     |     |   |   |       |       |     |    
|                                                    | Sempra
Commodities                                                                         | $                                                            | 178   |       | 98   | %   |   | $ | 988   |       | 100 | %   |   | $ | 1,468 |       | 100 | %  
|                                                    | Sempra
LNG                                                                                 |                                                              | 5     |       | 3    |     |   |   | --    |       | --  |     |   |   | --    |       | --  |    
|                                                    | Sempra
Generation                                                                          |                                                              | 1     |       | --   |     |   |   | 1     |       | --  |     |   |   | 23    |       | 2   |    
|                                                    | Parent
and other*                                                                          |                                                              | (2    | )     | (1   | )   |   |   | (1    | )     | --  |     |   |   | (23   | )     | (2  | )  
|                                                    |                                                                                            | Total
other cost of sales                                    | $     | 182   |      | 100 | % |   | $     | 988   |     | 100 | % |   | $     | 1,468 |     | 100 | %
|*                                                   | Includes
eliminations of intercompany activity.                                           
|**                                                  | Excludes
depreciation, which is shown separately on the Statements of Consolidated
Income.



In 2008, our Sempra Global and
Parent revenues decreased by $1.6 billion (36%) to $2.8 billion. The decrease
included

§

$2.2
billion lower revenues from Sempra Commodities. Revenues in 2008 and 2007
included $500 million and $2.7 billion, respectively, for Sempra Commodities.
These revenues were primarily for periods prior to the formation of RBS Sempra
Commodities, offset by

§

$308
million higher revenues at Sempra Generation, primarily due to increased power
sales and favorable natural gas prices and merchant sales activity;

§

$143
million higher revenues at Sempra Pipelines & Storage, primarily from
Mexican pipeline operations and the consolidation of EnergySouth starting in
October 2008; and

§

$96
million higher revenues at Sempra LNG, including $74 million from the
commencement of commercial operations at its Energía Costa Azul LNG receipt
terminal in May 2008 and $22 million lower mark-to-market losses related to a
natural gas marketing agreement with RBS Sempra Commodities.



20







Our
cost of natural gas, electric fuel and purchased power increased by $369 million
(28%) to $1.7 billion in 2008. The increase was primarily associated with the
higher revenues at Sempra Generation, Sempra Pipelines & Storage and Sempra
LNG.

Our other cost of sales decreased
$806 million (82%) to $182 million in 2008, primarily due to our reduced
interest in our commodities-marketing businesses. Other cost of sales included
$178 million in 2008 and $988 million in 2007 for Sempra Commodities, primarily
for periods prior to the formation of RBS Sempra Commodities.

In 2007, our Sempra Global and
Parent revenues decreased by $477 million (10%) to $4.4 billion. The cost of
natural gas, electric fuel and purchased power increased $81 million (7%) to
$1.3 billion, while other cost of sales decreased $480 million (33%) to $988
million. The decreases in our revenues and other cost of sales were primarily
due to trading activity at Sempra Commodities, resulting primarily from less
volatility in the natural gas markets. These decreases were partially offset by
higher Sempra Generation revenues and related costs. The increases at Sempra
Generation were primarily due to higher merchant customer revenues as a result
of increased sales volumes and higher prices.

Operation
and Maintenance

In the table below, weprovide a breakdown of our business units' operation and maintenance
expenses.



|                                    |                                                                    |       |       |     |    |   |   |       |       |     |    |   |   |       |     |     |    |   | 
|----------------------------------- | ------------------------------------------------------------------ | ----- | ----- | --- | -- | - | - | ----- | ----- | --- | -- | - | - | ----- | --- | --- | -- | - | 
|OPERATION
AND MAINTENANCE 2006-2008
|(Dollars
in millions)               |                                                                   
|                                    | Years ended December 31,                                          
|                                    | 2008                                                               | 2007  | 2006 
|Sempra
Utilities*:                  |                                                                    |       |       |     |    |   |   |       |       |     |    |   |   |       |     |     |   
|                                    | SDG&E                                                              | $     | 913   |     | 36 | % |   | $     | 807   |     | 27 | % |   | $     | 777 |     | 27 | %
|                                    | SoCalGas                                                           |       | 1,078 |     | 43 |   |   |       | 1,021 |     | 34 |   |   |       | 949 |     | 33 |  
|                                    |                                                                    |       |       |     |    |   |   |       |       |     |    |   |   |       |     |     |    |  
|Sempra
Global:                      |                                                                    |       |       |     |    |   |   |       |       |     |    |   |   |       |     |     |   
|                                    | Sempra
Commodities                                                 |       | 248   |     | 10 |   |   |       | 918   |     | 30 |   |   |       | 879 |     | 31 |  
|                                    | Sempra
Generation                                                  |       | 97    |     | 4  |   |   |       | 103   |     | 3  |   |   |       | 134 |     | 5  |  
|                                    | Sempra
Pipelines & Storage                                         |       | 62    |     | 2  |   |   |       | 42    |     | 1  |   |   |       | 40  |     | 1  |  
|                                    | Sempra
LNG                                                         |       | 77    |     | 3  |   |   |       | 44    |     | 2  |   |   |       | 39  |     | 1  |  
|                                    |                                                                    |       |       |     |    |   |   |       |       |     |    |   |   |       |     |     |    |  
|Parent
and other**                  |                                                                    | 61    |       | 2   |    |   |   | 97    |       | 3   |    |   |   | 61    |     | 2   |   
|Total
operation and maintenance     | $                                                                  | 2,536 |       | 100 | %  |   | $ | 3,032 |       | 100 | %  |   | $ | 2,879 |     | 100 | % 
|*                                   | Includes
recoverable expenses, which are fully offset in revenues.
|**                                  | Includes
intercompany eliminations recorded in
consolidation.     



Sempra
Energy

In 2008, our operation and
maintenance expenses decreased due to $670 million lower expenses from our
reduced interest in our commodities-marketing businesses, offset by higher
recoverable expenses (offset in revenues), litigation expense and other
operational costs at the Sempra Utilities.

In 2007, our operation and
maintenance expenses increased primarily due to higher recoverable expenses and
other operational costs at the Sempra Utilities.

SDG&E

In 2008, the increase in
SDG&E operation and maintenance expenses was due to:

§

$61
million higher recoverable expenses, including $35 million increase in energy
efficiency program expenses and $16 million increase in electric transmission
expenses

§

$32
million higher litigation expense

§

$13
million higher other operational costs

The increase in 2007 was due to
$23 million higher other operational costs, $7 million higher litigation expense
and $5 million higher recoverable expenses, offset by $5 million lower SONGS
operating costs.



21







SoCalGas

In 2008, the increase in SoCalGas
operation and maintenance expenses was due to:

§

$41
million higher other operational costs, including $13 million higher materials
and supplies costs, $10 million higher labor and employee benefits costs and $8
million higher bad debt expense

§

$13
million higher litigation expense

§

$3
million higher recoverable expenses

In 2007, the increase in expenses
was due to $41 million higher recoverable expenses (offset in revenues), $28
million higher other operational costs and $3 million higher litigation expense.

Gains
on Sale of Assets

Sempra
Energy

Our net pretax gains on the sale
of assets were

§

$114
million in 2008

§

$6
million in 2007

§

$1
million in 2006

The gains in 2008 included $109
million related to the RBS Sempra Commodities transaction, which is discussed in
Note 3 of the Notes to Consolidated Financial Statements.

Equity
Earnings (Losses) Before Income Taxes

Sempra
Energy

In 2008, the earnings from our
investment in the newly-formed RBS Sempra Commodities were $383 million. We
provide additional information about this investment's earnings in Note 4 of the
Notes to Consolidated Financial Statements.

Equity earnings (losses) before
income taxes from our other equity method investments were

§

$37
million in 2008

§

$(9)
million in 2007

§

$338
million in 2006

The increase in 2008 was
primarily due to the start of operations of Rockies Express-West in the first
quarter of 2008. In 2006, these earnings included a $344 million pretax gain on
the sale of power plants by Topaz, a joint venture that was owned 50% by Sempra
Generation. Further details about our equity method investments and the Topaz
sale are provided in Note 4 of the Notes to Consolidated Financial
Statements.

Other
Income (Expense), Net

Sempra
Energy

Other income (expense), net, was

§

$(54)
million in 2008

§

$90
million in 2007

§

$43
million in 2006

We include here the allowance for
equity funds used during construction, regulatory interest and other sundry
amounts. The increase in other expense, net, in 2008 was primarily due to

§

$80
million increase in losses from investments related to our executive retirement
and deferred compensation plans in 2008 ($53 million in losses in 2008 compared
to $27 million in gains in 2007);



22







§

$57
million in Mexican peso exchange losses in 2008 (largely offset by foreign tax
benefits arising from fluctuations in the U.S. dollar/Mexican peso exchange rate
and inflation); and

§

$24
million gain from interest-rate swaps in 2007, offset by

§

$16
million cash payment received for the early termination of a capacity agreement
for the Cameron LNG receipt terminal in 2008.

In 2007, other income, net,
included a $24 million net gain from interest-rate swaps.  We provide
further discussion of the interest-rate swaps related to Sempra LNG's Energía
Costa Azul project in Note 11 of the Notes to Consolidated Financial Statements.

SDG&E

Other income, net, was

§

$25
million in 2008

§

$11
million in 2007

§

$8
million in 2006

The increase in 2008 was
primarily due to a $10 million increase in allowance for equity funds used
during construction. Further details of the components of other income, net,
appear in Note 1 of the Notes to Consolidated Financial Statements.

Interest
Income

The table below shows the
interest income for Sempra Energy, SDG&E, PE and SoCalGas.



|                           |                          |      |    |      |   |      |  |   |     | 
|-------------------------- | ------------------------ | ---- | -- | ---- | - | ---- |  | - | --- | 
|INTEREST
INCOME 2006-2008  |                          |      |    |      |   |      | 
|(Dollars
in millions)      |                          |      |    |      |   |      | 
|                           | Years ended December 31,
|                           |                          | 2008 |    | 2007 |   | 2006 | 
|Sempra
Energy Consolidated |                          | $    | 45 |      | $ | 72   |  | $ | 109 | 
|SDG&E                      |                          |      | 6  |      |   | 8    |  |   | 6   | 
|PE                         |                          |      | 22 |      |   | 51   |  |   | 64  | 
|SoCalGas                   |                          |      | 11 |      |   | 27   |  |   | 29  | 



In 2008, the decreases in
interest income at Sempra Energy, PE and SoCalGas were primarily due to lower
average short-term investment balances and lower interest rates in 2008. At
Sempra Energy, short-term investment balances were higher in 2007 due to asset
sales in 2006.

The decrease in Sempra Energy's
interest income in 2007 was due to these events that occurred in 2006:

§

$12
million from the favorable resolution of a state income tax matter

§

$13
million from the resolution of an insurance claim at PE related to a
quasi-reorganization issue (discussed in Note 1 of the Notes to Consolidated
Financial Statements)

§

$6
million from an income tax audit settlement at SoCalGas



23







Interest
Expense

The table below shows the
interest expense for Sempra Energy, SDG&E, PE and SoCalGas.



|                           |                          |      |     |      |   |      |  |   |     | 
|-------------------------- | ------------------------ | ---- | --- | ---- | - | ---- |  | - | --- | 
|INTEREST
EXPENSE 2006-2008 |                          |      |     |      |   |      | 
|(Dollars
in millions)      |                          |      |     |      |   |      | 
|                           | Years ended December 31,
|                           |                          | 2008 |     | 2007 |   | 2006 | 
|Sempra
Energy Consolidated |                          | $    | 253 |      | $ | 272  |  | $ | 351 | 
|SDG&E                      |                          |      | 96  |      |   | 96   |  |   | 97  | 
|PE                         |                          |      | 65  |      |   | 76   |  |   | 76  | 
|SoCalGas                   |                          |      | 62  |      |   | 70   |  |   | 70  | 



Sempra
Energy

In 2008,the decrease was
due to

§

$18
million reduced interest expense related to energy crisis litigation
reserves;

§

$13
million lower other short-term debt interest;

§

$30
million effect of the repayment of long-term debt in 2007 at Parent and Other;
and

§

lower
interest rates, offset by

§

$35
million higher interest expense primarily from long-term debt issued by
SDG&E in September 2007 and by Parent and Other in 2008; and

§

$5
million net lower capitalized interest, including a reduction in interest
expense at Sempra LNG due to the start of commercial operations at the Energía
Costa Azul LNG receipt terminal in May 2008, offset by higher capitalized
interest for Sempra Pipelines & Storage's projects.

The decrease in Sempra Energy's
interest expense in 2007 was due to:

§

$41
million higher capitalized interest at Sempra LNG and Sempra Pipelines &
Storage

§

$22
million lower interest expense due to repayment and early redemption of
long-term debt primarily at Parent and Other

SDG&E

In 2008, $10 million higher
interest from long-term debt issued in September 2007 was partially offset by $5
million lower short-term debt interest and $3 million higher capitalized
interest.

PE and
SoCalGas

In 2008,the decrease in
interest expense was primarily the result of lower interest rates.



24







Income
Taxes

The table below shows the income
tax expense and effective income tax rates for Sempra Energy, SDG&E, PE and
SoCalGas.



|                                                            |                          |                    |      |                    |                    |  |                    |                    |  |    |   |  |   |     |  |    |  
|----------------------------------------------------------- | ------------------------ | ------------------ | ---- | ------------------ | ------------------ |  | ------------------ | ------------------ |  | -- | - |  | - | --- |  | -- | -
|INCOME
TAX EXPENSE AND EFFECTIVE INCOME TAX RATES 2006-2008
|(Dollars
in millions)                                      
|                                                            | Years ended December 31,
|                                                            | 2008                     |                    | 2007 |                    | 2006              
|                                                            | Income Tax Expense       | Effective Tax Rate |      | Income Tax Expense | Effective Tax Rate |  | Income Tax Expense | Effective Tax Rate
|Sempra
Energy Consolidated                                  | $                        | 438                |      | 29                 | %                  |  | $                  | 524                |  | 34 | % |  | $ | 641 |  | 33 | %
|SDG&E                                                       |                          | 161                |      | 32                 |                    |  |                    | 135                |  | 32 |   |  |   | 152 |  | 39 |  
|PE                                                          |                          | 141                |      | 36                 |                    |  |                    | 165                |  | 41 |   |  |   | 186 |  | 44 |  
|SoCalGas                                                    |                          | 140                |      | 36                 |                    |  |                    | 160                |  | 41 |   |  |   | 173 |  | 44 |  



Sempra
Energy

In 2008,the decrease in
income tax expense was due to lower pretax income and a lower effective tax
rate. The decrease in the effective tax rate was primarily due to:

§

higher
favorable resolutions of prior years' income tax issues in 2008

§

lower
income tax expense related to Mexican currency translation and inflation
adjustments

§

larger
tax deductions primarily at the Sempra Utilities related to the equity portion
of AFUDC and self-developed software costs

In 2007, the decrease in income
tax expense was primarily due to lower pretax income.

SDG&E

In 2008, the increase in income
tax expense was due to higher pretax income, partially offset by an
increase in tax deductions (primarily related to the equity portion of
AFUDC and self-developed software costs) and higher favorable resolution of
prior years' income tax issues ($17 million in 2008 compared to $16 million in
2007). Also, in 2007, the resolution of a regulatory matter resulted in pretax
income of $27 million and income tax of $1 million. This reduced the 2007
effective tax rate by 2%. In 2007, the decrease in income tax expense compared
to 2006 was primarily due to a lower effective tax rate resulting from higher
favorable resolution of prior years' income tax issues and the 2007 regulatory
reserve release. The decrease was partially offset by the effect of higher
pretax income in 2007.

PE and
SoCalGas

In 2008, the decrease in income
tax expense was primarily due to lower pretax income, larger tax deductions
(primarily for self-developed software costs), and higher favorable resolution
of prior years' income tax issues in 2008, offset by a lower federal deduction
for state taxes. In 2007, the decrease in income tax expense compared to 2006
was due to a lower effective tax rate and lower pretax income. The lower
effective tax rate was due to a higher deduction for basis differences in fixed
assets and a higher federal deduction for state taxes.

Equity
Earnings (Losses), Net of Income Tax

Sempra
Energy

Equity earnings (losses) of
unconsolidated subsidiaries, net of income tax, were

§

$63
million in 2008

§

$99
million in 2007

§

$(182)
million in 2006



25







Equity
earnings, net of income tax, were lower in 2008 due to a transaction in 2007. In
February 2007, Sempra Commodities sold its interests in an equity method
investment and a related cost-basis investment for cash and a 12.7-percent
interest in a newly formed entity. The gain on this transaction was $30 million.
The 2006 amount included a $221 million impairment loss associated with Sempra
Pipelines & Storage's Argentine investments.  We provide further
discussion of our equity method investments in Note 4 of the Notes to
Consolidated Financial Statements.

Discontinued
Operations

Sempra
Energy

Income (loss) from discontinued
operations was

§

$(26)
million in 2007

§

$315
million in 2006

The 2006 amount included $351
million in gains from the disposal of Sempra Generation's

§

Twin
Oaks Power plant,

§

Energy
Services and Facilities Management businesses, and

§

Sempra
Energy Production Company (SEPCO), its exploration and production
subsidiary.

These gains were offset by $42
million, primarily from an impairment loss related to Bangor Gas and Frontier
Energy. We provide further discussion of discontinued operations in Note 5 of
the Notes to Consolidated Financial Statements.

Net
Income

We summarizevariations in overall net income in "Overall Results of Operations of
Sempra Energy and Factors Affecting the Results" above. We discuss variations in
net income by business unit above in "Business Unit Results."

TRANSACTIONS
WITH AFFILIATES

We provide information about our
related party transactions in Note 1 of the Notes to Consolidated Financial
Statements.

BOOK
VALUE PER SHARE

Sempra Energy's book value per
share, on the last day of each year, is listed below:

§

$32.75
in 2008

§

$31.93
in 2007

§

$28.67
in 2006

The increases in 2008 and 2007
were primarily the result of comprehensive income exceeding dividends. The
increase in 2008 book value per share was also due to the reduction in common
stock from the share repurchase program in 2008.



26









CAPITAL
RESOURCES AND LIQUIDITY

We expect our cash flows from
operations to fund a substantial portion of our capital expenditures and
dividends.  In addition, we may meet our cash requirements through the
issuance of short-term and long-term debt.

Significant events affecting cash
flows in 2008 were

§

the
formation of RBS Sempra Commodities

§

the
repurchase of $1 billion of Sempra Energy common stock

§

the
acquisition of EnergySouth

We discuss these events in more
detail later in this section.

Our committed lines of credit
provide liquidity and support commercial paper.  They expire in August
2011.  At Sempra Energy, they are syndicated broadly among 20 different
banks and at the Sempra Utilities, among 17 different banks.  No single
bank has greater than a 10.7 percent share in any agreement.

The table below shows the amount
of available funds at year-end 2008:



|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |               |     |   |     |   | 
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ------------- | --- | - | --- | - | 
|AVAILABLE
FUNDS AT YEAR-END 2008       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |               |    
|(Dollars
in millions)                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |               |    
|                                       | Sempra Energy Consolidated                                                                                                                                                                                                                                                                                                                                                                                                                                      | SDG&E | PE / SoCalGas |    
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Unrestricted
cash and cash equivalents | $                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 331   | $             | 19  | $ | 206 |  
|Available
unused credit                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 2,863 |               | 253 | * | 453 | *
|*                                      | Borrowings
on the shared line of credit, discussed in Note 6 of the Notes to
Consolidated Financial Statements, are limited to $600 million for each
utility and $800 million in total. SDG&Es available funds reflect
letters of credit outstanding of $110 million and variable-rate demand
notes outstanding of $237 million supported by the line. SoCalGas
availability reflects the impact of SDG&Es use of the combined credit
available on the line.



Sempra
Energy

We believe thatthese
available funds and cash flows from operations, distributions from equity method
investments andsecurity issuances, combined with current cash balances,
will be adequate to:

§

finance
capital expenditures

§

meet
liquidity requirements

§

fund
shareholder dividends

§

fund
any new business acquisitions or start-ups

However, the recent global credit
crisis has severely affected the availability and cost of both short-term and
long-term financing.  If cash flows from operations were to be
significantly reduced or we were to be unable to borrow under acceptable terms,
we would reduce or postpone discretionary capital expenditures and investments
in new businesses.  If these measures were necessary, they would primarily
impact our Sempra Global businesses, as credit availability for the Sempra
Utilities has not been significantly impacted by the credit crisis.
 Discretionary expenditures at Sempra Global would include projects that we
have not yet made firm commitments to build, primarily renewable generation
facilities.  We do not expect to repurchase any common shares during 2009.
We continuously monitor our ability to finance the needs of our operating,
investing and financing activities in a manner consistent with our intention to
maintain strong, investment-quality ratings.

We have significant investments
in several trusts to provide for future payments of pensions, other
postretirement benefits, executive retirement and deferred compensation, and
nuclear decommissioning.  Although all of our trust funds investments are
diversified and managed in compliance with all laws and regulations, the value
of the



27







investments
in these trusts declined significantly in 2008 due to a decrease in the equity
market and volatility in the fixed income market.  Although the asset
values decreased in 2008, this has not affected the funds abilities to make
their required payments.  At the Sempra Utilities, the impact of these
market declines is generally recoverable in rates.  However, future
non-discretionary funding requirements for pension and other postretirement
benefit plans will be increased.

On May 22, 2008, our board of
directors approved an increase to our quarterly common stock dividend to $0.35
per share ($1.40 annually), an increase of $0.03 per share ($0.12 annually) from
$0.32 per share ($1.28 annually) authorized in February 2008. Our target annual
dividend payment ratio is 35 percent to 40 percent of net income.

On February 20, 2009, our board
of directors approved an increase to our quarterly common stock dividend to
$0.39 per share ($1.56 annually), an increase of $0.04 per share ($0.16
annually) or 11 percent.

We discuss our principal credit
agreements more fully in Note 6 of the Notes to Consolidated Financial
Statements.

Sempra
Utilities

The Sempra Utilities expect that
cash flows from operations and security issuances will continue to be adequate
to meet utility capital expenditure requirements.  As a result of
SDG&E's projected capital expenditure program, SDG&E has elected to
limit the payment of dividends on its common stock to Sempra Energy, and the
level of future common dividends from SDG&E and SoCalGas may be affected
during periods of increased capital expenditures.  The level of future
common dividends from PE is dependent upon common dividends paid by SoCalGas.
 In 2006, Sempra Energy made a capital contribution of $200 million to
SDG&E to assist in the purchase of the Palomar generating facility.
 Sempra Energy may make additional equity contributions to SDG&E or
SoCalGas to support the Sempra Utilities' capital expenditure programs.

Sempra
Commodities

On April 1, 2008, we completed
the formation of RBS Sempra Commodities, a partnership to own and operate Sempra
Energy's commodities-marketing businesses, which generally comprised the Sempra
Commodities business unit.  RBS is obligated to provide the joint venture
with all growth capital, working-capital requirements and credit support.
 However, we are providing transitional back-up guarantees and credit
support, some of which may continue for a prolonged period of time. RBS has
fully indemnified us for any claims or losses in connection with these
arrangements.

Our initial equity contribution
to the partnership was $1.6 billion, and RBS made an initial equity contribution
of $1.665 billion. As a result of the transaction, we received cash of
approximately $1.2 billion, net of our contribution.  We account for our
investment in the partnership under the equity method.  RBS Sempra
Commodities intends to distribute all of its net income on an annual basis,
although the distributions are within the discretion of the board of directors
of the partnership.  In limited cases, the partnership may retain earnings
allocable to the partners to replenish capital depleted through losses.  We
provide additional information about this transaction in Notes 3, 4 and 6 of the
Notes to Consolidated Financial Statements.

Sempra
Generation

Projects at Sempra Generation
have been financed through a combination of operating cash flow, project
financing, funds from the parent and external borrowings.  Asset sales in
2006 provided funds to assist in financing company projects.

Sempra Generation's long-term
power sale contracts may contain collateral requirements.  The DWR
contracts do not contain such requirements.  The collateral arrangements
require Sempra Generation and/or the counterparty to post cash, guarantees or
letters of credit to the other party for exposure in excess of established
thresholds. Sempra Generation may be required to provide collateral when market
price movements adversely affect the counterparty's cost of replacement energy
supplies if Sempra Generation fails to deliver the contracted amounts. Sempra
Generation had no outstanding collateral requirements under such contracts at
December 31, 2008 and 2007.



28







Sempra
Pipelines & Storage

Sempra Pipelines & Storage is
expected to require funding from the parent or from external sources to fund
projects, including:

§

development
and expansion of its natural gas storage projects

§

participation
in the development of REX, a natural gas pipeline

Sempra
LNG

Sempra LNG requires funding for
its development of LNG receiving facilities. While our credit facilities and
other Sempra Energy sources are expected to be adequate for these requirements,
we may decide to use project financing if there is an advantage in doing so. As
projects under construction are put in service, Sempra LNG is expected to
provide operating cash flow for further development within Sempra Global.

CASH
FLOWS FROM OPERATING ACTIVITIES



|                                      |      |             |      |             |      |   |      |   |   |       |  |   |      |   |     |   |   |       | 
|------------------------------------- | ---- | ----------- | ---- | ----------- | ---- | - | ---- | - | - | ----- |  | - | ---- | - | --- | - | - | ----- | 
|CASH
PROVIDED BY OPERATING ACTIVITIES |     
|(Dollars
in millions)                
|                                      | 2008 | 2008 Change | 2007 | 2007 Change | 2006 |  
|Sempra
Energy Consolidated            | $    | 1,181       |      | $           | (907 | ) | (43) | % | $ | 2,088 |  | $ | 459  |   | 28  | % | $ | 1,629 | 
|SDG&E                                 |      | 619         |      |             | (41  | ) | (6)  |   |   | 660   |  |   | 263  |   | 66  |   |   | 397   | 
|PE                                    |      | 572         |      |             | 81   |   | 16   |   |   | 491   |  |   | (420 | ) | (46 | ) |   | 911   | 
|SoCalGas                              |      | 568         |      |             | 90   |   | 19   |   |   | 478   |  |   | (395 | ) | (45 | ) |   | 873   | 



Sempra
Energy

Cash provided by operating
activities at Sempra Energy decreased in 2008 due to

§

a
$297 million decrease in income from continuing operations (adjusted for noncash
items), of which $383 million related to equity earnings from RBS Sempra
Commodities;

§

a
decrease of $303 million in net trading assets in 2007 compared to a $4 million
increase in 2008 (prior to the sale of the commodities-marketing businesses to
RBS Sempra Commodities);

§

a
decrease in overcollected balancing accounts in 2008 compared to an increase in
2007, primarily at SDG&E; and

§

a
decrease in accounts payable primarily due to accruals for higher maintenance
and purchased power costs associated with the El Dorado outage at Sempra
Generation at the end of 2007 and a decrease at Sempra Commodities in 2008
(prior to the sale of the commodities-marketing businesses to RBS Sempra
Commodities);offset by

§

a
decrease in accounts receivable, primarily at SoCalGas due to higher natural gas
volumes in 2007 due to a colder winter in 2007 compared to 2008; and

§

$329
million lower net income tax payments due to 2007 overpayments applied to 2008
taxes and higher refunds received in 2008 as compared to 2007.

The increase in cash provided by
operating activities at Sempra Energy in 2007 was primarily due to a $303
million decrease in net trading assets in 2007 compared to a $543 million
increase in 2006, and a $190 million increase in income from continuing
operations (adjusted for noncash items), offset by other changes in working
capital.  The working capital changes were driven primarily by higher
accounts receivable from higher seasonal sales volumes and lower accounts
payable from lower gas prices at the Sempra Utilities.



29







SDG&E

Cash provided by operating
activities at SDG&E decreased in 2008 primarily due to a decrease in
overcollected regulatory balancing accounts compared to an increase in 2007.
 Over- and under-collected regulatory balancing accounts reflect the
difference between customer billings and recorded or CPUC-authorized costs.
 These differences are required to be balanced over time.

The decrease in overcollected
regulatory balancing accounts was offset by changes in working capital,
principally inventory and lower net income tax payments.  The reduction in
inventory in 2008 resulted from SoCalGas assuming procurement responsibility for
SDG&Es core natural gas customers in 2008.  Lower net income tax
payments were due to 2007 overpayments applied to 2008 taxes and higher refunds
received in 2008 as compared to 2007.

The increase in cash provided by
operating activities at SDG&E in 2007 was primarily due to a $150 million
increase in income from continuing operations (adjusted for noncash items) and
an increase in overcollected regulatory balancing accounts.

PE
and SoCalGas

Cash provided by operating
activities at PE increased in 2008 primarily due to changes at SoCalGas,
principally an increase in net income adjusted for noncash items ($89 million at
PE and $91 million at SoCalGas), and a decrease in accounts receivable.
 Accounts receivable decreased in 2008 and increased in 2007 due to lower
natural gas prices and seasonably warm weather in 2008, resulting in lower
demand for natural gas for heating in the fourth quarter.

These increases were offset by an
increase in inventory and a $40 million payment for the termination of an
interest rate swap in 2008.  The increase in inventory in 2008 resulted
from SoCalGas assuming procurement responsibility for SDG&Es core natural
gas customers in 2008.

The decrease in cash provided by
PEs operating activities in 2007 was primarily due to changes in working
capital at SoCalGas, principally accounts receivable, accounts payable and
overcollected regulatory balancing accounts.  The working capital changes
were driven by higher accounts receivable from higher seasonal volumes and lower
accounts payable from lower gas prices.

The table below shows the
contributions to pension and other postretirement benefit plans for each of the
past three years.



|                                                                          |                  |      |                         |      |   |      |  |       |      |   |      |   |      | 
|------------------------------------------------------------------------- | ---------------- | ---- | ----------------------- | ---- | - | ---- |  | ----- | ---- | - | ---- | - | ---- | 
|CONTRIBUTIONS
TO PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS 2006-2008
|(Dollars
in millions)                                                     |                  |      |                         |      |   |      |  |       |     
|                                                                          |                  |      |                         |      |   |      |  | Other |     
|                                                                          | Pension Benefits |      | Postretirement Benefits |     
|                                                                          |                  | 2008 |                         | 2007 |   | 2006 |  |       | 2008 |   | 2007 |   | 2006 | 
|Sempra
Energy Consolidated                                                | $                | 65   | $                       | 35   | $ | 35   |  | $     | 40   | $ | 45   | $ | 32   | 
|SDG&E                                                                     |                  | 38   |                         | 27   |   | 30   |  |       | 16   |   | 15   |   | 12   | 
|PE
and SoCalGas                                                           |                  | 1    |                         | 1    |   | 1    |  |       | 22   |   | 28   |   | 19   | 

CASH
FLOWS FROM INVESTING ACTIVITIES



|                                  |      |             |      |             |      |   |     |   |   |        |   |   |       |   |     |   |   |        |  
|--------------------------------- | ---- | ----------- | ---- | ----------- | ---- | - | --- | - | - | ------ | - | - | ----- | - | --- | - | - | ------ | -
|CASH
USED IN INVESTING ACTIVITIES |     
|(Dollars
in millions)             |     
|                                  | 2008 | 2008 Change | 2007 | 2007 Change | 2006 |  
|Sempra
Energy Consolidated        | $    | (2,386      | )    | $           | 313  |   | 15  | % | $ | (2,073 | ) | $ | 1,207 |   | 139 | % | $ | (866   | )
|SDG&E                             |      | (940        | )    |             | 233  |   | 33  |   |   | (707   | ) |   | (360  | ) | (34 | ) |   | (1,067 | )
|PE                                |      | (319        | )    |             | (170 | ) | (35 | ) |   | (489   | ) |   | (59   | ) | (11 | ) |   | (548   | )
|SoCalGas                          |      | (318        | )    |             | (161 | ) | (34 | ) |   | (479   | ) |   | (34   | ) | (7  | ) |   | (513   | )





30







Sempra
Energy

Cash used in investing activities
at Sempra Energy increased in 2008.  The primary outflows of cash were

§

$495
million for the acquisition of EnergySouth, which is net of $16 million of cash
acquired;

§

$150
million contribution to Rockies Express; and

§

$413
million in purchases of industrial development bonds, offset by proceeds from
remarketing of these bonds of $237 million.

These outflows were partially
offset by the net proceeds from the RBS transaction.  Total proceeds of
$2.1 billion, which are net of $383 million of cash sold, were offset by our
capital contribution of $1.6 billion to form the partnership.

The increase in cash used in
investing activities at Sempra Energy in 2007 was primarily attributable to
activity in 2006, including:

§

$789
million in proceeds from asset sales (primarily the sales of Twin Oaks, the
Energy Services and Facilities Management businesses, and SEPCO at Sempra
Generation); and

§

$404
million in dividends received from our equity method investment related to the
sale of the Topaz power plants.

During 2006, Sempra Generation
sold its Texas-based power plants and other assets due to the increased market
valuation of coal-fired power plants in Texas. The coal-fired assets included
our wholly owned Twin Oaks power plant and Coleto Creek, which we co-owned in
the Topaz joint venture with Riverstone Holdings. The joint venture also owned
three operating natural gas and oil-fired plants in Laredo, San Benito and
Corpus Christi, Texas, which were sold in 2006.  We provide additional
information about the sales in Notes 4 and 5 of the Notes to Consolidated
Financial Statements.

SDG&E

Cash used in investing activities
at SDG&E increased in 2008 primarily due to:

§

a
$170 million increase in capital expenditures, including a $91 million increase
at Otay Mesa VIE

§

the
net purchase of $24 million of industrial development bonds

§

a
$33 million increase in loans to affiliates in 2008

The decrease in cash used in
investing activities at SDG&E in 2007 was primarily due to $356 million
higher capital expenditures in 2006 for:

§

the
purchase of the Palomar generating facility from Sempra Generation; and

§

construction
of the Otay Metro Powerloop transmission project; partially offset by

§

increased
capital spending in 2007 due to the October 2007 Southern California
wildfires.

PE
and SoCalGas

Cash used in investing activities
at PE decreased in 2008 due to the reduction in outstanding advances from
SoCalGas to Sempra Energy by $136 million in 2008.

Cash used in PEs and SoCalGas
investing activities in 2007 decreased primarily due to a $111 million decrease
in advances to Sempra Energy (including $87 million of advances made by
SoCalGas), partially offset by a $44 million increase in capital expenditures in
2007.



31







CAPITAL
EXPENDITURES AND INVESTMENTS

The table below shows our
expenditures for property, plant and equipment, and for investments. We provide
capital expenditure information by segment in Note 17 of the Notes to
Consolidated Financial Statements.



|                                                                |                               |       |                                             |   |      
|--------------------------------------------------------------- | ----------------------------- | ----- | ------------------------------------------- | - | -----
|SEMPRA
ENERGY CAPITAL EXPENDITURES AND INVESTMENTS/ACQUISITIONS
|(Dollars
in millions)                                           |                               |       |                                            
|                                                                | Property, plant and equipment |       | Investments and acquisition of subsidiaries
|2008                                                            | $                             | 2,061 |                                             | $ | 2,675
|2007                                                            |                               | 2,011 |                                             |   | 121  
|2006                                                            |                               | 1,907 |                                             |   | 257  
|2005                                                            |                               | 1,377 |                                             |   | 86   
|2004                                                            |                               | 1,065 |                                             |   | 74   



Sempra
Energy Capital Expenditures

Capital expenditures at the
Sempra Utilities are discussed below.

At Sempra Global, the primary
capital expenditures over the last three years were as follows:

Sempra
LNG

Energía Costa Azul LNG Receipt
Terminal. Through December 31, 2008, Sempra LNG has made expenditures of
$1.2 billion related to the terminal (including breakwater), the
nitrogen-injection facility, and an expansion project, including:

§

$228
million in 2008

§

$298
million in 2007

§

$302
million in 2006

Cameron LNG Receipt
Terminal. The estimated costs of this project, including capitalized
interest, are approximately $900 million (excluding pre-expansion costs, which
are $43 million to date).  Through December 31, 2008, Sempra LNG has made
expenditures of $793 million related to the terminal and a proposed expansion
project, including:

§

$152
million in 2008

§

$224
million in 2007

§

$279
million in 2006

Sempra
Pipelines & Storage

Sempra Pipelines & Storage
completed its expansion of its existing pipelines in Baja California, Mexico,
and the addition of a spur line to connect Sempra LNGs Energía Costa Azul
terminal to an existing Sempra Energy natural gas pipeline in Mexico with
interconnections to the U.S. border. Commercial operation of the pipelines
expansion began in May 2008.  Sempra Pipelines & Storage also had
capital expenditures for its Cameron Interstate Pipeline and natural gas storage
projects.  Related expenditures were

|                            |                            
|--------------------------- | ---------------------------
|Pipelines:                  | Natural gas
storage:       
|§
$147
million in 2008      | §
$34
million in 2008      
|§
$270
million through 2007 | §
$217
million through 2007



32









| | 
| | 

Sempra
Energy Investments and Acquisition of Subsidiaries

In 2008, investments and
acquisition of subsidiaries included

§

capital
contributions of $1.6 billion to RBS Sempra Commodities and $150 million to
Rockies Express Pipeline LLC (Rockies Express)

§

the
acquisition of EnergySouth for $495 million (net of $16 million of cash
acquired)

§

the
purchase of $413 million in industrial development bonds

In 2007, investments included

§

a
contribution of $100 million to Rockies Express

§

$21
million for purchases of available-for-sale securities and other investments

In 2006, investments included

§

a
$128 million investment in industrial development bonds in connection with the
Liberty project (discussed in Note 6 of the Notes to Consolidated Financial
Statements)

§

a
$104 million initial capital contribution to Rockies Express during the first
half of 2006

The 2006 contribution was
returned to Sempra Pipelines & Storage later that year in connection with
financing received by Rockies Express during the second quarter of 2006 and was
reported in Distributions from Investments on the Statements of Consolidated
Cash Flows.

Sempra
Utilities Capital Expenditures and Investments

The Sempra Utilities' capital
expenditures for property, plant and equipment were



|                      |   |      |   |      |   |      
|--------------------- | - | ---- | - | ---- | - | -----
|(Dollars
in millions) |   | 2008 |   | 2007 |   | 2006 
|SDG&E                 | $ | 884  | $ | 714  | $ | 1,070
|SoCalGas              |   | 454  |   | 457  |   | 413  



Capital expenditures at the
Sempra Utilities in 2008 included

SDG&E

§

$386
million of improvements to natural gas and electric distribution

§

$230
million of improvements to electric transmission and generation systems

§

$178
million at Otay Mesa VIE

SoCalGas

§

$454
million of improvements to natural gas infrastructure

The larger amount in 2006 for
SDG&E compared to 2008 and 2007 was primarily due to the purchase of the
Palomar generating facility from Sempra Generation in 2006.  This purchase
is substantially eliminated in Sempra Energys Statement of Consolidated Cash
Flows in 2006, as the capital expenditures were recorded by Sempra Energy over
the construction period from 2004 through the first quarter of 2006.

SDG&E also purchased $488
million of industrial development bonds in 2008.  We discuss these bonds in
Note 6 of the Notes to Consolidated Financial Statements.

FUTURE
CONSTRUCTION EXPENDITURES AND INVESTMENTS

The amounts and timing of capital
expenditures are generally subject to approvals by the CPUC, the FERC and other
regulatory bodies. However, in 2009, we expect to make capital expenditures and
investments of $2.5 billion, including:



33







§

$1.3
billion at the Sempra Utilities for capital projects and plant improvements
($800 million at SDG&E and $500 million at SoCalGas)

§

$1.2
billion at our other subsidiaries for the development of LNG facilities, natural
gas storage facilities and pipelines, and renewable generation projects

The expected capital expenditures
of $1.2 billion at our other subsidiaries include an expected contribution of
$450 million to Rockies Express.

The Sempra Utilities expect the
capital expenditures to include

§

$500
million for additions to SDG&Es natural gas and electric distribution
generation systems, and advanced metering infrastructure

§

$500
million at SoCalGas for improvements to distribution and transmission systems,
and for advanced metering infrastructure

§

$200
million for improvements to SDG&Es electric transmission infrastructure

§

$100
million at SDG&E for the Sunrise Powerlink transmission line

The Sempra Utilities expect to
finance these expenditures and investments with cash flows from operations, cash
on hand and debt issuances.  These amounts do not include $130 million of
expected capital expenditures of Otay Mesa VIE.

Over the next five years, the
Sempra Utilities expect to make capital expenditures of:

§

$5.8
billion at SDG&E, at an average rate of $1.17 billion per year

§

$3.2
billion at SoCalGas, at an average rate of $650 million per year

SDG&Es estimated capital
expenditures include $189 million for the transfer of Sempra Generations El
Dorado facility in 2011.

Sempra Energy expects to make
capital expenditures at its other subsidiaries of $2.9 billion, at an average
rate of $580 million per year, over the next five years.

Capital expenditure amounts
include capitalized interest. At the Sempra Utilities, the amounts also include
the portion of allowance for funds used during construction (AFUDC) related to
debt, but exclude the portion of AFUDC related to equity.  We provide
further details about AFUDC in Note 1 of the Notes to Consolidated Financial
Statements.

Periodically, we review our
construction, investment and financing programs and revise them in response to
changes in regulation, economic conditions, competition, customer growth,
inflation, customer rates, the cost and availability of capital, and
environmental requirements. We discuss these considerations in more detail in
Notes 14 and 16 of the Notes to Consolidated Financial Statements.

Our level of capital expenditures
and investments in the next few years may vary substantially and will depend on
the cost and availability of financing, regulatory approvals and business
opportunities providing desirable rates of return.  We intend to finance
our capital expenditures in a manner that will maintain our strong
investment-grade ratings and capital structure.



34







CASH
FLOWS FROM FINANCING ACTIVITIES



|                                     |      |             |      |             |       |  |     |   |   |      |   |   |      |   |     |   |   |      |  
|------------------------------------ | ---- | ----------- | ---- | ----------- | ----- |  | --- | - | - | ---- | - | - | ---- | - | --- | - | - | ---- | -
|CASH
FLOWS FROM FINANCING ACTIVITIES |     
|(Dollars
in millions)                |      |            
|                                     | 2008 | 2008 Change | 2007 | 2007 Change | 2006  | 
|Sempra
Energy Consolidated           | $    | 868         |      | $           | 1,164 |  | 393 | % | $ | (296 | ) | $ | 316  |   | 52  | % | $ | (612 | )
|SDG&E                                |      | 182         |      |             | 15    |  | 9   |   |   | 167  |   |   | (276 | ) | (62 | ) |   | 443  |  
|PE                                   |      | (106        | )    |             | 48    |  | 31  |   |   | (154 | ) |   | 88   |   | 36  |   |   | (242 | )
|SoCalGas                             |      | (103        | )    |             | 48    |  | 32  |   |   | (151 | ) |   | 88   |   | 37  |   |   | (239 | )



Sempra
Energy

Cash from financing activities at
Sempra Energy in 2008 increased due to

§

a
$1,302 million increase in issuances of long-term debt and

§

a
$993 million decrease in long-term debt payments, offset by

§

an
$833 million increase in common stock repurchases (reflecting our $1 billion
share repurchase program in 2008) and

§

a
$248 million lower increase in short-term debt.

The decrease in cash used in
financing activities at Sempra Energy in 2007 was primarily due to an $812
million increase in short-term debt in 2007 compared to a $791 million decrease
in 2006. This decrease was offset by:

§

an
$809 million increase in long-term debt payments

§

a
$148 million decrease in issuances of long-term debt

§

a
$148 million increase in common stock repurchases

§

$83
million of proceeds in 2006 from the sale of our interests in affordable-housing
projects

The increase in short-term debt
was primarily to fund the repayment of maturing long-term debt, and to a lesser
extent, from increased borrowings at Sempra Commodities.

SDG&E

Cash provided by financing
activities at SDG&E in 2008 increased due to:

§

no
payments on long-term debt in 2008, compared to $66 million in 2007; and

§

a
$72 million decrease in short-term debt in 2007, offset by

§

a
$120 million net decrease in the issuance of long-term debt in 2008 (a $250
million decrease at SDG&E, offset by an increase of $130 million by Otay
Mesa VIE).

The decrease in cash provided by
financing activities at SDG&E in 2007 was primarily due to:

§

a
$200 million capital contribution made by Sempra Energy in 2006

§

a
$98 million decrease in issuances of long-term debt in 2007

PE
and SoCalGas

Cash used in financing activities
at PE and SoCalGas in 2008 decreased due to a $250 million issuance of long-term
debt in 2008, offset by an increase of $200 million in common dividends
paid.

The 2007 changes at PE and
SoCalGas were due to an $88 million decrease in short-term debt at SoCalGas in
2006.



35







LONG-TERM
DEBT

Long-term balances (including the
current portion of long-term debt) at December 31, 2008 were:



|                           |      |       |      |       |   |      
|-------------------------- | ---- | ----- | ---- | ----- | - | -----
|(Dollars
in millions)      | 2008 | 2007  | 2006
|Sempra
Energy Consolidated | $    | 6,954 | $    | 4,560 | $ | 5,206
|SDG&E                      |      | 2,144 |      | 1,958 |   | 1,704
|PE/SoCalGas                |      | 1,370 |      | 1,113 |   | 1,107



At December 31, 2008, the
following information applies to long-term debt:



|                                            |                            |   |       |   |          |  
|------------------------------------------- | -------------------------- | - | ----- | - | -------- | -
|                                            | Sempra Energy Consolidated |   | SDG&E |   | SoCalGas |  
|Weighted
average life to maturity, in years | 10.1                       |   | 15.9  |   | 8.8      |  
|Weighted
average interest rate              | 5.68                       | % | 4.85  | % | 4.71     | %



Issuances
of Long-Term Debt

In November 2008, Sempra Energy
publicly offered and sold $250 million of 8.90-percent notes maturing in 2013
and $500 million of 9.80-percent notes maturing in 2019.

In November 2008, SoCalGas
publicly offered and sold $250 million of 5.50-percent first mortgage bonds
maturing in 2014.

In June 2008, Sempra Energy
publicly offered and sold $500 million of 6.15-percent notes maturing in
2018.

In 2008, SDG&Es variable
interest entity, Otay Mesa VIE, had construction loan borrowings of $193
million.

In September 2007, SDG&E
publicly offered and sold $250 million of 6.125-percent first mortgage bonds,
maturing in 2037. Otay Mesa VIE had construction loan borrowings of $63
million.

In September 2006, SDG&E
issued $161 million of variable-rate first mortgage bonds, maturing in 2018, and
applied the proceeds in November 2006 to retire an identical amount of first
mortgage bonds.

In June 2006, SDG&E publicly
offered and sold $250 million of 6-percent first mortgage bonds, maturing in
2026.

In 2006, Sempra Pipelines &
Storage incurred $128 million of long-term debt in order to reduce its property
tax related to the Liberty facility in Calcasieu Parish.  We discuss the
debt further in Note 6 of the Notes to Consolidated Financial Statements. Sempra
Pipelines & Storage recorded bonds receivable for the same amount.

Payments
on Long-Term Debt

Payments on long-term debt in
2008 included $60 million of Sempra Pipelines & Storage notes payable that
matured in April 2008.

Payments on long-term debt in
2007 primarily consisted of:

§

$600
million of Sempra Energy notes payable that matured in May 2007

§

$300
million of Sempra Energy notes payable that were due in May 2008 but were
redeemed in August 2007

§

$66 million,
the remaining outstanding balance of SDG&Es rate-reduction bonds

Payments on long-term debt in
2006 were primarily at SDG&E and consisted of:

§

$161
million first mortgage bonds

§

$66
million rate-reduction bonds

Also in 2006, Sempra Energy
repaid $24 million of debt incurred to acquire limited partnership
interests.



36







In
Note 6 of the Notes to Consolidated Financial Statements, we provide information
about our lines of credit and additional information about debt activity.

CAPITAL
STOCK TRANSACTIONS

Sempra
Energy

During 2008, we repurchased 18.4
million shares of our common stock for $1 billion in a share repurchase program.
We discuss this repurchase program in Note 13 of the Notes to Consolidated
Financial Statements.  Cash provided by employee stock option exercises
was

§

$18
million in 2008

§

$32
million in 2007

§

$79
million in 2006

During 2007, we repurchased
approximately 3 million shares of common stock for $161 million in connection
with a share repurchase program authorized in 2005.

DIVIDENDS

Sempra
Energy

Sempra Energy paid dividends on
common stock of:

§

$339
million in 2008

§

$316
million in 2007

§

$283
million in 2006

The increases were due to
increases in the per-share quarterly dividend from $0.30 in 2006 to $0.31 in
2007 and to $0.35 in 2008.  The increase in 2008 was offset by $11 million
due to the reduction in shares from the repurchase program.

SDG&E did not pay any common
dividends to Sempra Energy in 2008, 2007 or 2006 to preserve cash to fund its
capital expenditures program.

SoCalGas paid dividends to PE and
PE paid corresponding dividends to Sempra Energy of:

§

$350
million in 2008

§

$150
million in 2007

§

$150
million in 2006

In December 2007, SoCalGas
declared a common dividend of $150 million to PE and PE declared a corresponding
dividend of the same amount to Sempra Energy.  These dividends were paid in
January 2008. Dividends paid by SoCalGas to PE are eliminated in Sempra Energy's
and PEs consolidated financial statements for all three years.  Dividends
paid by PE to Sempra Energy are eliminated in Sempra Energys consolidated
financial statements for all three years.

The board of directors for each
of Sempra Energy, SDG&E, PE and SoCalGas have the discretion to determine
the payment and amount of future dividends. The CPUC's regulation of SDG&E's
and SoCalGas'capital structures limits the amounts that are available
for loans and dividends to Sempra Energy.  At December 31, 2008, Sempra
Energy could have received combined loans and dividends of approximately $150
million from SDG&E. No amounts were available from SoCalGas at December 31,
2008.



37







CAPITALIZATION



|                                                       |                         |                            |  |         |  |         |  |         
|------------------------------------------------------ | ----------------------- | -------------------------- |  | ------- |  | ------- |  | --------
|TOTAL
CAPITALIZATION AND DEBT-TO-CAPITALIZATION RATIOS
|(Dollars
in millions)                                  |                         |                            |  |         |  |         |  |         
|                                                       | As of December 31, 2008
|                                                       |                         | Sempra Energy Consolidated |  | SDG&E   |  | PE      |  | SoCalGas
|Total
capitalization                                   |                         | $ 15,845                   |  | $ 4,893 |  | $ 3,310 |  | $ 2,860 
|Debt-to-capitalization
ratio                           |                         | 47%                        |  | 44%     |  | 41%     |  | 48%     



Significant changes during 2008
that affected capitalization include the following:

§

Sempra
Energy:a net increase in long-term debt, increases in short-term
borrowings, an increase in minority interests and comprehensive income exceeding
dividends, offset by common stock repurchases

§

SDG&E:increases in long-term debt and comprehensive income, offset by a
decrease in minority interest

§

PE
and SoCalGas:comprehensive income exceeding dividends and an
increase in long-term debt

We provide additional information
about the significant changes in Notes 6 and 13 of the Notes to Consolidated
Financial Statements and "Overall Results of Operations of Sempra Energy and
Factors Affecting the Results" above.



38







COMMITMENTS

The following tables summarize
principal contractual commitments at December 31, 2008 for Sempra Energy,
SDG&E and PE/SoCalGas, respectively.  We provide additional information
about commitments above and in Notes 6, 9 and 16 of the Notes to Consolidated
Financial Statements.



|                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |  |               |       |               |   |            |  |   |        |  |   |        | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | ------------- | ----- | ------------- | - | ---------- |  | - | ------ |  | - | ------ | 
|PRINCIPAL
CONTRACTUAL COMMITMENTS OF SEMPRA ENERGY
|(Dollars
in millions)                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |  |               |       |               |   |            |  |   |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 2009  |  | 2010
and 2011 |       | 2012
and 2013 |   | Thereafter |  |   | Total 
|Short-term
debt                                    | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 503   |  | $             | --    |               | $ | --         |  | $ | --     |  | $ | 503   
|Long-term
debt                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 410   |  |               | 813   |               |   | 948        |  |   | 4,783  |  |   | 6,954 
|Interest
on debt (1)                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 356   |  |               | 636   |               |   | 592        |  |   | 2,387  |  |   | 3,971 
|Due
to unconsolidated affiliate                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | --    |  |               | 102   |               |   | --         |  |   | --     |  |   | 102   
|Operating
leases                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 99    |  |               | 181   |               |   | 93         |  |   | 346    |  |   | 719   
|Litigation
settlements                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 28    |  |               | 55    |               |   | 49         |  |   | 49     |  |   | 181   
|Purchased-power
contracts                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 342   |  |               | 501   |               |   | 495        |  |   | 1,676  |  |   | 3,014 
|Natural
gas contracts                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 1,265 |  |               | 876   |               |   | 95         |  |   | 211    |  |   | 2,447 
|LNG
contract (2)                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 366   |  |               | 2,157 |               |   | 2,154      |  |   | 17,933 |  |   | 22,610
|Construction
commitments                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 322   |  |               | 251   |               |   | --         |  |   | --     |  |   | 573   
|SONGS
decommissioning                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | --    |  |               | --    |               |   | --         |  |   | 445    |  |   | 445   
|Other
asset retirement obligations                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 17    |  |               | 33    |               |   | 35         |  |   | 647    |  |   | 732   
|Pension
and postretirement benefit obligations (3) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 211   |  |               | 562   |               |   | 603        |  |   | 1,274  |  |   | 2,650 
|Environmental
commitments                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 26    |  |               | 24    |               |   | 4          |  |   | 14     |  |   | 68    
|Other                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 9     |  |               | 21    |               |   | 8          |  |   | 41     |  |   | 79    
|Totals                                             | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 3,954 |  | $             | 6,212 |               | $ | 5,076      |  | $ | 29,806 |  | $ | 45,048
|(1)                                                | We
calculate expected interest payments using the stated interest rate for
fixed-rate obligations, including floating-to-fixed interest-rate swaps.
 We calculate expected interest payments for variable-rate
obligations based on forward rates in effect at December 31, 2008,
including fixed-to-floating interest-rate swaps.                                                                                                                                                                                                                                                                                                                                                                                                            
|(2)                                                | Sempra
LNG has a purchase agreement with Tangguh PSC Contractors (Tangguh PSC)
for the supply of 500 million cubic feet of natural gas per day from
Indonesias Tangguh liquefaction facility to Sempra LNGs Energía Costa
Azul regasification terminal at a price based on the Southern California
border index. The expected minimum payments under the contract are based
on forward prices of the Southern California border index plus an
estimated 1 percent escalation per year. Sempra LNG has a contract to sell
a portion of the volumes purchased from Tangguh PSC to Mexicos national
electric company, Comisión Federal de Electricidad (CFE) at prices that
are based on the Southern California border index for natural gas.
|(3)                                                | Amounts
are after reduction for the Medicare Part D subsidy and only include
expected payments to the plans for the next 10
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            





39









|                                                   |                                                                                                                                                                                                                                                                                                                                            |      |  |   |               |  |   |               |  |   |            |  |   |       | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | - | ------------- |  | - | ------------- |  | - | ---------- |  | - | ----- | 
|PRINCIPAL
CONTRACTUAL COMMITMENTS OF SDG&E        
|(Dollars
in millions)                              |                                                                                                                                                                                                                                                                                                                                            |      |  |   |               |  |   |               |  |   |            |  |   |      
|                                                   |                                                                                                                                                                                                                                                                                                                                            | 2009 |  |   | 2010 and 2011 |  |   | 2012 and 2013 |  |   | Thereafter |  |   | Total
|Long-term
debt                                     | $                                                                                                                                                                                                                                                                                                                                          | 2    |  | $ | 14            |  | $ | 14            |  | $ | 2,114      |  | $ | 2,144
|Interest
on debt (1)                               |                                                                                                                                                                                                                                                                                                                                            | 102  |  |   | 214           |  |   | 223           |  |   | 1,347      |  |   | 1,886
|Operating
leases                                   |                                                                                                                                                                                                                                                                                                                                            | 24   |  |   | 43            |  |   | 35            |  |   | 59         |  |   | 161  
|Litigation
settlements                             |                                                                                                                                                                                                                                                                                                                                            | 6    |  |   | 12            |  |   | 12            |  |   | 11         |  |   | 41   
|Purchased-power
contracts                          |                                                                                                                                                                                                                                                                                                                                            | 342  |  |   | 501           |  |   | 495           |  |   | 1,676      |  |   | 3,014
|Construction
commitments                           |                                                                                                                                                                                                                                                                                                                                            | 138  |  |   | 249           |  |   | --            |  |   | --         |  |   | 387  
|El
Dorado purchase agreement                       |                                                                                                                                                                                                                                                                                                                                            | --   |  |   | 189           |  |   | --            |  |   | --         |  |   | 189  
|SONGS
decommissioning                              |                                                                                                                                                                                                                                                                                                                                            | --   |  |   | --            |  |   | --            |  |   | 445        |  |   | 445  
|Other
asset retirement obligations                 |                                                                                                                                                                                                                                                                                                                                            | 4    |  |   | 8             |  |   | 7             |  |   | 90         |  |   | 109  
|Pension
and postretirement benefit obligations (2) |                                                                                                                                                                                                                                                                                                                                            | 77   |  |   | 196           |  |   | 208           |  |   | 358        |  |   | 839  
|Environmental
commitments                          |                                                                                                                                                                                                                                                                                                                                            | 6    |  |   | 6             |  |   | 2             |  |   | 14         |  |   | 28   
|Totals                                             | $                                                                                                                                                                                                                                                                                                                                          | 701  |  | $ | 1,432         |  | $ | 996           |  | $ | 6,114      |  | $ | 9,243
|(1)                                                | SDG&E
calculates expected interest payments using the stated interest rate for
fixed-rate obligations, including floating-to-fixed interest-rate swaps.
 SDG&E calculates expected interest payments for variable-rate
obligations based on forward rates in effect at December 31, 2008,
including fixed-to-floating interest-rate swaps.
|(2)                                                | Amounts
are after reduction for the Medicare Part D subsidy and only include
expected payments to the plans for the next 10
years.                                                                                                                                                                                                        





|                                                     |                                                                                                                                                                                                                                                                                         |       |  |   |               |  |   |               |  |   |            |  |   |       | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | - | ------------- |  | - | ------------- |  | - | ---------- |  | - | ----- | 
|PRINCIPAL
CONTRACTUAL COMMITMENTS OF PE AND SOCALGAS
|(Dollars
in millions)                                |                                                                                                                                                                                                                                                                                         |       |  |   |               |  |   |               |  |   |            |  |   |      
|                                                     |                                                                                                                                                                                                                                                                                         | 2009  |  |   | 2010 and 2011 |  |   | 2012 and 2013 |  |   | Thereafter |  |   | Total
|SoCalGas                                             |                                                                                                                                                                                                                                                                                         |       |  |   |               |  |   |               |  |   |            |  |   |      
|Long-term
debt                                       | $                                                                                                                                                                                                                                                                                       | 100   |  | $ | 250           |  | $ | 250           |  | $ | 770        |  | $ | 1,370
|Interest
on debt (1)                                 |                                                                                                                                                                                                                                                                                         | 62    |  |   | 117           |  |   | 94            |  |   | 381        |  |   | 654  
|Natural
gas contracts                                |                                                                                                                                                                                                                                                                                         | 991   |  |   | 874           |  |   | 95            |  |   | 211        |  |   | 2,171
|Operating
leases                                     |                                                                                                                                                                                                                                                                                         | 47    |  |   | 85            |  |   | 13            |  |   | 14         |  |   | 159  
|Construction
commitments                             |                                                                                                                                                                                                                                                                                         | 32    |  |   | --            |  |   | --            |  |   | --         |  |   | 32   
|Litigation
settlements                               |                                                                                                                                                                                                                                                                                         | 12    |  |   | 23            |  |   | 23            |  |   | 23         |  |   | 81   
|Environmental
commitments                            |                                                                                                                                                                                                                                                                                         | 20    |  |   | 17            |  |   | 3             |  |   | --         |  |   | 40   
|Pension
and postretirement benefit obligations (2)   |                                                                                                                                                                                                                                                                                         | 101   |  |   | 295           |  |   | 323           |  |   | 760        |  |   | 1,479
|Asset
retirement obligations                         |                                                                                                                                                                                                                                                                                         | 14    |  |   | 25            |  |   | 27            |  |   | 529        |  |   | 595  
|Total
SoCalGas                                       |                                                                                                                                                                                                                                                                                         | 1,379 |  |   | 1,686         |  |   | 828           |  |   | 2,688      |  |   | 6,581
|PE
- operating leases                                |                                                                                                                                                                                                                                                                                         | 13    |  |   | 6             |  |   | 1             |  |   | --         |  |   | 20   
|Total
PE consolidated                                | $                                                                                                                                                                                                                                                                                       | 1,392 |  | $ | 1,692         |  | $ | 829           |  | $ | 2,688      |  | $ | 6,601
|(1)                                                  | Expected
interest payments were calculated using the stated interest rate for
fixed-rate obligations.  Expected interest payments were calculated
based on forward rates in effect at December 31, 2008 for variable-rate
obligations, including fixed-to-floating interest-rate swaps.
|(2)                                                  | Amounts
are after reduction for the Medicare Part D subsidy and only include
expected payments to the plans for the next 10
years.                                                                                                                                                     





40







The
tables exclude

§

contracts
between consolidated affiliates

§

intercompany
debt

§

individual
contracts that have annual cash requirements less than $1 million

§

employment
contracts

The tables also exclude income
tax liabilities of

§

$88
million for Sempra Energy

§

$18
million for SDG&E

§

$18
million for SoCalGas

These liabilities were recorded
in accordance with Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (FIN 48). They were excluded from the tables
because we are unable to reasonably estimate the timing of future payments due
to uncertainties in the timing of the effective settlement of tax positions.

We provide additional information
about unrecognized tax benefits in Note 8 of the Notes to Consolidated Financial
Statements.

OFF
BALANCE-SHEET ARRANGEMENTS

Sempra Energy has provided
guarantees aggregating $2.6 billion at December 31, 2008, to related parties,
including the guarantees related to Rockies Express financings and continuing
transitional guarantees related to RBS Sempra Commodities.  We discuss
these guarantees further in Notes 6 and 16 of the Notes to Consolidated
Financial Statements.



41









CREDIT
RATINGS

The table below shows the credit
ratings of Sempra Energy and its principal subsidiaries which remained at
investment grade levels in 2008. Also in 2008, Standard & Poors upgraded
SDG&Es and SoCalGas unsecured debt rating from A- to A. As of January 31,
2009, the companies have a stable ratings outlook from Moodys and Fitch credit
rating agencies.  However, in July 2008, Standard & Poors issued a
negative ratings outlook on the companies, except Sempra Global.



|                                                           |  |          |  |                  |  |      
|---------------------------------------------------------- |  | -------- |  | ---------------- |  | -----
|CREDIT
RATINGS OF SEMPRA ENERGY AND PRINCIPAL SUBSIDIARIES
|                                                           |  |          |  |                  |  |      
|                                                           |  |          |  |                  |  |      
|                                                           |  | Standard |  | Moody's Investor |  |      
|                                                           |  | & Poor's |  | Services, Inc.   |  | Fitch
|SEMPRA
ENERGY                                              |  |          |  |                  |  |      
|Unsecured
debt                                             |  | BBB+     |  | Baa1             |  | A    
|                                                           |  |          |  |                  |  |      
|SDG&E                                                      |  |          |  |                  |  |      
|Secured
debt                                               |  | A+       |  | A1               |  | AA   
|Unsecured
debt                                             |  | A        |  | A2               |  | AA-  
|Preferred
stock                                            |  | BBB+     |  | Baa1             |  | A+   
|Commercial
paper                                           |  | A-1      |  | P-1              |  | F-1+ 
|                                                           |  |          |  |                  |  |      
|SoCalGas                                                   |  |          |  |                  |  |      
|Secured
debt                                               |  | A+       |  | A1               |  | AA   
|Unsecured
debt                                             |  | A        |  | A2               |  | AA-  
|Preferred
stock                                            |  | BBB+     |  | Baa1             |  | A+   
|Commercial
paper                                           |  | A-1      |  | P-1              |  | F-1+ 
|                                                           |  |          |  |                  |  |      
|PACIFIC
ENTERPRISES                                        |  |          |  |                  |  |      
|Preferred
stock                                            |  | BBB+     |  | --               |  | A    
|                                                           |  |          |  |                  |  |      
|SEMPRA
GLOBAL                                              |  |          |  |                  |  |      
|Unsecured
debt guaranteed by Sempra Energy                 |  | --       |  | Baa1             |  | A    
|Commercial
paper guaranteed by Sempra Energy               |  | A-2      |  | P-2              |  | F-1  





42









FACTORS
INFLUENCING FUTURE PERFORMANCE

SEMPRA
ENERGY OVERVIEW

The Sempra Utilities' operations
and Sempra Generation's long-term contracts generally provide relatively stable
earnings and liquidity. However, for the next few years SDG&E will limit its
common stock dividends to reinvest a portion of its earnings in significant
capital projects. Also, Sempra Generations contract with the DWR, which
provides a significant portion of Sempra Generation's revenues, ends in late
2011. Because it is unable to forecast with certainty future electricity prices
and the cost of natural gas, contracts it enters into to replace this capacity
may provide substantially lower revenue.

We expect that Sempra LNG and
Sempra Pipelines & Storage will provide relatively stable earnings and
liquidity from their current operations and construction programs completed in
the future, but will require substantial funding for these programs. In
addition, until there are firm supply or capacity contracts for 100% of Sempra
LNGs Cameron facility and until firm supply contracts become effective for the
Energía Costa Azul facility, Sempra LNG will seek to obtain interim LNG
supplies, which may result in greater variability in revenues and earnings.
Sempra LNG may also enter into short-term service contracts to utilize
capacity.

The Sempra Utilities' performance
will depend primarily on the ratemaking and regulatory process, electric and
natural gas industry restructuring, environmental regulations, and the changing
energy marketplace. Their performance will also depend on the successful
completion of capital projects that we discuss in various sections of this
report. As the 2008 GRC provides for fixed annual increases rather than for
adjustments based on inflation indices as in the past, performance will depend
on the Sempra Utilities' ability to manage the effects of rising costs,
including bad debts. We provide additional information in Notes 14 and 15 of the
Notes to Consolidated Financial Statements.

The Sempra Utilities have
additional income potential above authorized margins through incentive
mechanisms. If performance goals and incentive targets are achieved, SDG&E
and SoCalGas expect incentive earnings to contribute annually from $3 million to
$7 million and from $10 million to $20 million, respectively, to their net
income. Amounts realized each year may be affected by the timing of the approval
of the award. If goals are not met, penalties may be incurred.

As we discuss in Note 3 of the
Notes to Consolidated Financial Statements, on April 1, 2008, we completed the
formation of a partnership, RBS Sempra Commodities, to own and operate our
commodities-marketing businesses, which generally comprised our Sempra
Commodities segment. Our joint venture partner, RBS, is obligated to provide the
partnership with all growth capital, working-capital requirements and credit
support, as we discuss above in "Capital Resources and Liquidity  Sempra
Commodities." Future earnings and distributions from the partnership will depend
on profitability and growth achieved in the joint venture and the continued
ability of RBS to provide capital and credit support for the partnership. RBS
has been greatly affected by the world-wide turmoil in banking and became
indirectly controlled by the government of the United Kingdom on December 1,
2008.

We may be further impacted by the
current world-wide economic crisis and rapidly changing economic conditions. The
impacts of the global credit market crisis on our credit availability and cost
are discussed in "Capital Resources and Liquidity" in this report. Moreover, the
dollar has strengthened significantly against all foreign currencies, especially
in Mexico and South America where we have significant operations. These factors,
coupled with very low natural gas prices which affect profitability at Sempra
Generation and Sempra LNG, could, if they remain unchanged, adversely affect
profitability. Additionally, given the uncertainty of commodity markets and the
lack of debt financing for energy infrastructure, which impact related hedging
activity, growth at RBS Sempra Commodities could be dampened.

We discuss additional matters
that could affect our future performance in Notes 14 through 16 of the Notes to
Consolidated Financial Statements.



43







LITIGATION

We describe legal proceedings
which could adversely affect our future performance in Note 16 of the Notes to
Consolidated Financial Statements.

SEMPRA
UTILITIES -- INDUSTRY DEVELOPMENTS AND CAPITAL PROJECTS

We describe capital projects,
electric and natural gas regulation and rates, and other pending proceedings and
investigations that affect our business in Notes 14 and 15 of the Notes to
Consolidated Financial Statements.

SEMPRA
GLOBAL INVESTMENTS

As we discuss in "Cash Flows From
Investing Activities," our investments will significantly impact our future
performance. In addition to the discussion below, we provide information about
these investments in "Capital Resources and Liquidity."

Sempra
Generation

In December 2008, Sempra
Generation completed a solar-energy project, a 10-MW photovoltaic
power-generation site next to its El Dorado Energy power plant near Boulder
City, Nevada.  The plant began operations in December 2008 and began
selling power to Pacific Gas and Electric in 2009 under a 20-year power purchase
agreement.

Sempra Generation also has
purchased land and incurs development costs for potential development of
renewable energy generation projects.

Sempra Generation is no longer
planning to construct a proposed 600-MW natural gas-fired generation plant,
Catoctin Power, in Adamstown, Maryland.

Sempra
Pipelines & Storage

EnergySouth

In October 2008, Sempra Pipelines
& Storage acquired EnergySouth, an energy services holding company based in
Mobile, Alabama.  Principal holdings of EnergySouth include Sempra
Midstream (formerly EnergySouth Midstream) and Mobile Gas. As a natural gas
distribution utility, Mobile Gas serves approximately 93,000 customers in
southwest Alabama.

Sempra Midstream is the general
partner and 91-percent owner of Bay Gas Storage Company (Bay Gas) and owned 60
percent of Mississippi Hub, LLC (Mississippi Hub) through December 31, 2008.
 On January 16, 2009, Sempra Midstream acquired the remaining 40-percent
ownership interest in Mississippi Hub for $94 million.

Bay Gas provides underground
storage and delivery of natural gas.  It is the easternmost storage
facility on the Gulf Coast, with direct service to the Florida market.
Currently, Bay Gas has

§

11.4
Bcf of working natural gas storage capacity that is fully contracted and in
operation

§

an
additional 5 Bcf that is 64-percent contracted and under construction with a
scheduled in-service date of late-2010

We plan to increase the total Bay
Gas capacity to 27 Bcf of underground salt-dome storage.

Mississippi Hub develops
high-turn, underground salt-dome natural gas storage in Simpson County,
Mississippi.  This facility has planned direct interconnections to the
natural gas production areas in eastern Texas, Oklahoma and Arkansas, as well as
to the Northeast sales market.

Currently, Mississippi Hubs
first 15 Bcf of storage capacity is under construction.  Long-term
commitments are in place for 4 Bcf of this capacity.  Operations are slated
to commence in late-2010.  We plan to increase the total Mississippi Hub
capacity to 30 Bcf of high-turn, salt-dome storage by the end of 2015.

We expect capital costs of the
Bay Gas and Mississippi Hub projects to be approximately $800 million.



44







Rockies
Express Pipeline

The Rockies Express project is
comprised of three segments: 1) the Entrega Pipeline, 2) REX-West, and 3)
REX-East.

§

The
Entrega Pipeline runs from the Meeker Hub in Colorado to Wamsutter, Wyoming and
connects Wamsutter to an interconnection with REX at the Cheyenne Hub in
Colorado. The pipeline began service in February 2007.

§

REX-West
extends 713 miles from the Cheyenne Hub to Audrain County in Missouri, and began
interim service in January 2008 and full service in May 2008.

§

We
expect REX-East, which will run 638 miles from Missouri to Clarington, Ohio, to
be fully operational in late 2009 subject to timely receipt of regulatory
approvals.

Total project cost is estimated
to be approximately $6.2 billion.

Rockies Express is requesting
authorization to construct and operate certain facilities that will comprise its
Meeker, Colorado to Cheyenne, Wyoming expansion project. The proposed expansion
will add additional natural gas compression, and the expansion is fully
contracted and is expected to be operational in April 2010.  The total
estimated cost for the proposed project is approximately $78 million.

In February 2006, Rockies Express
entered into an agreement with Overthrust Pipeline Company (Overthrust), a
subsidiary of Questar Corp., for a long-term lease to provide REX with capacity
for up to 1.5 Bcf per day on Overthrust's pipeline. The capacity lease
effectively extends the REX to the Opal Hub in Wyoming.

Liberty Gas
Storage (Liberty)

Liberty, as currently permitted,
is a 17-Bcf salt-cavern natural gas storage facility located in Calcasieu
Parish, Louisiana.  The facility has been under construction by Sempra
Pipelines & Storage and its 25-percent partner Proliance Transportation and
Storage, LLC. When completed, Liberty will be connected with several interstate
pipelines, including the Cameron Interstate Pipeline operated by Sempra
Pipelines & Storage, and will connect area LNG regasification terminals to
an interstate natural gas transmission system and storage facilities.  We
estimate the total project cost to be approximately $250 million, and we have
expended $204 million through December 31, 2008. Completion of the project has
been delayed by subsurface and well-completion problems.  If ongoing
corrective measures prove to be unsuccessful, the salt-cavern facility may not
go into service, or may have reduced capacity when placed in service.  In
the event that the cavern is abandoned, we may be required to take an impairment
charge of up to $65 million after tax.

In 2006, we acquired additional
property with 11 Bcf of existing salt dome caverns and the capability to add
significant additional capacity by mining new caverns.  These caverns would
allow Liberty to expand to at least 28 Bcf of total capacity.  Total
project costs for Liberty and its expansion are expected to be approximately
$450 million to $500 million.

Pipelines in
Mexico

Sempra Pipelines & Storage
completed its expansion of its existing pipeline in Baja California, Mexico, and
the addition of a spur line to connect Sempra LNGs Energía Costa Azul terminal
to an existing Sempra Energy natural gas pipeline in Mexico with
interconnections to the U.S. border. Commercial operation of the pipeline
expansion began in May 2008.

Sempra
LNG

Energía Costa
Azul LNG Receipt Terminal

Sempra LNGs Energía Costa Azul
LNG receipt terminal in Baja California, Mexico, with a capacity of 1 Bcf per
day, began operations in May 2008.  The facility generates revenue under a
capacity agreement with Shell México Gas Natural, expiring in 2028, that permits
Shell to use one-half of the terminals capacity.  We expect that LNG
supplies will begin arriving in 2009 under a 20-year purchase and sale agreement
with Tangguh PSC (discussed in "Commitments" above) that will fully use the
remaining capacity.  Sempra LNG has been negotiating for temporary supplies
of LNG to use the available capacity until the Tangguh PSC supplies arrive.



45







A
nitrogen-injection facility currently under construction will allow the terminal
to process LNG cargoes from a wider variety of sources and will provide
additional revenue from long-term firm capacity payments for the injection
service.  We expect the nitrogen-injection facility to be completed late
2009.

Sempra LNG has a 15-year natural
gas sales contract with Mexicos government-owned electric utility, the CFE,
which started in 2008 and runs through 2022.  The agreement provides the
CFE with an average of about 130 million cubic feet per day of natural gas. The
contract supports the CFEs future energy needs in northern Baja California,
including the Presidente Juarez power plant in Rosarito, Mexico.

We have received approvals from
key governmental agencies to expand the terminal capacity to 2.5 Bcf per day.
 The ultimate scope and timing of a proposed expansion project will depend
on the outcome of negotiations for supply and/or terminal service
agreements.

Cameron LNG
Receipt Terminal

Sempra LNGs Cameron LNG receipt
terminal is currently under construction in Hackberry, Louisiana. Construction
is expected to be completed, and capacity revenues to start, in the second half
of 2009. The terminal is under contract for 40% of its capacity through 2029.
Total project costs for the Cameron LNG receipt terminal are expected to be
approximately $900 million. Force majeure and cost overrun claims have been made
by some of the construction companies at the receipt terminal for additional
costs, primarily related to hurricanes. Sempra LNG is currently in negotiations
with the companies, and cannot estimate at this time the additional amounts that
may be paid. In January 2007, Sempra LNG received approval from the FERC for a
possible expansion of the terminals production capacity to 2.65 Bcf per day of
natural gas from 1.5 Bcf per day. The ultimate scope and timing of the expansion
project will depend on the outcome of negotiations for supply and/or terminal
service agreements.

MARKET
RISK

Market risk is the risk of
erosion of our cash flows, net income, asset values and equity due to adverse
changes in prices for various commodities and in interest rates. Sempra Energy
also may be adversely affected by changes in foreign-currency rates.

Risk
Policies

Sempra Energy has policies
governing its market risk management and trading activities. As required by CPUC
and FERC affiliate compliance rules, Sempra Energy and the Sempra Utilities
maintain separate and independent risk management committees, organizations and
processes for each of the Sempra Utilities and for all non-CPUC regulated
affiliates to provide oversight of these activities. The committees consist of
senior officers who establishpolicy, oversee energy risk management
activities, and monitor the results of trading and other activities to ensure
compliance with our stated energy risk management and trading policies. These
activities include, but are not limited to, daily monitoring of detailed
information for market positions that create credit, liquidity and market
risk.Independently from our energy procurement departments, the
respective oversight organizations and committees separately monitor energy
price risk management, and measure and report the credit, liquidity and market
risk associated with these positions.

Along with other tools, we use
Value at Risk (VaR) to measure our exposure to market risk. VaR is an estimate
of the potential loss on a position or portfolio of positions over a specified
holding period, based on normal market conditions and within a given statistical
confidence interval. VaR is calculated independently by the respective risk
management oversight organizations. We use historical and implied volatilities
and correlations between instruments and positions in our calculations.

The Sempra Utilities use energy
and natural gas derivatives to manage natural gas and energy price risk
associated with servicing load requirements. The use of energy and natural gas
derivatives is subject to certain limitations imposed by company policy and is
in compliance with risk management and trading activity plans that have been
filed with and approved by the CPUC. Any costs or gains/losses associated with
the use of energy and natural gas derivatives are considered to be commodity
costs. Commodity costs are generally passed on to customers as incurred.
However, SoCalGas is subject to incentive mechanisms that reward or penalize the
utility for commodity costs above or below certain benchmarks.



46







In
2008, we completed the formation of RBS Sempra Commodities, a partnership that
owns and operates the commodities-marketing businesses previously held by us as
subsidiaries. We now account for our investment in the partnership under the
equity method. As a result of the transaction, we no longer include on our
Consolidated Balance Sheet the commodities and financial instruments related to
these businesses that subjected us to commodities price risk and credit risk.
However, the joint venture partnership is still subject to these risks, which
could impact our portion of partnership earnings.

In addition, as a transitional
measure, Sempra Energy continues to provide back-up guarantees and credit
support for RBS Sempra Commodities, as we discuss above in "Capital Resources
and Liquidity" and in Note 6 of the Notes to Consolidated Financial
Statements.

We discuss revenue recognition in
Notes 1 and 11 of the Notes to Consolidated Financial Statements and the
additional market-risk information regarding derivative instruments in Note 11
of the Notes to Consolidated Financial Statements.

We have exposure to changes in
commodity prices, interest rates and foreign currency rates and exposure to
counterparty nonperformance. The following discussion of these primary
market-risk exposures as of December 31, 2008, includes a discussion of how
these exposures are managed.

Commodity
Price Risk

Market risk related to physical
commodities is created by volatility in the prices and basis of certain
commodities. Our various subsidiaries are exposed, in varying degrees, to price
risk, primarily to prices in the natural gas and electricity markets. Our policy
is to manage this risk within a framework that considers the unique markets, and
operating and regulatory environments of each subsidiary.

Sempra Global reduces its
commodity price risk exposure substantially by passing most of the risk to its
counterparties in the contracts it enters into. Any residual exposure is
monitored as described above.

The Sempra Utilities' market-risk
exposure is limited due to CPUC-authorized rate recovery of the costs of
commodity purchases, intrastate transportation, and storage activity. However,
SoCalGas may, at times, be exposed to market risk as a result of incentive
mechanisms that reward or penalize the utility for commodity costs above or
below certain benchmarks for SoCalGas' GCIM, which we discuss in Note 15of the Notes to Consolidated Financial Statements. If commodity prices were
to rise too rapidly, it is likely that volumes would decline. This decline would
increase the per-unit fixed costs, which could lead to further volume declines.
The Sempra Utilities manage their risk within the parameters of their market
risk management framework. As of December 31, 2008, the total VaR of the Sempra
Utilities' natural gas and electric positions was not material, and the
procurement activities were in compliance with the procurement plans filed with
and approved by the CPUC.

Interest
Rate Risk

We are exposed to fluctuations in
interest rates primarily as a result of our having issued short- and long-term
debt. Subject to regulatory constraints, we periodically enter into
interest-rate swap agreements to moderate our exposure to interest-rate changes
and to lower our overall costs of borrowing.

The table below shows the nominal
amount and the one-year VaR for long-term debt, excluding commercial paper, at
December 31, 2008:



|                                           |                                           |       |              |  |              |     |              |  |              |       |              |  |   |     |  |  |   |       |  |  |   |     |  | 
|------------------------------------------ | ----------------------------------------- | ----- | ------------ |  | ------------ | --- | ------------ |  | ------------ | ----- | ------------ |  | - | --- |  |  | - | ----- |  |  | - | --- |  | 
|                                           | Sempra Energy Consolidated                |       | SDG&E        |  | PE/SoCalGas 
|(Dollars
in millions)                      | Nominal Debt                              |       | One-Year VaR |  | Nominal Debt |     | One-Year VaR |  | Nominal Debt |       | One-Year VaR
|Utility
fixed-rate*                        | $                                         | 3,023 |              |  | $            | 657 |              |  | $            | 1,910 |              |  | $ | 430 |  |  | $ | 1,113 |  |  | $ | 229 | 
|Utility
variable-rate*                     |                                           | 486   |              |  |              | 64  |              |  |              | 236   |              |  |   | 69  |  |  |   | 250   |  |  |   | 6   | 
|Non-utility,
fixed-rate and variable-rate* |                                           | 2,829 |              |  |              | 467 |              |  |              | --    |              |  |   | --  |  |  |   | --    |  |  |   | --  | 
|*                                          | After
the effects of interest-rate swaps.



At December 31, 2008, the total
notional amount of interest-rate swap transactions ranged from $1.1 billion to
$1.4 billion at Sempra Energy and $249 million to $553 million at SDG&E
(ranges relate to amortizing notional



47







amounts).
At December 31, 2008, SoCalGas' total notional amount of interest-rate swap
transactions was $150 million. We provide further information about
interest-rate swap transactions in Note 11 of the Notes to Consolidated
Financial Statements.

We also are subject to the effect
of interest-rate fluctuations on the assets of our pension plans, other
postretirement benefit plans, and SDG&E's nuclear decommissioning trusts.
However, we expect the effects of these fluctuations, as they relate to the
Sempra Utilities, to be passed on to customers.

Credit
Risk

Credit risk is the risk of loss
that would be incurred as a result of nonperformance of our counterparties'
contractual obligations. We monitor credit risk through a credit-approval
process and the assignment and monitoring of credit limits. We establish these
credit limits based on risk and return considerations under terms customarily
available in the industry.

As with market risk, we have
policies that govern the management of credit risk, which are administered by
the respective credit departments for each of the Sempra Utilities and for all
non-CPUC regulated affiliates and overseen by their separate risk management
committees.

This oversight includes
calculating current and potential credit risk on a daily basis and monitoring
actual balances in comparison to approved limits. We avoid concentration of
counterparties whenever possible, and we believe our credit policies
significantly reduce overall credit risk. These policies include an evaluation
of the following:

§

prospective
counterparties' financial condition (including credit ratings)

§

collateral
requirements under certain circumstances

§

the
use of standardized agreements that allow for the netting of positive and
negative exposures associated with a single counterparty

§

other
security such as lock-box liens and downgrade triggers

We believe that we have provided
adequate reserves for counterparty nonperformance.

As we describe in Note 16 of the
Notes to Consolidated Financial Statements, Sempra Generation has a contract
with the DWR to supply up to 1,900 MW of power to the state of California over
10 years, which began in 2001. This contract results in a significant potential
nonperformance exposure with a single counterparty; however, this risk has been
addressed and mitigated by the liquidated damages provision of the contract.

When they become operational,
development projects at Sempra Global rely significantly on the ability of their
suppliers to perform on long-term agreements and on our ability to enforce
contract terms in the event of nonperformance. Also, the factors that we
consider in evaluating a development project include negotiating customer and
supplier agreements and, therefore, we rely on these agreements for future
performance. We also may base our decision to go forward on development projects
on these agreements.

As noted above under "Interest
Rate Risk," we periodically enter into interest-rate swap agreements to moderate
exposure to interest-rate changes and to lower the overall cost of borrowing. We
would be exposed to interest-rate fluctuations on the underlying debt should a
counterparty to the swap fail to perform.

Foreign
Currency Rate Risk

We have investments in entities
whose functional currency is not the U.S. dollar, exposing us to foreign
exchange movements, primarily in Latin American currencies. For example, as a
result of the devaluation of the Argentine peso that began at the end of 2001,
Sempra Pipelines & Storage has reduced the carrying value of its Argentine
investments downward by a cumulative total of $270 million as of December 31,
2008. In addition, Sempra Pipelines & Storage had reduced the carrying value
of other Latin American investments by a cumulative total of $108 million as of
December 31, 2008. These noncash adjustments continue to occur based on
fluctuations in the functional currencies and generally do not affect net
income, but affect other comprehensive income and accumulated other
comprehensive income (loss). However, in 2006, the impairment of the Argentine
investments reflected the cumulative effect of currency translation adjustments.
We provide further discussion in Note 4 of the Notes to Consolidated Financial
Statements.



48







The
Mexican subsidiaries have U.S. dollar receivables and payables that give rise to
foreign exchange movements for Mexican tax purposes. In addition, monetary
assets and liabilities are adjusted for inflation for Mexican tax purposes. The
fluctuations in foreign currency and inflation are subject to Mexican taxes and
expose us to significant fluctuations in tax expense from changes in the
exchange and inflation rates in Mexico.

Our primary objective in reducing
foreign currency risk is to preserve the economic value of our overseas
investments and to reduce net income volatility that would otherwise occur due
to exchange-rate fluctuations.

Our net investment in our Latin
American operating companies and the resulting cash flows are partially
protected against normal exchange-rate fluctuations by rate-setting mechanisms
that are intended to compensate for local inflation and currency exchange-rate
fluctuations. In addition, we offset material cross-currency transactions and
net income exposure through various means, including financial instruments and
short-term investments.

Because we do not hedge our net
investment in foreign countries, we are susceptible to volatility in other
comprehensive income caused by exchange-rate fluctuations.

CRITICAL
ACCOUNTING POLICIES AND ESTIMATES, AND KEY NONCASH PERFORMANCE INDICATORS

Management views certain
accounting policies as critical because their application is the most relevant,
judgmental, and/or material to our financial position and results of operations,
and/or because they require the use of material judgments and estimates.

We describe our significant
accounting policies in Note 1 of the Notes to Consolidated Financial Statements.
 We discuss choices among alternative accounting policies that are material
to our financial statements and information concerning significant estimates
with the audit committee of the Sempra Energy board of directors.

The most critical policies, all
of which are mandatory under generally accepted accounting principles in the
United States of America and the regulations of the Securities and Exchange
Commission, appear in the table below:



|                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|CRITICAL ACCOUNTING
POLICIES                                                                                                                                                                                                                                                           
|SEMPRA
ENERGY, SDG&E AND SOCALGAS                                                                                                                                                                                                                                                      
|CONTINGENCIES                                                                                                                                                                                                                                                                          
|Statement
of Financial Accounting Standards (SFAS) 5, Accounting for
Contingencies, establishes the amounts and timing of when we provide
for contingent losses. We continuously assess potential loss contingencies
for litigation claims, environmental remediation and other
events.
|Assumptions
& Approach Used                                                                                                                                                                                                                                                             |  | We
accrue losses for the estimated impacts of various conditions, situations
or circumstances involving uncertain outcomes. For loss contingencies, we
accrue the loss if:

§
information
is available indicating it is probable that a loss has been incurred,
given the likelihood of uncertain future events, and
§
the
amounts of the loss can be reasonably estimated.

SFAS
5 does not permit the accrual of contingencies that might result in
gains.
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                    |  | Details
of our issues in this area are discussed in Note 16 of the Notes to
Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                              



49









|                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|SEMPRA
ENERGY, SDG&E AND SOCALGAS (CONTINUED)                                                                                                                                                                                                                 
|REGULATORY
ACCOUNTING                                                                                                                                                                                                                                         
|SFAS
71, Accounting for the Effects of Certain Types of Regulation, has
a significant effect on the way the Sempra Utilities record assets and
liabilities, and the related revenues and expenses that would not be
recorded absent the principles in SFAS 71.
|Assumptions
& Approach Used                                                                                                                                                                                                                                    |  | The
Sempra Utilities record a regulatory asset if it is probable that, through
the ratemaking process, the utility will recover that asset from
customers. Similarly, regulatory liabilities are recorded for amounts
recovered in rates in advance of the expenditure. The Sempra Utilities
review probabilities associated with regulatory balances whenever new
events occur, such as:

§
changes
in the regulatory environment or the utility's competitive position
§
issuance
of a regulatory commission order
§
passage
of new legislation

To
the extent that circumstances associated with regulatory balances change,
the regulatory balances could be adjusted.                                                                                                                     
|Effect
if Different Assumptions Used                                                                                                                                                                                                                           |  | Details
of the Sempra Utilities' regulatory assets and liabilities are discussed
in Note 1 of the Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|INCOME
TAXES                                                                                                                                                                                                                                                  
|SFAS
109, Accounting for Income Taxes, governs the way we provide for
income taxes.                                                                                                                                                                           
|Assumptions
& Approach Used                                                                                                                                                                                                                                    |  | Our
income tax expense and related balance sheet amounts involve significant
management estimates and judgments. Amounts of deferred income tax assets
and liabilities, as well as current and noncurrent accruals, involve
judgments and estimates of the timing and probability of recognition of
income and deductions by taxing authorities. When we evaluate the
anticipated resolution of income-tax issues, we consider

§
past
resolutions of the same or similar issue
§
the
status of any income-tax examination in progress
§
positions
taken by taxing authorities with other taxpayers with similar issues

The
likelihood of deferred tax recovery is based on analyses of the deferred
tax assets and our expectation of future taxable income, based on our
strategic planning.
|Effect
if Different Assumptions Used                                                                                                                                                                                                                           |  | Actual
income taxes could vary from estimated amounts because of:

§
future
impacts of various items including changes in tax laws
§
our
financial condition in future periods
§
the
resolution of various income tax issues between us and taxing
authorities

We
discuss details of our issues in this area in Note 8 of the Notes to
Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                     



50









|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|SEMPRA
ENERGY, SDG&E AND SOCALGAS (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                      
|INCOME
TAXES (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
a company's financial statements. FIN 48 addresses how an entity should
recognize, measure, classify and disclose in its financial statements
uncertain tax positions that it has taken or expects to take in an income
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
|Assumptions
& Approach Used                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | For
a position to qualify for benefit recognition under FIN 48, the position
must have at least a "more likely than not" chance of being sustained
(based on the positions technical merits) upon challenge by the
respective authorities. The term "more likely than not" means a likelihood
of more than 50 percent. If we do not have a more likely than not position
with respect to a tax position, then we may not recognize any of the
potential tax benefit associated with the position. A tax position that
meets the "more likely than not" recognition shall be measured as the
largest amount of tax benefit that is greater than 50 percent likely of
being realized upon the effective resolution of the tax
position.                                       
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Unrecognized
tax benefits involve managements judgment regarding the likelihood of the
benefit being sustained. The final resolution of uncertain tax positions
could result in adjustments to recorded amounts and may affect our results
of operations, financial position and cash flows.

We
discuss additional information related to accounting for uncertainty in
income taxes in Note 8 of the Notes to Consolidated Financial
Statements.                                                                                                                                                                                                                                                                                                                          
|DERIVATIVES                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|SFAS
133, Accounting for Derivative Instruments and Hedging Activities,
as amended, and related Emerging Issues Task Force Issues govern the
accounting requirements for derivatives.                                                                                                                                                                                                                                                                              
|Assumptions
& Approach Used                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | We
value derivative instruments at fair value on the balance sheet. Depending
on the purpose for the contract and the applicability of hedge accounting,
the impact of instruments may be offset in earnings, on the balance sheet,
or in other comprehensive income. We also use normal purchase or sale
accounting for certain contracts. As discussed elsewhere in this report,
whenever possible, we use exchange quotations or other third-party pricing
to estimate fair values; if no such data is available, we use internally
developed models and other techniques. The assumed collectibility of
derivative assets and receivables considers

§
events
specific to a given counterparty
§
the
tenor of the transaction
§
the
credit-worthiness of the counterparty
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                                                                                                                                                                                                |  | The
application of hedge accounting to certain derivatives and the normal
purchase or sale election is made on a contract-by-contract basis. Using
hedge accounting or the normal purchase or sale election in a different
manner could materially impact our results of operations. The effects of
derivatives accounting have a significant impact on Sempra Energys
consolidated balance sheet but have no significant effect on the Sempra
Utilities' results of operations because of the principles in SFAS 71 and
the application of the normal purchase or sale election. We provide
details of our financial instruments in Note 11 of the Notes to
Consolidated Financial Statements.                                                                             



51









|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|SEMPRA
ENERGY, SDG&E AND SOCALGAS (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|DEFINED
BENEFIT PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|We
have funded and unfunded noncontributory defined benefit plans that
together cover substantially all of our employees. We also have other
postretirement benefit plans covering substantially all of our employees.
We account for our pension and other postretirement benefit plans under
SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits,SFAS 106, Employers' Accounting
for Postretirement Benefits Other than Pensions,SFAS 132(R),
Employers' Disclosures about Pensions and Other Postretirement Benefits -
an amendment of FASB Statements No. 87, 88, and 106,and under SFAS
158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106,
and 132(R).
|Assumptions
& Approach Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | To
measure our pension and postretirement obligations, costs and liabilities,
we rely on several assumptions. We consider current market conditions,
including interest rates, in making these assumptions.  We annually
review these assumptions prior to the beginning of each year and update
when appropriate.

The
critical assumptions used to develop the required estimates include the
following key factors:

§
discount
rate
§
expected
return on plan assets
§
health-care
cost trend rates
§
mortality
rates
§
rate
of compensation increases
§
payout
elections (lump sum or annuity)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | The
actuarial assumptions we use may differ materially from actual results due
to:

§
return
on plan assets
§
changing
market and economic conditions
§
higher
or lower withdrawal rates
§
longer
or shorter participant life spans
§
more
or fewer lump sum versus annuity payout elections made by plan
participants

These
differences, other than those related to the Sempra Utilities plans, where
rate recovery offsets any effects of the assumptions on net income, may
result in a significant impact to the amount of pension and postretirement
benefit expense we record. For the remaining plans, the approximate annual
effect on net income of a 0.25 percent point increase or decrease in the
assumed discount rate would be $2 million and a 0.25 percent point
increase or decrease in the assumed rate of return on plan assets
would be less than $1 million.

We
provide information about the impact of increases and decreases in the
health-care cost trend rate in Note 9 of the Notes to Consolidated
Financial Statements.



52









|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|SEMPRA
ENERGY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|IMPAIRMENT
TESTING OF LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|SFAS
144, Accounting for the Impairment or Disposal of Long-Lived
Assets, requires that long-lived assets be evaluated as necessary for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such assets may not be recoverable or the assets
meet the held-for-sale criteria under SFAS 144.                                                                                                                                                                                                                                                                                                                            
|Assumptions
& Approach Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Whenever
events or changes in circumstances indicate that an asset's carrying
amount may not be recoverable, we apply SFAS 144 to estimate the fair
value of our long-lived assets. For these estimates, we may consider data
from multiple valuation methods, including data from market participants.
We exercise judgment to estimate the future cash flows and the useful
lives of long-lived assets and to determine management's intent to use the
assets. Management's intent to use or dispose of assets is subject to
re-evaluation and can change over time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | The
fair value of long-lived assets can vary if differing estimates and
assumptions are used in the applied valuation techniques. We discuss
impairment of long-lived assets in Note 1 of the Notes to Consolidated
Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|CARRYING
VALUE OF EQUITY METHOD INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
Accounting Principles Board (APB) Opinion 18, The Equity Method of
Accounting for Investments in Common Stock(APB 18),
investments are generally accounted for under the equity method when we
have an ownership interest of 20 to 50 percent. For investments accounted
for under the equity method of accounting, the premium or excess cost over
underlying fair value of net assets is referred to as equity method
goodwill. In accordance with APB 18, as amended by SFAS 142, Goodwill
and Other Intangible Assets, equity method goodwill is not subject to
amortization but rather to impairment testing, as is the equity method
investment overall.
|Assumptions
& Approach Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | We
consider whether the fair value of each equity investment as a whole, not
the underlying net assets, has declined and whether that decline is other
than temporary. Therefore, we re-evaluate the amount at which we carry the
excess of cost over fair value of net assets accounted for under the
equity method. We discuss unamortized goodwill related to unconsolidated
subsidiaries in Note 1 of the Notes to Consolidated Financial Statements.

When
calculating estimates of fair or realizable values, we consider whether we
intend to sell the investment or hold it. For certain held investments,
critical assumptions include

§
the
prospects for an energy trading enterprise
§
the
availability and costs of natural gas
§
competing
fuels (primarily propane) and electricity

Sempra
Pipelines & Storage owns non-controlling interests in two Argentine
natural gas distribution companies. In view of continuing disputes with
the Argentine government, we decided to sell our investments in these
companies in December 2006. We recorded a noncash impairment charge to net
income of $221 million in the fourth quarter of 2006.
|Effect
if Different Assumptions Used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | We
estimated the fair value of our Argentine investments using primarily an
income-based valuation approach, including risk assumptions for similar
investments. The risk assumptions applied by other market participants to
value the investments could vary significantly, which could result in a
different impairment charge, and ultimately additional loss or gain upon
sale.

We
provide additional details in Note 4 of the Notes to Consolidated
Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              





53







KEY
NONCASH PERFORMANCE INDICATORS

A discussion of key noncash
performance indicators related to each business unit follows:

Sempra
Utilities

Key noncash performance
indicators include number of customers, and natural gas volumes and electricity
sold. Additional noncash performance indicators include goals related to safety,
customer service, customer reputation, environmental considerations, on-time and
on-budget completion of major projects and initiatives, and in the case of
SDG&E, electric reliability. We discuss natural gas volumes and electricity
sold in "Results of Operations  Changes in Revenues, Costs and Earnings"
above.

Sempra
Commodities

Prior to the sale of our
commodities-marketing businesses to RBS Sempra Commodities as discussed in Note
3, Sempra Commodities did not use noncash performance factors. Its key
indicators were profit margins by product line and by geographic area.

Sempra
Generation

Key noncash performance
indicators include plant availability factors at the generating plants. For
competitive reasons, Sempra Generation does not disclose its plant availability
factors. Additional noncash performance indicators include goals related to
safety, environmental considerations, and fixed and variable operating and
maintenance costs.

Sempra
Pipelines & Storage

Key noncash performance
indicators for Sempra Pipelines & Storage's consolidated operations include
natural gas sales volume, facility availability, capacity utilization, and for
some Mexican pipeline operations, customer count. We discuss these above in "Our
Business" and "Factors Influencing Future Performance." Additional noncash
performance indicators include goals related to safety, environmental
considerations, and regulatory compliance.

Sempra
LNG

Key noncash performance
indicators include plant availability and capacity utilization. We discuss these
above in "Our Business" and "Factors Influencing Future Performance." Additional
noncash performance indicators include goals related to safety, environmental
considerations, and on-time and on-budget completion of development
projects.

NEW
ACCOUNTING STANDARDS

We discuss the relevant
pronouncements that have recently become effective and have had or may have a
significant effect on our financial statements in Note 2 of the Notes to
Consolidated Financial Statements.



54









INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this report
that are not historical fact and constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are necessarily based upon assumptions with respect
to the future, involve risks and uncertainties, and are not guarantees of
performance. These forward-looking statements represent our estimates and
assumptions only as of the date of this report.

In this report, when we use words
such as "believes," "expects," "anticipates," "plans," "estimates," "projects,"
"contemplates," "intends," "depends," "should," "could," "would," "may,"
"potential," "target," "goals," or similar expressions, or when we discuss our
strategy, plans or intentions, we are making forward-looking statements.

Factors, among others, that could
cause our actual results and future actions to differ materially from those
described in forward-looking statements include

§

local,
regional, national and international economic, competitive, political,
legislative and regulatory conditions and developments;

§

actions
by the California Public Utilities Commission, the California State Legislature,
the California Department of Water Resources, the Federal Energy Regulatory
Commission, the Federal Reserve Board, and other regulatory and governmental
bodies in the United States, the United Kingdom and other countries;

§

capital
markets conditions and inflation, interest and exchange rates;

§

energy
and trading markets, including the timing and extent of changes and volatility
in commodity prices;

§

the
availability of electric power, natural gas and liquefied natural gas;

§

weather
conditions and conservation efforts;

§

war
and terrorist attacks;

§

business,
regulatory, environmental and legal decisions and requirements;

§

the
status of deregulation of retail natural gas and electricity delivery;

§

the
timing and success of business development efforts;

§

the
resolution of litigation; and

§

other
uncertainties, all of which are difficult to predict and many of which are
beyond our control.

We caution you not to rely unduly
on any forward-looking statements. You should review and consider carefully the
risks, uncertainties and other factors that affect our business as described in
this report and other reports that we file with the Securities and Exchange
Commission.



55









COMMON
STOCK DATA

SEMPRA
ENERGY COMMON STOCK

Our common stock is traded on the
New York Stock Exchange. At February 12, 2009, there were 46,000 record holders
of our common stock.

The following table shows Sempra
Energy quarterly common stock data:



|                                                                                                                                                                                                        |      |              |        |  |               |        |  |              |        |  |               |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------ | ------ |  | ------------- | ------ |  | ------------ | ------ |  | ------------- | ------ | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                        |      | FirstQuarter |        |  | SecondQuarter |        |  | ThirdQuarter |        |  | FourthQuarter |       
|2008                                                                                                                                                                                                    |      |              |        |  |               |        |  |              |        |  |               |       
|Market
price                                                                                                                                                                                            |      |              |        |  |               |        |  |              |        |  |               |       
|                                                                                                                                                                                                        | High |              | $63.00 |  |               | $59.96 |  |              | $58.99 |  |               | $51.21 | 
|                                                                                                                                                                                                        | Low  |              | $48.58 |  |               | $53.02 |  |              | $43.35 |  |               | $34.29 | 
|                                                                                                                                                                                                        |      |              |        |  |               |        |  |              |        |  |               |       
|2007                                                                                                                                                                                                    |      |              |        |  |               |        |  |              |        |  |               |       
|Market
price                                                                                                                                                                                            |      |              |        |  |               |        |  |              |        |  |               |       
|                                                                                                                                                                                                        | High |              | $63.03 |  |               | $66.38 |  |              | $62.25 |  |               | $64.21 | 
|                                                                                                                                                                                                        | Low  |              | $54.73 |  |               | $57.04 |  |              | $50.95 |  |               | $57.62 | 
|We
declared dividends of $0.32 per share in the first quarter of 2008 and
$0.35 per share in each of the remaining quarters of 2008.  We
declared dividends of $0.31 per share in each quarter of
2007.

PE,
SOCALGAS AND SDG&E COMMON STOCK

Sempra Energy owns all of PE's
issued and outstanding common stock. PE owns all of the common stock of
SoCalGas. Enova Corporation, a wholly owned subsidiary of Sempra Energy, owns
all of SDG&Es issued and outstanding common stock.

Information concerning dividend
declarations for PE, SoCalGas and SDG&E is included in each of their
"Statements of Consolidated Comprehensive Income and Changes in Shareholders'
Equity" set forth in the Consolidated Financial Statements.

DIVIDEND
RESTRICTIONS

The payment and the amount of
future dividends for Sempra Energy, SDG&E, PE, and SoCalGas are within the
discretion of their boards of directors. As a result of its projected capital
expenditure program, SDG&E has elected to suspend the payment of dividends
on its common stock to Sempra Energy over the last three years, and future
common dividends from SDG&E, PE and SoCalGas may be limited to reduce the
amount of debt financing required during periods of increased capital
expenditures.  The CPUCs regulation of the Sempra Utilities capital
structures limits the amounts that the Sempra Utilities can pay us in the form
of loans and dividends.



56









PERFORMANCE
GRAPH -- COMPARATIVE TOTAL SHAREHOLDER RETURNS

The following graph (Figure 2)
compares the percentage change in the cumulative total shareholder return on
Sempra Energy common stock for the five-year period ending December 31, 2008,
with the performance over the same period of the Standard & Poor's 500 Index
and the Standard & Poor's 500 Utilities Index.

These returns were calculated
assuming an initial investment of $100 in our common stock, the S&P 500
Index and the S&P 500 Utilities Index on December 31, 2003, and the
reinvestment of all dividends.



[sempra_annualreport2008014.gif]

Figure 2: Comparison of
Cumulative Five-Year Total Return



57









|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------ | ---- | ---- | ------ |  | - | ------ |  | - | ------ |  | - | ------ | --- | 
|FIVE-YEAR
SUMMARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                
|The following tables present selected financial
data of Sempra Energy, SDG&E, PE and SoCalGas for the five years ended
December 31, 2008. The data is derived from the audited consolidated
financial statements of each company. You should read this information in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and notes contained in this Annual Report.
|FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA FOR SEMPRA ENERGY                                                                                                                                                                                                                                                                                                                                                                                                     
|(In
millions, except for per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | At December 31 or for the years then ended                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 2008                                                                                             | 2007   | 2006 | 2005 | 2004  
|Sempra
Energy Consolidated                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Sempra
Utilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Natural
gas                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $                                                                                                | 5,419  |      | $    | 4,869  |  | $ | 4,763  |  | $ | 5,253  |  | $ | 4,537  |    
|Electric                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                  | 2,553  |      |      | 2,184  |  |   | 2,136  |  |   | 1,789  |  |   | 1,658  |    
|Sempra
Global and parent                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                  | 2,786  |      |      | 4,385  |  |   | 4,862  |  |   | 4,470  |  |   | 3,039  |    
|Total
revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $                                                                                                | 10,758 |      | $    | 11,438 |  | $ | 11,761 |  | $ | 11,512 |  | $ | 9,234  |    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Income
from continuing operations                                                                                                                                                                                                                                                                                                                                                                                                                                   | $                                                                                                | 1,113  |      | $    | 1,125  |  | $ | 1,091  |  | $ | 913    |  | $ | 915    |    
|Net
income                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $                                                                                                | 1,113  |      | $    | 1,099  |  | $ | 1,406  |  | $ | 920    |  | $ | 895    |    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Income
per common share from continuing operations:                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                               | $                                                                                                | 4.50   |      | $    | 4.34   |  | $ | 4.25   |  | $ | 3.71   |  | $ | 4.01   |    
|Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $                                                                                                | 4.43   |      | $    | 4.26   |  | $ | 4.17   |  | $ | 3.62   |  | $ | 3.92   |    
|Net
income per common share:                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                               | $                                                                                                | 4.50   |      | $    | 4.24   |  | $ | 5.48   |  | $ | 3.74   |  | $ | 3.92   |    
|Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $                                                                                                | 4.43   |      | $    | 4.16   |  | $ | 5.38   |  | $ | 3.65   |  | $ | 3.83   |    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Dividends
declared per common share                                                                                                                                                                                                                                                                                                                                                                                                                                 | $                                                                                                | 1.37   |      | $    | 1.24   |  | $ | 1.20   |  | $ | 1.16   |  | $ | 1.00   |    
|Return
on common equity                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                  | 13.6%  |      |      | 13.9%  |  |   | 20.6%  |  |   | 16.7%  |  |   | 20.5%  |    
|Effective
income tax rate                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                  | 29%    |      |      | 34%    |  |   | 33%    |  |   | 4%     |  |   | 18%    |    
|Price
range of common shares                                                                                                                                                                                                                                                                                                                                                                                                                                        | $                                                                                                | 63.00- |      | $    | 66.38- |  | $ | 57.35- |  | $ | 47.86- |  | $ | 37.93- |    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  | 34.29  |      |      | 50.95  |  |   | 42.90  |  |   | 35.53  |  |   | 29.51  |    
|Weighted
average rate base:                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|SoCalGas                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $                                                                                                | 2,702  |      | $    | 2,642  |  | $ | 2,477  |  | $ | 2,386  |  | $ | 2,351  |    
|SDG&E                                                                                                                                                                                                                                                                                                                                                                                                                                                               | $                                                                                                | 4,050  |      | $    | 3,846  |  | $ | 3,474  |  | $ | 2,902  |  | $ | 2,755  |    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|AT
DECEMBER 31                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                  |        |      |      |        |  |   |        |  |   |        |  |   |        |    
|Current
assets*                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $                                                                                                | 2,476  |      | $    | 9,964  |  | $ | 10,766 |  | $ | 12,827 |  | $ | 9,156  |    
|Total
assets*                                                                                                                                                                                                                                                                                                                                                                                                                                                       | $                                                                                                | 26,400 |      | $    | 28,717 |  | $ | 27,699 |  | $ | 28,246 |  | $ | 23,697 |    
|Current
liabilities*                                                                                                                                                                                                                                                                                                                                                                                                                                                | $                                                                                                | 3,612  |      | $    | 9,020  |  | $ | 9,099  |  | $ | 11,253 |  | $ | 9,033  |    
|Long-term
debt (excludes current portion)                                                                                                                                                                                                                                                                                                                                                                                                                           | $                                                                                                | 6,544  |      | $    | 4,553  |  | $ | 4,525  |  | $ | 4,815  |  | $ | 4,182  |    
|Short-term
debt**                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $                                                                                                | 913    |      | $    | 1,071  |  | $ | 933    |  | $ | 1,141  |  | $ | 783    |    
|Trust
preferred securities                                                                                                                                                                                                                                                                                                                                                                                                                                          | $                                                                                                | --     |      | $    | --     |  | $ | --     |  | $ | --     |  | $ | 200    | ***
|Shareholders
equity                                                                                                                                                                                                                                                                                                                                                                                                                                                | $                                                                                                | 7,969  |      | $    | 8,339  |  | $ | 7,511  |  | $ | 6,160  |  | $ | 4,865  |    
|Common
shares outstanding                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                  | 243.3  |      |      | 261.2  |  |   | 262.0  |  |   | 257.2  |  |   | 234.2  |    
|Book
value per share                                                                                                                                                                                                                                                                                                                                                                                                                                                | $                                                                                                | 32.75  |      | $    | 31.93  |  | $ | 28.67  |  | $ | 23.95  |  | $ | 20.77  |    
|*                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | As
adjusted in 2004 through 2007 for the retrospective adoption of FASB Staff
Position FIN 39-1.
|**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Includes
long-term debt due within one year.                                                    
|***                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | We
redeemed these securities in February 2005.                                                  



On April 1, 2008, we sold our
commodities-marketing businesses into a joint venture, and began accounting for
these businesses under the equity method. We discuss this transaction further in
Notes 3 and 4 of the Notes to Consolidated Financial Statements.

We discuss discontinued
operations in Note 5 of the Notes to Consolidated Financial Statements, and
litigation and other contingencies in Note 16 of the Notes to Consolidated
Financial Statements.



58









|                                                                          |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       |  | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ----- | ---- | ---- | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | 
|FIVE-YEAR
SUMMARIES (Contd)                                             
|FIVE-YEAR
SUMMARIES OF SELECTED FINANCIAL DATA FOR SDG&E, PE AND
SOCALGAS
|(Dollars
in millions)                                                    
|                                                                          | At December 31 or for the years then ended                                                      
|                                                                          | 2008                                                                                             | 2007  | 2006 | 2005 | 2004 
|SDG&E                                                                     |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Income
Statement Data:                                                    |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Operating
revenues                                                        | $                                                                                                | 3,251 |      | $    | 2,852 |  | $ | 2,785 |  | $ | 2,512 |  | $ | 2,274 | 
|Operating
income                                                          | $                                                                                                | 570   |      | $    | 500   |  | $ | 477   |  | $ | 393   |  | $ | 393   | 
|Dividends
on preferred stock                                              | $                                                                                                | 5     |      | $    | 5     |  | $ | 5     |  | $ | 5     |  | $ | 5     | 
|Earnings
applicable to common shares                                      | $                                                                                                | 339   |      | $    | 283   |  | $ | 237   |  | $ | 262   |  | $ | 208   | 
|                                                                          |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Balance
Sheet Data:                                                       |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Total
assets*                                                             | $                                                                                                | 9,079 |      | $    | 8,499 |  | $ | 7,794 |  | $ | 7,489 |  | $ | 6,834 | 
|Long-term
debt (excludes current portion)                                 | $                                                                                                | 2,142 |      | $    | 1,958 |  | $ | 1,638 |  | $ | 1,455 |  | $ | 1,022 | 
|Short-term
debt**                                                         | $                                                                                                | 2     |      | $    | --    |  | $ | 138   |  | $ | 66    |  | $ | 66    | 
|Preferred
stock subject to mandatory redemption                           | $                                                                                                | --    |      | $    | 14    |  | $ | 17    |  | $ | 19    |  | $ | 21    | 
|Shareholders
equity                                                      | $                                                                                                | 2,621 |      | $    | 2,279 |  | $ | 1,994 |  | $ | 1,562 |  | $ | 1,376 | 
|Pacific
Enterprises                                                       |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Income
Statement Data:                                                    |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Operating
revenues                                                        | $                                                                                                | 4,768 |      | $    | 4,282 |  | $ | 4,181 |  | $ | 4,617 |  | $ | 3,997 | 
|Operating
income                                                          | $                                                                                                | 435   |      | $    | 436   |  | $ | 439   |  | $ | 347   |  | $ | 407   | 
|Dividends
on preferred stock                                              | $                                                                                                | 4     |      | $    | 4     |  | $ | 4     |  | $ | 4     |  | $ | 4     | 
|Earnings
applicable to common shares                                      | $                                                                                                | 248   |      | $    | 238   |  | $ | 235   |  | $ | 221   |  | $ | 232   | 
|                                                                          |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Balance
Sheet Data:                                                       |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Total
assets*                                                             | $                                                                                                | 7,907 |      | $    | 6,802 |  | $ | 6,841 |  | $ | 6,531 |  | $ | 6,088 | 
|Long-term
debt (excludes current portion)                                 | $                                                                                                | 1,270 |      | $    | 1,113 |  | $ | 1,107 |  | $ | 1,100 |  | $ | 864   | 
|Short-term
debt**                                                         | $                                                                                                | 100   |      | $    | --    |  | $ | --    |  | $ | 96    |  | $ | 30    | 
|Shareholders
equity                                                      | $                                                                                                | 1,940 |      | $    | 1,916 |  | $ | 1,930 |  | $ | 1,834 |  | $ | 1,814 | 
|SoCalGas                                                                  |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Income
Statement Data:                                                    |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Operating
revenues                                                        | $                                                                                                | 4,768 |      | $    | 4,282 |  | $ | 4,181 |  | $ | 4,617 |  | $ | 3,997 | 
|Operating
income                                                          | $                                                                                                | 434   |      | $    | 437   |  | $ | 439   |  | $ | 347   |  | $ | 409   | 
|Dividends
on preferred stock                                              | $                                                                                                | 1     |      | $    | 1     |  | $ | 1     |  | $ | 1     |  | $ | 1     | 
|Earnings
applicable to common shares                                      | $                                                                                                | 244   |      | $    | 230   |  | $ | 223   |  | $ | 211   |  | $ | 232   | 
|                                                                          |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Balance
Sheet Data:                                                       |                                                                                                  |       |      |      |       |  |   |       |  |   |       |  |   |       | 
|Total
assets*                                                             | $                                                                                                | 7,351 |      | $    | 6,406 |  | $ | 6,359 |  | $ | 6,007 |  | $ | 5,636 | 
|Long-term
debt (excludes current portion)                                 | $                                                                                                | 1,270 |      | $    | 1,113 |  | $ | 1,107 |  | $ | 1,100 |  | $ | 864   | 
|Short-term
debt**                                                         | $                                                                                                | 100   |      | $    | --    |  | $ | --    |  | $ | 96    |  | $ | 30    | 
|Shareholders
equity                                                      | $                                                                                                | 1,490 |      | $    | 1,470 |  | $ | 1,490 |  | $ | 1,417 |  | $ | 1,407 | 
|*                                                                         | As
adjusted in 2004 through 2007 for the retrospective adoption of FASB Staff
Position FIN 39-1.
|**                                                                        | Includes
long-term debt due within one year.                                                    



We do not provide per-share data
for SDG&E, Pacific Enterprises and SoCalGas, since each of them is directly
or indirectly wholly owned by Sempra Energy.

We discuss litigation and other
contingencies in Note 16 of the Notes to Consolidated Financial Statements.



59







CONTROLS
AND PROCEDURES

EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES

Sempra Energy, SDG&E, PE and
SoCalGas have designed and maintain disclosure controls and procedures to ensure
that information required to be disclosed in their respective reports is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission and is
accumulated and communicated to the management of each company, including each
respective Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure. In designing and evaluating these
controls and procedures, the management of each company recognizes that any
system of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives;
therefore, the management of each company applies judgment in evaluating the
cost-benefit relationship of other possible controls and procedures.

Under the supervision and with
the participation of management, including the Chief Executive Officers and
Chief Financial Officers of Sempra Energy, SDG&E, PE and SoCalGas, each
company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of December 31, 2008, the end of the
period covered by this report. Based on these evaluations, the Chief Executive
Officers and Chief Financial Officers of Sempra Energy, SDG&E, PE and
SoCalGas concluded that their respective company's disclosure controls and
procedures were effective at the reasonable assurance level.

MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

SEMPRA
ENERGY, SDG&E, PE, SOCALGAS

The respective management of each
company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of the management of each
company, including each company's principal executive officer and principal
financial officer, the effectiveness of each company's internal control over
financial reporting was evaluated based on the framework in Internal Control
-- Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on the evaluations, each company concluded
that its internal control over financial reporting was effective as of December
31, 2008. Deloitte & Touche, LLP audited the effectiveness of each company's
internal control over financial reporting as of December 31, 2008, as stated in
their reports, which are included in this Annual Report.

There have been no changes in the
companies' internal control over financial reporting during the most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the companies' internal control over financial reporting.

CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.



60







REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

SEMPRA
ENERGY

To
the Board of Directors and Shareholders of Sempra Energy:

We have audited the internal
control over financial reporting of Sempra Energy and subsidiaries (the
"Company") as of December 31, 2008, based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.  The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control
over Financial Reporting.  Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.  A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis.  Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year
ended December 31, 2008 of the Company and our report dated February 23, 2009,
expressed an unqualified opinion on those financial statements.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





61







To
the Board of Directors and Shareholders of Sempra Energy:

We have audited the accompanying
consolidated balance sheets of Sempra Energy and subsidiaries (the "Company") as
of December 31, 2008 and 2007, and the related consolidated statements of
income, comprehensive income and changes in shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2008.  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 the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of Sempra Energy and subsidiaries as of December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion on the Company's internal control over
financial reporting.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





62









SAN
DIEGO GAS & ELECTRIC COMPANY

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

We have audited the internal
control over financial reporting of San Diego Gas & Electric Company and
subsidiary (the "Company") as of December 31, 2008, based on criteria
established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission.  The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements
Report on Internal Control over Financial Reporting.  Our responsibility is
to express an opinion on the Company's internal control over financial reporting
based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.  A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis.  Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year
ended December 31, 2008 of the Company and our report dated February 23, 2009,
expressedan unqualified opinion on those financial statements.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009







63







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

We have audited the accompanying
consolidated balance sheets of San Diego Gas & Electric Company and
subsidiary (the "Company") as of December 31, 2008 and 2007, and the related
consolidated statements of income, comprehensive income and changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2008.  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 the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of San Diego Gas & Electric Company and subsidiary as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of
America.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion on the Company's internal control over
financial reporting.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





64









PACIFIC
ENTERPRISES

To
the Board of Directors and Shareholders of Pacific Enterprises:

We have audited the internal
control over financial reporting of Pacific Enterprises and subsidiaries (the
"Company") as of December 31, 2008, based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.  The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control
over Financial Reporting.  Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.  A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis.  Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year
ended December 31, 2008 of the Company and our report dated February 23, 2009,
expressed an unqualified opinion on those financial statements.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





65







To
the Board of Directors and Shareholders of Pacific Enterprises:

We have audited the accompanying
consolidated balance sheets of Pacific Enterprises and subsidiaries (the
"Company") as of December 31, 2008 and 2007, and the related consolidated
statements of income, comprehensive income and changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2008.  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 the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of Pacific Enterprises and subsidiaries as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion on the Company's internal control over
financial reporting.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





66









SOUTHERN
CALIFORNIA GAS COMPANY

To
the Board of Directors and Shareholders of Southern California Gas Company:

We have audited the internal
control over financial reporting of Southern California Gas Company and
subsidiaries (the "Company") as of December 31, 2008, based on criteria
established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission.  The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements
Report on Internal Control over Financial Reporting.  Our responsibility is
to express an opinion on the Company's internal control over financial reporting
based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.  A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis.  Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year
ended December 31, 2008 of the Company and our report dated February 23, 2009,
expressed an unqualified opinion on those financial statements.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





67







To
the Board of Directors and Shareholders of Southern California Gas
Company:

We have audited the accompanying
consolidated balance sheets of Southern California Gas Company and subsidiaries
(the "Company") as of December 31, 2008 and 2007, and the related consolidated
statements of income, comprehensive income and changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2008.  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 the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of Southern California Gas Company and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion on the Company's internal control over
financial reporting.



/S/ DELOITTE
& TOUCHE LLP



San Diego, CaliforniaFebruary 23, 2009





68









|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|SEMPRA
ENERGY                                                                                                   
|STATEMENTS
OF CONSOLIDATED INCOME                                                                               
|(Dollars
in millions, except per share amounts)                                                                 
|                                                                                                                 | Years ended December 31,
|                                                                                                                 | 2008                     | 2007    | 2006
|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|REVENUES                                                                                                         |                          |         |      |   |         |   |   |         |  
|Sempra
Utilities                                                                                                 | $                        | 7,972   |      | $ | 7,053   |   | $ | 6,899   |  
|Sempra
Global and parent                                                                                         |                          | 2,786   |      |   | 4,385   |   |   | 4,862   |  
|Total
revenues                                                                                                   |                          | 10,758  |      |   | 11,438  |   |   | 11,761  |  
|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|EXPENSES
AND OTHER INCOME                                                                                        |                          |         |      |   |         |   |   |         |  
|Sempra
Utilities:                                                                                                |                          |         |      |   |         |   |   |         |  
|Cost
of natural gas                                                                                              |                          | (3,244  | )    |   | (2,763  | ) |   | (2,756  | )
|Cost
of electric fuel and purchased power                                                                        |                          | (900    | )    |   | (699    | ) |   | (721    | )
|Sempra
Global and parent:                                                                                        |                          |         |      |   |         |   |   |         |  
|Cost
of natural gas, electric fuel and purchased power                                                           |                          | (1,671  | )    |   | (1,302  | ) |   | (1,221  | )
|Other
cost of sales                                                                                              |                          | (182    | )    |   | (988    | ) |   | (1,468  | )
|Operation
and maintenance                                                                                        |                          | (2,536  | )    |   | (3,032  | ) |   | (2,879  | )
|Depreciation
and amortization                                                                                    |                          | (687    | )    |   | (686    | ) |   | (657    | )
|Franchise
fees and other taxes                                                                                   |                          | (312    | )    |   | (295    | ) |   | (275    | )
|Gains
on sale of assets                                                                                          |                          | 114     |      |   | 6       |   |   | 1       |  
|Equity
earnings (losses):                                                                                        |                          |         |      |   |         |   |   |         |  
|RBS
Sempra Commodities LLP                                                                                       |                          | 383     |      |   | --      |   |   | --      |  
|Other                                                                                                            |                          | 37      |      |   | (9      | ) |   | 338     |  
|Other
income (expense), net                                                                                      |                          | (54     | )    |   | 90      |   |   | 43      |  
|Interest
income                                                                                                  |                          | 45      |      |   | 72      |   |   | 109     |  
|Interest
expense                                                                                                 |                          | (253    | )    |   | (272    | ) |   | (351    | )
|Preferred
dividends of subsidiaries                                                                              |                          | (10     | )    |   | (10     | ) |   | (10     | )
|Income
from continuing operations before income taxes and equity earnings of
certain unconsolidated subsidiaries |                          | 1,488   |      |   | 1,550   |   |   | 1,914   |  
|Income
tax expense                                                                                               |                          | (438    | )    |   | (524    | ) |   | (641    | )
|Equity
earnings (losses), net of income tax                                                                      |                          | 63      |      |   | 99      |   |   | (182    | )
|Income
from continuing operations                                                                                |                          | 1,113   |      |   | 1,125   |   |   | 1,091   |  
|Discontinued
operations, net of income tax                                                                       |                          | --      |      |   | (26     | ) |   | 315     |  
|Net
income                                                                                                       | $                        | 1,113   |      | $ | 1,099   |   | $ | 1,406   |  
|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|Basic
earnings per share:                                                                                        |                          |         |      |   |         |   |   |         |  
|Income
from continuing operations                                                                                | $                        | 4.50    |      | $ | 4.34    |   | $ | 4.25    |  
|Discontinued
operations, net of income tax                                                                       |                          | --      |      |   | (0.10   | ) |   | 1.23    |  
|Net
income                                                                                                       | $                        | 4.50    |      | $ | 4.24    |   | $ | 5.48    |  
|Weighted-average
number of shares outstanding (thousands)                                                        |                          | 247,387 |      |   | 259,269 |   |   | 256,477 |  
|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|Diluted
earnings per share:                                                                                      |                          |         |      |   |         |   |   |         |  
|Income
from continuing operations                                                                                | $                        | 4.43    |      | $ | 4.26    |   | $ | 4.17    |  
|Discontinued
operations, net of income tax                                                                       |                          | --      |      |   | (0.10   | ) |   | 1.21    |  
|Net
income                                                                                                       | $                        | 4.43    |      | $ | 4.16    |   | $ | 5.38    |  
|Weighted-average
number of shares outstanding (thousands)                                                        |                          | 251,159 |      |   | 264,004 |   |   | 261,368 |  
|Dividends
declared per share of common stock                                                                     | $                        | 1.37    |      | $ | 1.24    |   | $ | 1.20    |  
|                                                                                                                 |                          |         |      |   |         |   |   |         |  
|See
Notes to Consolidated Financial Statements.                                                                 







69







|                                                                              |                                                                                     |                                    |                   |        |        |   |        |        |        |  |  |  |  |  | 
|----------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------- | ----------------- | ------ | ------ | - | ------ | ------ | ------ |  |  |  |  |  | 
|SEMPRA
ENERGY                                                                
|CONSOLIDATED
BALANCE SHEETS                                                  
|(Dollars
in millions)                                                        
|                                                                              | December 31,2008                                                                    |                                    | December 31,2007*
|                                                                              |                                                                                     |                                    |                   |        |        |   |        |       
|ASSETS                                                                        |                                                                                     |                                    |                  
|Current
assets:                                                               |                                                                                     |                                    |                   |        |        |   |        |        |       
|                                                                              | Cash
and cash equivalents                                                           |                                    | $                 | 331    |        |   | $      | 668    |       
|                                                                              | Short-term
investments                                                              |                                    |                   | 176    |        |   |        | --     |       
|                                                                              | Restricted
cash                                                                     |                                    |                   | 27     |        |   |        | 1      |       
|                                                                              | Trade
accounts receivable, net                                                      |                                    |                   | 903    |        |   |        | 960    |       
|                                                                              | Other
accounts and notes receivable, net                                            |                                    |                   | 78     |        |   |        | 114    |       
|                                                                              | Income
taxes receivable                                                             |                                    |                   | 195    |        |   |        | 99     |       
|                                                                              | Deferred
income taxes                                                               |                                    |                   | 31     |        |   |        | 247    |       
|                                                                              | Trading-related
receivables and deposits, net                                       |                                    |                   | --     |        |   |        | 2,719  |       
|                                                                              | Derivative
trading instruments                                                      |                                    |                   | --     |        |   |        | 2,170  |       
|                                                                              | Commodities
owned                                                                   |                                    |                   | --     |        |   |        | 2,231  |       
|                                                                              | Inventories                                                                         |                                    |                   | 320    |        |   |        | 224    |       
|                                                                              | Regulatory
assets                                                                   |                                    |                   | 121    |        |   |        | 106    |       
|                                                                              | Fixed-price
contracts and other derivatives                                         |                                    |                   | 160    |        |   |        | 28     |       
|                                                                              | Other                                                                               |                                    |                   | 134    |        |   |        | 397    |       
|                                                                              |                                                                                     | Total
current assets               |                   |        | 2,476  |   |        |        | 9,964  | 
|                                                                              |                                                                                     |                                    |                   |        |        |   |        |        |        |  |  |  |  | 
|Investments
and other assets:                                                 |                                                                                     |                                    |                   |        |        |   |        |       
|                                                                              | Regulatory
assets arising from fixed-price contracts and other derivatives          |                                    |                   | 264    |        |   |        | 309    |       
|                                                                              | Regulatory
assets arising from pension and other postretirement benefit
obligations |                                    |                   | 1,188  |        |   |        | 162    |       
|                                                                              | Other
regulatory assets                                                             |                                    |                   | 534    |        |   |        | 460    |       
|                                                                              | Nuclear
decommissioning trusts                                                      |                                    |                   | 577    |        |   |        | 739    |       
|                                                                              | Investment
in RBS Sempra Commodities LLP                                            |                                    |                   | 2,082  |        |   |        | --     |       
|                                                                              | Other
investments                                                                   |                                    |                   | 1,166  |        |   |        | 1,243  |       
|                                                                              | Goodwill
and other intangible assets                                                |                                    |                   | 539    |        |   |        | 179    |       
|                                                                              | Sundry                                                                              |                                    |                   | 709    |        |   |        | 777    |       
|                                                                              |                                                                                     | Total
investments and other assets |                   |        | 7,059  |   |        |        | 3,869  | 
|                                                                              |                                                                                     |                                    |                   |        |        |   |        |       
|Property,
plant and equipment:                                                |                                                                                     |                                    |                   |        |        |   |        |       
|                                                                              | Property,
plant and equipment                                                       |                                    |                   | 23,153 |        |   |        | 20,917 |       
|                                                                              | Less
accumulated depreciation and amortization                                      |                                    |                   | (6,288 | )      |   |        | (6,033 | )     
|                                                                              |                                                                                     | Property,
plant and equipment, net |                   |        | 16,865 |   |        |        | 14,884 | 
|Total
assets                                                                  |                                                                                     | $                                  | 26,400            |        |        | $ | 28,717 |       
|                                                                              |                                                                                     |                                    |                   |        |        |   |        |       
|See
Notes to Consolidated Financial Statements.                               |                                                                                     |                                    |                   |        |        |   |        |       
|                                                                              |                                                                                     |                                    |                   |        |        |   |        |       
|*
As adjusted for the retrospective adoption of FASB Staff Position FIN
39-1. |                                                                                    







70







|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |       |       |  |  |  |  |  | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------- | ------ | ----- | ----- | - | ------ | ----- | ----- |  |  |  |  |  | 
|SEMPRA
ENERGY                                                                
|CONSOLIDATED
BALANCE SHEETS                                                  
|(Dollars
in millions)                                                        
|                                                                              | December 31,2008                                                                                                                                                    |                                              | December 31,2007*
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|LIABILITIES
AND SHAREHOLDERS' EQUITY                                          |                                                                                                                                                                     |                                              |                  
|Current
liabilities:                                                          |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|                                                                              | Short-term
debt                                                                                                                                                     |                                              |                   | $      | 503   |       |   | $      | 1,064 |      
|                                                                              | Accounts
payable  trade                                                                                                                                            |                                              |                   |        | 606   |       |   |        | 1,374 |      
|                                                                              | Accounts
payable  other                                                                                                                                            |                                              |                   |        | 250   |       |   |        | 189   |      
|                                                                              | Due
to unconsolidated affiliates                                                                                                                                    |                                              |                   |        | 38    |       |   |        | 60    |      
|                                                                              | Trading-related
payables                                                                                                                                            |                                              |                   |        | --    |       |   |        | 2,265 |      
|                                                                              | Derivative
trading instruments                                                                                                                                      |                                              |                   |        | --    |       |   |        | 1,672 |      
|                                                                              | Commodities
sold with agreement to repurchase                                                                                                                       |                                              |                   |        | --    |       |   |        | 500   |      
|                                                                              | Dividends
and interest payable                                                                                                                                      |                                              |                   |        | 156   |       |   |        | 145   |      
|                                                                              | Accrued
compensation and benefits                                                                                                                                   |                                              |                   |        | 280   |       |   |        | 265   |      
|                                                                              | Regulatory
balancing accounts, net                                                                                                                                  |                                              |                   |        | 335   |       |   |        | 481   |      
|                                                                              | Current
portion of long-term debt                                                                                                                                   |                                              |                   |        | 410   |       |   |        | 7     |      
|                                                                              | Fixed-price
contracts and other derivatives                                                                                                                         |                                              |                   |        | 180   |       |   |        | 53    |      
|                                                                              | Customer
deposits                                                                                                                                                   |                                              |                   |        | 170   |       |   |        | 143   |      
|                                                                              | Other                                                                                                                                                               |                                              |                   |        | 684   |       |   |        | 802   |      
|                                                                              |                                                                                                                                                                     | Total
current liabilities                    |                   |        |       | 3,612 |   |        |       | 9,020 | 
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|Long-term
debt                                                                |                                                                                                                                                                     |                                              |                   | 6,544  |       |       |   | 4,553  |      
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|Deferred
credits and other liabilities:                                       |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|                                                                              | Due
to unconsolidated affiliate                                                                                                                                     |                                              |                   |        | 102   |       |   |        | 102   |      
|                                                                              | Customer
advances for construction                                                                                                                                  |                                              |                   |        | 155   |       |   |        | 153   |      
|                                                                              | Pension
and other postretirement benefit obligations, net of plan assets                                                                                            |                                              |                   |        | 1,487 |       |   |        | 434   |      
|                                                                              | Deferred
income taxes                                                                                                                                               |                                              |                   |        | 946   |       |   |        | 531   |      
|                                                                              | Deferred
investment tax credits                                                                                                                                     |                                              |                   |        | 57    |       |   |        | 61    |      
|                                                                              | Regulatory
liabilities arising from removal obligations                                                                                                             |                                              |                   |        | 2,430 |       |   |        | 2,522 |      
|                                                                              | Asset
retirement obligations                                                                                                                                        |                                              |                   |        | 1,159 |       |   |        | 1,129 |      
|                                                                              | Other
regulatory liabilities                                                                                                                                        |                                              |                   |        | 219   |       |   |        | 265   |      
|                                                                              | Fixed-price
contracts and other derivatives                                                                                                                         |                                              |                   |        | 392   |       |   |        | 332   |      
|                                                                              | Deferred
credits and other                                                                                                                                          |                                              |                   |        | 909   |       |   |        | 949   |      
|                                                                              |                                                                                                                                                                     | Total
deferred credits and other liabilities |                   |        |       | 7,856 |   |        |       | 6,478 | 
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|Preferred
stock of subsidiaries                                               |                                                                                                                                                                     |                                              |                   | 179    |       |       |   | 179    |      
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|Minority
interests                                                            |                                                                                                                                                                     |                                              |                   | 240    |       |       |   | 148    |      
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|Commitments
and contingencies (Note 16)                                       |                                                                                                                                                                     |                                              |                   |        |       |       |   |       
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |       |       |  |  |  |  | 
|Shareholders'
equity:                                                         |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|                                                                              | Preferred
stock (50 million shares authorized; none issued)                                                                                                         |                                              |                   | --     |       |       |   | --     |      
|                                                                              | Common
stock (750 million shares authorized; 243 million and 261 million shares
outstanding at December 31, 2008 and December 31, 2007, respectively; no
par value) |                                              |                   | 2,265  |       |       |   | 3,198  |      
|                                                                              | Retained
earnings                                                                                                                                                   |                                              |                   |        | 6,235 |       |   |        | 5,464 |      
|                                                                              | Deferred
compensation                                                                                                                                               |                                              |                   |        | (18   | )     |   |        | (22   | )    
|                                                                              | Accumulated
other comprehensive income (loss)                                                                                                                       |                                              |                   |        | (513  | )     |   |        | (301  | )    
|                                                                              |                                                                                                                                                                     | Total
shareholders' equity                   |                   |        |       | 7,969 |   |        |       | 8,339 | 
|Total
liabilities and shareholders' equity                                    |                                                                                                                                                                     |                                              | $                 | 26,400 |       |       | $ | 28,717 |      
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|See
Notes to Consolidated Financial Statements.                               |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|                                                                              |                                                                                                                                                                     |                                              |                   |        |       |       |   |        |      
|*
As adjusted for the retrospective adoption of FASB Staff Position FIN
39-1. |                                                                                                                                                                    





71







|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|--------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------ | ------------------------ | ---- | ------ | ------ | ---- | ------ | ------ | ---- | -
|SEMPRA
ENERGY                                                  
|STATEMENTS
OF CONSOLIDATED CASH FLOWS                          
|(Dollars
in millions)                                           |                                                                                  
|                                                                |                                                                                   |                                                      |                                                  | Years ended December 31,
|                                                                |                                                                                   | 2008                                                 |                                                  |                          | 2007 |        |        | 2006 |       
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|CASH
FLOWS FROM OPERATING ACTIVITIES                            |                                                                                   |                                                      |                                                  |                          |      |        |        |      |       
|                                                                | Net
income                                                                        | $                                                    | 1,113                                            |                          | $    | 1,099  |        | $    | 1,406  |       
|                                                                | Adjustments
to reconcile net income to net cash provided by operating
activities: |                                                      |                                                  |                          |      |        |        |      |        |       
|                                                                |                                                                                   |                                                      | Discontinued
operations                          |                          | --   |        |        | 26   |        |        | (315 | )
|                                                                |                                                                                   |                                                      | Depreciation
and amortization                    |                          | 687  |        |        | 686  |        |        | 657  |  
|                                                                |                                                                                   |                                                      | Gains
on sale of assets, net                     |                          | (114 | )      |        | (6   | )      |        | (1   | )
|                                                                |                                                                                   |                                                      | Deferred
income taxes and investment tax credits |                          | 324  |        |        | 149  |        |        | 77   |  
|                                                                |                                                                                   |                                                      | Noncash
rate-reduction bond expense              |                          | --   |        |        | 55   |        |        | 60   |  
|                                                                |                                                                                   |                                                      | Equity
earnings                                  |                          | (483 | )      |        | (90  | )      |        | (156 | )
|                                                                |                                                                                   |                                                      | Other                                            |                          | 141  |        |        | 46   |        |        | 47   |  
|                                                                | Quasi-reorganization
resolution                                                   |                                                      | --                                               |                          |      | --     |        |      | 12     |       
|                                                                | Net
changes in other working capital components                                   |                                                      | (483                                             | )                        |      | 25     |        |      | (183   | )     
|                                                                | Distributions
from RBS Sempra Commodities LLP                                     |                                                      | 85                                               |                          |      | --     |        |      | --     |       
|                                                                | Changes
in other assets                                                           |                                                      | (15                                              | )                        |      | 22     |        |      | 20     |       
|                                                                | Changes
in other liabilities                                                      |                                                      | (74                                              | )                        |      | 79     |        |      | 42     |       
|                                                                |                                                                                   | Net
cash provided by continuing operations           |                                                  | 1,181                    |      |        | 2,091  |      |        | 1,666  |     
|                                                                |                                                                                   | Net
cash used in discontinued operations             |                                                  | --                       |      |        | (3     | )    |        | (37    | )   
|                                                                |                                                                                   | Net
cash provided by operating activities            |                                                  | 1,181                    |      |        | 2,088  |      |        | 1,629  |     
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|CASH
FLOWS FROM INVESTING ACTIVITIES                            |                                                                                   |                                                      |                                                  |                          |      |        |        |      |       
|                                                                | Expenditures
for property, plant and equipment                                    |                                                      | (2,061                                           | )                        |      | (2,011 | )      |      | (1,907 | )     
|                                                                | Proceeds
from sale of assets from continuing operations, net of cash sold         |                                                      | 2,295                                            |                          |      | 103    |        |      | 40     |       
|                                                                | Expenditures
for investments and acquisition of businesses, net of cash acquired  |                                                      | (2,675                                           | )                        |      | (121   | )      |      | (257   | )     
|                                                                | Distributions
from investments                                                    |                                                      | 34                                               |                          |      | 18     |        |      | 104    |       
|                                                                | Purchases
of nuclear decommissioning and other trust assets                       |                                                      | (485                                             | )                        |      | (646   | )      |      | (546   | )     
|                                                                | Proceeds
from sales by nuclear decommissioning and other trusts                   |                                                      | 469                                              |                          |      | 613    |        |      | 503    |       
|                                                                | Dividends
received from equity method investments                                 |                                                      | --                                               |                          |      | --     |        |      | 431    |       
|                                                                | Decrease
in notes receivable from unconsolidated affiliates                       |                                                      | 60                                               |                          |      | --     |        |      | --     |       
|                                                                | Other                                                                             |                                                      | (23                                              | )                        |      | (29    | )      |      | (27    | )     
|                                                                |                                                                                   | Net
cash used in continuing operations               |                                                  | (2,386                   | )    |        | (2,073 | )    |        | (1,659 | )   
|                                                                |                                                                                   | Net
cash provided by discontinued operations         |                                                  | --                       |      |        | --     |      |        | 793    |     
|                                                                |                                                                                   | Net
cash used in investing activities                |                                                  | (2,386                   | )    |        | (2,073 | )    |        | (866   | )   
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|CASH
FLOWS FROM FINANCING ACTIVITIES                            |                                                                                   |                                                      |                                                  |                          |      |        |        |      |       
|                                                                | Common
dividends paid                                                             |                                                      | (339                                             | )                        |      | (316   | )      |      | (283   | )     
|                                                                | Issuances
of common stock                                                         |                                                      | 18                                               |                          |      | 40     |        |      | 97     |       
|                                                                | Repurchases
of common stock                                                       |                                                      | (1,018                                           | )                        |      | (185   | )      |      | (37    | )     
|                                                                | Issuances
of long-term debt                                                       |                                                      | 1,706                                            |                          |      | 404    |        |      | 552    |       
|                                                                | Payments
on long-term debt                                                        |                                                      | (79                                              | )                        |      | (1,072 | )      |      | (263   | )     
|                                                                | Increase
(decrease) in short-term debt, net                                       |                                                      | 564                                              |                          |      | 812    |        |      | (791   | )     
|                                                                | Financing
transaction related to Sempra Financial                                 |                                                      | --                                               |                          |      | --     |        |      | 83     |       
|                                                                | Other                                                                             |                                                      | 16                                               |                          |      | 21     |        |      | 28     |       
|                                                                |                                                                                   | Net
cash provided by (used in) continuing operations |                                                  | 868                      |      |        | (296   | )    |        | (614   | )   
|                                                                |                                                                                   | Net
cash provided by discontinued operations         |                                                  | --                       |      |        | --     |      |        | 2      |     
|                                                                |                                                                                   | Net
cash provided by (used in) financing activities  |                                                  | 868                      |      |        | (296   | )    |        | (612   | )   
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|Increase
(decrease) in cash and cash equivalents                |                                                                                   | (337                                                 | )                                                |                          | (281 | )      |        | 151  |       
|Cash
and cash equivalents, January 1                            |                                                                                   | 668                                                  |                                                  |                          | 920  |        |        | 769  |       
|Cash
assumed in connection with FIN 46(R) initial consolidation |                                                                                   | --                                                   |                                                  |                          | 29   |        |        | --   |       
|Cash
and cash equivalents, December 31                          | $                                                                                 | 331                                                  |                                                  | $                        | 668  |        | $      | 920  |       
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|                                                                |                                                                                   |                                                      |                                                  |                          |      |        |        |      |        |        |      |  
|See
Notes to Consolidated Financial Statements.                 |                                                                                   |                                                      |                                                  |                          |      |        |        |      |       



72









|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|------------------------------------------------------------------- | ----------- | ----------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ----- | - | ---- | ---- | - | ---- | ---- | -
|SEMPRA
ENERGY                                                      
|STATEMENTS
OF CONSOLIDATED CASH FLOWS                              
|(Dollars
in millions)                                               |            
|                                                                    |             |                                                                                           |                                                 | Years ended December 31,
|                                                                    |             | 2008                                                                                      |                                                 |                          | 2007  |   |      | 2006 |  
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|CHANGES
IN OTHER WORKING CAPITAL                                    |             |                                                                                           |                                                 |                          |       |   |      |      |  
|                                                                    | COMPONENTS  |                                                                                           |                                                 |                          |       |   |      |      |   |     
|(Excluding
cash and cash equivalents, and debt due within one year) |             |                                                                                           |                                                 |                          |       |   |      |      |  
|                                                                    |             | Accounts
and notes receivable                                                             | $                                               | 110                      |       | $ | (63  | )    | $ | 94   |     
|                                                                    |             | Net
trading assets                                                                        |                                                 | (4                       | )     |   | 303  |      |   | (543 | )   
|                                                                    |             | Income
taxes, net                                                                         |                                                 | 13                       |       |   | (73  | )    |   | (51  | )   
|                                                                    |             | Inventories                                                                               |                                                 | (75                      | )     |   | (9   | )    |   | (3   | )   
|                                                                    |             | Regulatory
balancing accounts                                                             |                                                 | (138                     | )     |   | 120  |      |   | 170  |     
|                                                                    |             | Regulatory
assets and liabilities                                                         |                                                 | 1                        |       |   | --   |      |   | 4    |     
|                                                                    |             | Other
current assets                                                                      |                                                 | 71                       |       |   | (109 | )    |   | (2   | )   
|                                                                    |             | Accounts
payable                                                                          |                                                 | (526                     | )     |   | (82  | )    |   | 227  |     
|                                                                    |             | Other
current liabilities                                                                 |                                                 | 65                       |       |   | (62  | )    |   | (79  | )   
|                                                                    |             |                                                                                           | Net
changes in other working capital components | $                        | (483  | ) | $    | 25   |   | $    | (183 | )
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW                                |             |                                                                                           |                                                 |                          |       |   |      |      |  
|                                                                    | INFORMATION |                                                                                           |                                                 |                          |       |   |      |      |   |     
|                                                                    |             | Interest
payments, net of amounts capitalized                                             | $                                               | 233                      |       | $ | 380  |      | $ | 337  |     
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|                                                                    |             | Income
tax payments, net of refunds                                                       | $                                               | 114                      |       | $ | 443  |      | $ | 601  |     
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|SUPPLEMENTAL
DISCLOSURE OF NONCASH                                  |             |                                                                                           |                                                 |                          |       |   |      |      |  
|                                                                    | ACTIVITIES  |                                                                                           |                                                 |                          |       |   |      |      |   |     
|                                                                    |             | Acquisition
of business:                                                                  |                                                 |                          |       |   |      |      |   |      |     
|                                                                    |             |                                                                                           | Assets
acquired                                 | $                        | 1,307 |   | $    | --   |   | $    | --   |  
|                                                                    |             |                                                                                           | Cash
paid, net of cash acquired                 |                          | (495  | ) |      | --   |   |      | --   |  
|                                                                    |             |                                                                                           | Liabilities
assumed                             | $                        | 812   |   | $    | --   |   | $    | --   |  
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|                                                                    |             | Increase
(decrease) in accounts payable from investments in property, plant and
equipment | $                                               | (9                       | )     | $ | 81   |      | $ | (43  | )   
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|                                                                    |             | Dividends
declared but not paid                                                           | $                                               | 88                       |       | $ | 84   |      | $ | 82   |     
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |     
|                                                                    |             | Fair
value of stock received for services rendered                                        | $                                               | --                       |       | $ | 32   |      | $ | --   |     
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|                                                                    |             | Fair
value of stock received for sale of investments                                      | $                                               | --                       |       | $ | 26   |      | $ | --   |     
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|                                                                    |             |                                                                                           |                                                 |                          |       |   |      |      |   |      |      |  
|See
Notes to Consolidated Financial Statements.                     |             |                                                                                           |                                                 |                          |       |   |      |      |  







73







|                                                                                    |                      |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|----------------------------------------------------------------------------------- | -------------------- | - | ------------ | - | ----------------- | - | -------------------------------------- | - | --------------------------------------------- | - | -------------------------- | -
|SEMPRA
ENERGY                                                                      
|STATEMENTS
OF CONSOLIDATED COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS'
EQUITY
|Years
ended December 31, 2008, 2007 and 2006                                       
|(Dollars
in millions)                                                               | Comprehensive Income |   | Common Stock |   | Retained Earnings |   | Deferred Compensation Relating to ESOP |   | Accumulated Other Comprehensive Income (Loss) |   | Total Shareholders' Equity |  
|Balance
at December 31, 2005                                                        |                      |   | $ 2,958      |   | $ 3,588           |   | $ (28                                  | ) | $ (358                                        | ) | $ 6,160                    |  
|Net
income                                                                          | $ 1,406              |   |              |   | 1,406             |   |                                        |   |                                               |   | 1,406                      |  
|Comprehensive
income adjustments:                                                   |                      |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Foreign
currency translation adjustments                                            | (12                  | ) |              |   |                   |   |                                        |   | (12                                           | ) | (12                        | )
|Available-for-sale
securities                                                       | 18                   |   |              |   |                   |   |                                        |   | 18                                            |   | 18                         |  
|Pension
adjustment                                                                  | (7                   | ) |              |   |                   |   |                                        |   | (7                                            | ) | (7                         | )
|Financial
instruments                                                               | 8                    |   |              |   |                   |   |                                        |   | 8                                             |   | 8                          |  
|Comprehensive
income                                                                | $ 1,413              |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Adoption
of FASB Statement No. 158                                                  |                      |   |              |   |                   |   |                                        |   | (39                                           | ) | (39                        | )
|Adoption
of FASB Statement No. 123(R)                                               |                      |   | 96           |   |                   |   |                                        |   |                                               |   | 96                         |  
|Common
stock dividends declared                                                     |                      |   |              |   | (313              | ) |                                        |   |                                               |   | (313                       | )
|Quasi-reorganization
adjustment                                                     |                      |   | 13           |   |                   |   |                                        |   |                                               |   | 13                         |  
|Issuance
of common stock                                                            |                      |   | 175          |   |                   |   |                                        |   |                                               |   | 175                        |  
|Tax
benefit related to share-based compensation                                     |                      |   | 32           |   |                   |   |                                        |   |                                               |   | 32                         |  
|Repurchase
of common stock                                                          |                      |   | (37          | ) |                   |   |                                        |   |                                               |   | (37                        | )
|Common
stock released from ESOP                                                     |                      |   | 8            |   |                   |   | 3                                      |   |                                               |   | 11                         |  
|Balance
at December 31, 2006                                                        |                      |   | 3,245        |   | 4,681             |   | (25                                    | ) | (390                                          | ) | 7,511                      |  
|Adoption
of FASB Statement No. 157                                                  |                      |   |              |   | 12                |   |                                        |   |                                               |   | 12                         |  
|Adoption
of FIN 48                                                                  |                      |   |              |   | (2                | ) |                                        |   |                                               |   | (2                         | )
|Net
income                                                                          | $ 1,099              |   |              |   | 1,099             |   |                                        |   |                                               |   | 1,099                      |  
|Comprehensive
income adjustments:                                                   |                      |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Foreign
currency translation adjustments                                            | 38                   |   |              |   |                   |   |                                        |   | 38                                            |   | 38                         |  
|Available-for-sale
securities                                                       | 10                   |   |              |   |                   |   |                                        |   | 10                                            |   | 10                         |  
|Pension
and other post retirement benefits                                          | 15                   |   |              |   |                   |   |                                        |   | 15                                            |   | 15                         |  
|Financial
instruments                                                               | 26                   |   |              |   |                   |   |                                        |   | 26                                            |   | 26                         |  
|Comprehensive
income                                                                | $ 1,188              |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Share-based
compensation expense                                                    |                      |   | 43           |   |                   |   |                                        |   |                                               |   | 43                         |  
|Common
stock dividends declared                                                     |                      |   |              |   | (326              | ) |                                        |   |                                               |   | (326                       | )
|Quasi-reorganization
adjustment                                                     |                      |   | (2           | ) |                   |   |                                        |   |                                               |   | (2                         | )
|Issuance
of common stock                                                            |                      |   | 62           |   |                   |   |                                        |   |                                               |   | 62                         |  
|Tax
benefit related to share-based compensation                                     |                      |   | 26           |   |                   |   |                                        |   |                                               |   | 26                         |  
|Repurchase
of common stock                                                          |                      |   | (185         | ) |                   |   |                                        |   |                                               |   | (185                       | )
|Common
stock released from ESOP                                                     |                      |   | 9            |   |                   |   | 3                                      |   |                                               |   | 12                         |  
|Balance
at December 31, 2007                                                        |                      |   | 3,198        |   | 5,464             |   | (22                                    | ) | (301                                          | ) | 8,339                      |  
|Net
income                                                                          | $ 1,113              |   |              |   | 1,113             |   |                                        |   |                                               |   | 1,113                      |  
|Comprehensive
income adjustments:                                                   |                      |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Foreign
currency translation adjustments                                            | (140                 | ) |              |   |                   |   |                                        |   | (140                                          | ) | (140                       | )
|Available-for-sale
securities                                                       | (26                  | ) |              |   |                   |   |                                        |   | (26                                           | ) | (26                        | )
|Pension
and other postretirement benefits                                           | (30                  | ) |              |   |                   |   |                                        |   | (30                                           | ) | (30                        | )
|Financial
instruments                                                               | (16                  | ) |              |   |                   |   |                                        |   | (16                                           | ) | (16                        | )
|Comprehensive
income                                                                | $ 901                |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|Share-based
compensation expense                                                    |                      |   | 49           |   |                   |   |                                        |   |                                               |   | 49                         |  
|Common
stock dividends declared                                                     |                      |   |              |   | (342              | ) |                                        |   |                                               |   | (342                       | )
|Issuance
of common stock                                                            |                      |   | 18           |   |                   |   |                                        |   |                                               |   | 18                         |  
|Tax
benefit related to share-based compensation                                     |                      |   | 6            |   |                   |   |                                        |   |                                               |   | 6                          |  
|Repurchase
of common stock                                                          |                      |   | (1,018       | ) |                   |   |                                        |   |                                               |   | (1,018                     | )
|Common
stock released from ESOP                                                     |                      |   | 12           |   |                   |   | 4                                      |   |                                               |   | 16                         |  
|Balance
at December 31, 2008                                                        |                      |   | $ 2,265      |   | $ 6,235           |   | $ (18                                  | ) | $ (513                                        | ) | $ 7,969                    |  
|                                                                                    |                      |   |              |   |                   |   |                                        |   |                                               |   |                            |  
|See
Notes to Consolidated Financial Statements.                                    



74







|                                                |                          |       |      |   |       |   |   |       |  
|----------------------------------------------- | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | -
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
|STATEMENTS
OF CONSOLIDATED INCOME              
|(Dollars
in millions)                          
|                                                | Years ended December 31,
|                                                | 2008                     | 2007  | 2006
|                                                |                         
|Operating
revenues                              |                          |       |      |   |       |   |   |       |  
|Electric                                        | $                        | 2,562 |      | $ | 2,194 |   | $ | 2,147 |  
|Natural
gas                                     |                          | 689   |      |   | 658   |   |   | 638   |  
|Total
operating revenues                        |                          | 3,251 |      |   | 2,852 |   |   | 2,785 |  
|                                                |                          |       |      |   |       |   |   |       |  
|Operating
expenses                              |                          |       |      |   |       |   |   |       |  
|Cost
of electric fuel and purchased power       |                          | 900   |      |   | 699   |   |   | 721   |  
|Cost
of natural gas                             |                          | 415   |      |   | 392   |   |   | 380   |  
|Operation
and maintenance                       |                          | 913   |      |   | 807   |   |   | 777   |  
|Depreciation
and amortization                   |                          | 298   |      |   | 301   |   |   | 291   |  
|Franchise
fees and other taxes                  |                          | 158   |      |   | 155   |   |   | 140   |  
|Gains
on sale of assets                         |                          | (3    | )    |   | (2    | ) |   | (1    | )
|Total
operating expenses                        |                          | 2,681 |      |   | 2,352 |   |   | 2,308 |  
|                                                |                          |       |      |   |       |   |   |       |  
|Operating
income                                |                          | 570   |      |   | 500   |   |   | 477   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Other
income, net                               |                          | 25    |      |   | 11    |   |   | 8     |  
|Interest
income                                 |                          | 6     |      |   | 8     |   |   | 6     |  
|Interest
expense                                |                          | (96   | )    |   | (96   | ) |   | (97   | )
|Income
before income taxes                      |                          | 505   |      |   | 423   |   |   | 394   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Income
tax expense                              |                          | 161   |      |   | 135   |   |   | 152   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Net
income                                      |                          | 344   |      |   | 288   |   |   | 242   |  
|Preferred
dividend requirements                 |                          | 5     |      |   | 5     |   |   | 5     |  
|Earnings
applicable to common shares            | $                        | 339   |      | $ | 283   |   | $ | 237   |  
|                                               
|See
Notes to Consolidated Financial Statements.





75









|                                                                              |                                                                                      |                     |                                    |   |       |       |        |   |       |  |  |  | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------- | ---------------------------------- | - | ----- | ----- | ------ | - | ----- |  |  |  | 
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY                              
|CONSOLIDATED
BALANCE SHEETS                                                  
|(Dollars
in millions)                                                         |                                                                                      |                     |                                    |  
|                                                                              | December 31,2008                                                                     | December 31, 2007 *
|                                                                              |                                                                                      |                     |                                    |  
|ASSETS                                                                        |                                                                                      |                     |                                    |   |       |       |       
|Current
assets:                                                               |                                                                                      |                     |                                    |   |       |       |       
|                                                                              | Cash
and cash equivalents                                                            | $                   | 19                                 |   |       | $     | 158    |  
|                                                                              | Short-term
investments                                                               |                     | 24                                 |   |       |       | --     |  
|                                                                              | Accounts
receivable  trade                                                          |                     | 225                                |   |       |       | 207    |  
|                                                                              | Accounts
receivable  other                                                          |                     | 30                                 |   |       |       | 49     |  
|                                                                              | Due
from unconsolidated affiliates                                                   |                     | 29                                 |   |       |       | 22     |  
|                                                                              | Income
taxes receivable                                                              |                     | 22                                 |   |       |       | 56     |  
|                                                                              | Deferred
income taxes                                                                |                     | 17                                 |   |       |       | 67     |  
|                                                                              | Inventories                                                                          |                     | 62                                 |   |       |       | 113    |  
|                                                                              | Regulatory
assets arising from fixed-price contracts and other derivatives           |                     | 94                                 |   |       |       | 52     |  
|                                                                              | Other
regulatory assets                                                              |                     | 8                                  |   |       |       | 14     |  
|                                                                              | Fixed-price
contracts and other derivatives                                          |                     | 39                                 |   |       |       | 18     |  
|                                                                              | Other                                                                                |                     | 15                                 |   |       |       | 34     |  
|                                                                              |                                                                                      |                     | Total
current assets               |   | 584   |       |        |   | 790   | 
|                                                                              |                                                                                      |                     |                                    |   |       |       |        |   |       | 
|Other
assets:                                                                 |                                                                                      |                     |                                    |   |       |       |       
|                                                                              | Due
from unconsolidated affiliate                                                    |                     | 4                                  |   |       |       | 5      |  
|                                                                              | Deferred
taxes recoverable in rates                                                  |                     | 369                                |   |       |       | 312    |  
|                                                                              | Regulatory
assets arising from fixed-price contracts and other derivatives           |                     | 264                                |   |       |       | 309    |  
|                                                                              | Regulatory
assets arising from pensions and other postretirement benefit
obligations |                     | 393                                |   |       |       | 162    |  
|                                                                              | Other
regulatory assets                                                              |                     | 59                                 |   |       |       | 48     |  
|                                                                              | Nuclear
decommissioning trusts                                                       |                     | 577                                |   |       |       | 739    |  
|                                                                              | Sundry                                                                               |                     | 154                                |   |       |       | 123    |  
|                                                                              |                                                                                      |                     | Total
other assets                 |   | 1,820 |       |        |   | 1,698 | 
|                                                                              |                                                                                      |                     |                                    |   |       |       |        |   |       | 
|Property,
plant and equipment:                                                |                                                                                      |                     |                                    |   |       |       |       
|                                                                              | Property,
plant and equipment                                                        |                     | 9,095                              |   |       |       | 8,282  |  
|                                                                              | Less
accumulated depreciation and amortization                                       |                     | (2,420                             | ) |       |       | (2,271 | )
|                                                                              |                                                                                      |                     | Property,
plant and equipment, net |   | 6,675 |       |        |   | 6,011 | 
|Total
assets                                                                  | $                                                                                    | 9,079               |                                    |   | $     | 8,499 |       
|                                                                              |                                                                                      |                     |                                    |   |       |       |       
|See
Notes to Consolidated Financial Statements.                               |                                                                                      |                     |                                    |   |       |       |       
|                                                                              |                                                                                      |                     |                                    |   |       |       |       
|*
As adjusted for the retrospective adoption of FASB Staff Position FIN
39-1. |                                                                                      |                     |                                   







76







|                                                                              |                                                                                            |                            |                                              |       |       |       |       |       |       |  |  |  | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------- | -------------------------------------------- | ----- | ----- | ----- | ----- | ----- | ----- |  |  |  | 
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY                              
|CONSOLIDATED
BALANCE SHEETS                                                  
|(Dollars
in millions)                                                         |                                                                                            |                            |                                              |      
|                                                                              | December 31,2008                                                                           | December 31, 2007 *       
|                                                                              |                                                                                            |                            |                                              |      
|LIABILITIES
AND SHAREHOLDERS' EQUITY                                          |                                                                                            |                            |                                              |       |       |       |      
|Current
liabilities:                                                          |                                                                                            |                            |                                              |       |       |       |      
|                                                                              | Accounts
payable                                                                           | $                          | 261                                          |       |       | $     | 290   |      
|                                                                              | Due
to unconsolidated affiliates                                                           |                            | 1                                            |       |       |       | 10    |      
|                                                                              | Regulatory
balancing accounts, net                                                         |                            | 114                                          |       |       |       | 298   |      
|                                                                              | Customer
deposits                                                                          |                            | 53                                           |       |       |       | 52    |      
|                                                                              | Fixed-price
contracts and other derivatives                                                |                            | 77                                           |       |       |       | 52    |      
|                                                                              | Accrued
compensation and benefits                                                          |                            | 105                                          |       |       |       | 98    |      
|                                                                              | Mandatorily
redeemable preferred securities                                                |                            | --                                           |       |       |       | 14    |      
|                                                                              | Current
portion of long-term debt                                                          |                            | 2                                            |       |       |       | --    |      
|                                                                              | Other                                                                                      |                            | 163                                          |       |       |       | 161   |      
|                                                                              |                                                                                            |                            | Total
current liabilities                    |       | 776   |       |       |       | 975   | 
|                                                                              |                                                                                            |                            |                                              |       |       |       |       |       |       | 
|Long-term
debt                                                                |                                                                                            | 2,142                      |                                              |       |       | 1,958 |      
|                                                                              |                                                                                            |                            |                                              |       |       |       |      
|Deferred
credits and other liabilities:                                       |                                                                                            |                            |                                              |       |       |       |      
|                                                                              | Customer
advances for construction                                                         |                            | 26                                           |       |       |       | 33    |      
|                                                                              | Pension
and other postretirement benefit obligations, net of plan assets                   |                            | 419                                          |       |       |       | 190   |      
|                                                                              | Deferred
income taxes                                                                      |                            | 628                                          |       |       |       | 506   |      
|                                                                              | Deferred
investment tax credits                                                            |                            | 26                                           |       |       |       | 29    |      
|                                                                              | Regulatory
liabilities arising from removal obligations                                    |                            | 1,212                                        |       |       |       | 1,335 |      
|                                                                              | Asset
retirement obligations                                                               |                            | 550                                          |       |       |       | 554   |      
|                                                                              | Fixed-price
contracts and other derivatives                                                |                            | 347                                          |       |       |       | 329   |      
|                                                                              | Deferred
credits and other                                                                 |                            | 204                                          |       |       |       | 176   |      
|                                                                              |                                                                                            |                            | Total
deferred credits and other liabilities |       | 3,412 |       |       |       | 3,152 | 
|                                                                              |                                                                                            |                            |                                              |       |       |       |       |       |       | 
|Minority
interest                                                             |                                                                                            | 128                        |                                              |       |       | 135   |      
|                                                                              |                                                                                            |                            |                                              |       |       |       |      
|Commitments
and contingencies (Note 16)                                       |                                                                                            |                            |                                              |       |       |       |      
|                                                                              |                                                                                            |                            |                                              |       |       |       |      
|Shareholders'
equity:                                                         |                                                                                            |                            |                                              |       |       |       |      
|                                                                              | Preferred
stock not subject to mandatory redemption                                        |                            | 79                                           |       |       |       | 79    |      
|                                                                              | Common
stock (255 million shares authorized; 117 million shares outstanding; no
par value) |                            | 1,138                                        |       |       |       | 1,138 |      
|                                                                              | Retained
earnings                                                                          |                            | 1,417                                        |       |       |       | 1,078 |      
|                                                                              | Accumulated
other comprehensive income (loss)                                              |                            | (13                                          | )     |       |       | (16   | )    
|                                                                              |                                                                                            | Total
shareholders' equity |                                              | 2,621 |       |       |       | 2,279 |      
|Total
liabilities and shareholders' equity                                    | $                                                                                          | 9,079                      |                                              |       | $     | 8,499 |      
|                                                                              |                                                                                            |                            |                                              |       |       |       |      
|See
Notes to Consolidated Financial Statements.                               |                                                                                            |                            |                                              |       |       |       |      
|                                                                              |                                                                                            |                            |                                              |       |       |       |      
|*
As adjusted for the retrospective adoption of FASB Staff Position FIN
39-1. |                                                                                            |                            |                                             









77







|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|--------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------------ | ------------------------ | ---- | ---- | --- | ---- | ------ | --- | ------ | -
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY                
|STATEMENTS
OF CONSOLIDATED CASH FLOWS                          
|(Dollars
in millions)                                           |                                                                                 
|                                                                |                                                                                  |                               |                                                  | Years ended December 31,
|                                                                |                                                                                  | 2008                          |                                                  |                          | 2007 |      |     | 2006 |       
|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|CASH
FLOWS FROM OPERATING ACTIVITIES                            |                                                                                  |                               |                                                  |                          |      |      |     |      |       
|                                                                | Net
income                                                                       | $                             | 344                                              |                          | $    | 288  |     | $    | 242    |    
|                                                                | Adjustments
to reconcile net income to net cash provided by operating
activities |                               |                                                  |                          |      |      |     |      |        |    
|                                                                |                                                                                  |                               | Depreciation
and amortization                    |                          | 298  |      |     | 301  |        |     | 291    |  
|                                                                |                                                                                  |                               | Deferred
income taxes and investment tax credits |                          | 113  |      |     | (40  | )      |     | (130   | )
|                                                                |                                                                                  |                               | Noncash
rate-reduction bond expense              |                          | --   |      |     | 55   |        |     | 60     |  
|                                                                |                                                                                  |                               | Other                                            |                          | (3   | )    |     | 12   |        |     | 3      |  
|                                                                | Changes
in other assets                                                          |                               | 19                                               |                          |      | 5    |     |      | 9      |    
|                                                                | Changes
in other liabilities                                                     |                               | (23                                              | )                        |      | (5   | )   |      | (16    | )  
|                                                                | Changes
in working capital components:                                           |                               |                                                  |                          |      |      |     |      |        |    
|                                                                |                                                                                  | Accounts
receivable           |                                                  | 1                        |      |      | (43 | )    |        | 39  |       
|                                                                |                                                                                  | Interest
receivable           |                                                  | 1                        |      |      | (1  | )    |        | 2   |       
|                                                                |                                                                                  | Due
to/from affiliates, net   |                                                  | 18                       |      |      | 7   |      |        | (12 | )     
|                                                                |                                                                                  | Inventories                   |                                                  | 51                       |      |      | (16 | )    |        | (19 | )     
|                                                                |                                                                                  | Other
current assets          |                                                  | (49                      | )    |      | 6   |      |        | (19 | )     
|                                                                |                                                                                  | Income
taxes                  |                                                  | 44                       |      |      | (31 | )    |        | (32 | )     
|                                                                |                                                                                  | Accounts
payable              |                                                  | (70                      | )    |      | 10  |      |        | 9   |       
|                                                                |                                                                                  | Regulatory
balancing accounts |                                                  | (184                     | )    |      | 133 |      |        | (14 | )     
|                                                                |                                                                                  | Other
current liabilities     |                                                  | 59                       |      |      | (21 | )    |        | (16 | )     
|                                                                |                                                                                  |                               | Net
cash provided by operating activities        |                          | 619  |      |     | 660  |        |     | 397    |  
|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|CASH
FLOWS FROM INVESTING ACTIVITIES                            |                                                                                  |                               |                                                  |                          |      |      |     |      |       
|                                                                | Expenditures
for property, plant and equipment                                   |                               | (884                                             | )                        |      | (714 | )   |      | (1,070 | )  
|                                                                | Expenditures
for short-term investments                                          |                               | (488                                             | )                        |      | --   |     |      | --     |    
|                                                                | Proceeds
from sale of short-term investments                                     |                               | 464                                              |                          |      | --   |     |      | --     |    
|                                                                | Purchases
of nuclear decommissioning trust assets                                |                               | (468                                             | )                        |      | (587 | )   |      | (481   | )  
|                                                                | Proceeds
from sales by nuclear decommissioning trusts                            |                               | 468                                              |                          |      | 592  |     |      | 484    |    
|                                                                | Increase
in loans to affiliates, net                                             |                               | (33                                              | )                        |      | --   |     |      | (1     | )  
|                                                                | Proceeds
from sale of assets                                                     |                               | 1                                                |                          |      | 2    |     |      | 1      |    
|                                                                |                                                                                  |                               | Net
cash used in investing activities            |                          | (940 | )    |     | (707 | )      |     | (1,067 | )
|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|CASH
FLOWS FROM FINANCING ACTIVITIES                            |                                                                                  |                               |                                                  |                          |      |      |     |      |       
|                                                                | Capital
contribution                                                             |                               | --                                               |                          |      | --   |     |      | 200    |    
|                                                                | Preferred
dividends paid                                                         |                               | (5                                               | )                        |      | (5   | )   |      | (5     | )  
|                                                                | Redemptions
of preferred stock                                                   |                               | (14                                              | )                        |      | (3   | )   |      | (3     | )  
|                                                                | Issuances
of long-term debt                                                      |                               | 193                                              |                          |      | 313  |     |      | 411    |    
|                                                                | Payments
on long-term debt                                                       |                               | --                                               |                          |      | (66  | )   |      | (227   | )  
|                                                                | Increase
(decrease) in short-term debt, net                                      |                               | --                                               |                          |      | (72  | )   |      | 72     |    
|                                                                | Capital
contribution received by Otay Mesa VIE                                   |                               | 9                                                |                          |      | --   |     |      | --     |    
|                                                                | Other                                                                            |                               | (1                                               | )                        |      | --   |     |      | (5     | )  
|                                                                |                                                                                  |                               | Net
cash provided by financing activities        |                          | 182  |      |     | 167  |        |     | 443    |  
|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|Increase
(decrease) in cash and cash equivalents                |                                                                                  | (139                          | )                                                |                          | 120  |      |     | (227 | )     
|Cash
and cash equivalents, January 1                            |                                                                                  | 158                           |                                                  |                          | 9    |      |     | 236  |       
|Cash
assumed in connection with FIN 46(R) initial consolidation |                                                                                  | --                            |                                                  |                          | 29   |      |     | --   |       
|Cash
and cash equivalents, December 31                          | $                                                                                | 19                            |                                                  | $                        | 158  |      | $   | 9    |       
|                                                                |                                                                                  |                               |                                                  |                          |      |      |     |      |        |     |        |  
|See
Notes to Consolidated Financial Statements.                 |                                                                                  |                               |                                                  |                          |      |      |     |      |       







78







|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|------------------------------------------------ |  | ------------------------------------------------------------------------------ | - | ------------------------ | ---- | - | --- | ---- | - | --- |  | 
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY 
|STATEMENTS
OF CONSOLIDATED CASH FLOWS           
|(Dollars
in millions)                            | 
|                                                 |  |                                                                                |   | Years ended December 31,
|                                                 |  | 2008                                                                           |   |                          | 2007 |   |     | 2006 |  
|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |  |                                                                                |   |                          |      |   |     |      |  
|                                                 |  | Interest
payments, net of amounts capitalized                                  | $ | 92                       |      | $ | 85  |      | $ | 91  | 
|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|                                                 |  | Income
tax payments, net of refunds                                            | $ | 3                        |      | $ | 206 |      | $ | 313 | 
|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|SUPPLEMENTAL
DISCLOSURE OF NONCASH ACTIVITIES    |  |                                                                                |   |                          |      |   |     |      |  
|                                                 |  | Increase
in accounts payable from investments in property, plant and
equipment | $ | 33                       |      | $ | 37  |      | $ | 21  | 
|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|                                                 |  | Dividends
declared but not paid                                                | $ | 1                        |      | $ | 1   |      | $ | 1   | 
|                                                 |  |                                                                                |   |                          |      |   |     |      |   |     |  | 
|See
Notes to Consolidated Financial Statements.  |  |                                                                                |   |                          |      |   |     |      |  





79









|                                                                                    |                      |   |                                                     |  |              |  |                   |   |                                               |   |                            |  
|----------------------------------------------------------------------------------- | -------------------- | - | --------------------------------------------------- |  | ------------ |  | ----------------- | - | --------------------------------------------- | - | -------------------------- | -
|SAN
DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY                                    
|STATEMENTS
OF CONSOLIDATED COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS'
EQUITY
|Years
ended December 31, 2008, 2007 and 2006                                       
|(Dollars
in millions)                                                               | Comprehensive Income |   | Preferred Stock Not Subject to Mandatory Redemption |  | Common Stock |  | Retained Earnings |   | Accumulated Other Comprehensive Income (Loss) |   | Total Shareholders' Equity |  
|Balance
at December 31, 2005                                                        |                      |   | $ 79                                                |  | $ 938        |  | $ 559             |   | $ (14                                         | ) | $ 1,562                    |  
|Net
income                                                                          | $ 242                |   |                                                     |  |              |  | 242               |   |                                               |   | 242                        |  
|Pension
adjustment                                                                  | (2                   | ) |                                                     |  |              |  |                   |   | (2                                            | ) | (2                         | )
|Comprehensive
income                                                                | $ 240                |   |                                                     |  |              |  |                   |   |                                               |   |                            |  
|Adoption
of FASB Statement No. 158                                                  |                      |   |                                                     |  |              |  |                   |   | (3                                            | ) | (3                         | )
|Preferred
stock dividends declared                                                  |                      |   |                                                     |  |              |  | (5                | ) |                                               |   | (5                         | )
|Capital
contribution                                                                |                      |   |                                                     |  | 200          |  |                   |   |                                               |   | 200                        |  
|Balance
at December 31, 2006                                                        |                      |   | 79                                                  |  | 1,138        |  | 796               |   | (19                                           | ) | 1,994                      |  
|Adoption
of FIN 48                                                                  |                      |   |                                                     |  |              |  | (1                | ) |                                               |   | (1                         | )
|Net
income                                                                          | $ 288                |   |                                                     |  |              |  | 288               |   |                                               |   | 288                        |  
|Financial
instruments                                                               | (1                   | ) |                                                     |  |              |  |                   |   | (1                                            | ) | (1                         | )
|Pension
adjustment                                                                  | 4                    |   |                                                     |  |              |  |                   |   | 4                                             |   | 4                          |  
|Comprehensive
income                                                                | $ 291                |   |                                                     |  |              |  |                   |   |                                               |   |                            |  
|Preferred
stock dividends declared                                                  |                      |   |                                                     |  |              |  | (5                | ) |                                               |   | (5                         | )
|Balance
at December 31, 2007                                                        |                      |   | 79                                                  |  | 1,138        |  | 1,078             |   | (16                                           | ) | 2,279                      |  
|Net
income                                                                          | $ 344                |   |                                                     |  |              |  | 344               |   |                                               |   | 344                        |  
|Pension
adjustment                                                                  | 3                    |   |                                                     |  |              |  |                   |   | 3                                             |   | 3                          |  
|Comprehensive
income                                                                | $ 347                |   |                                                     |  |              |  |                   |   |                                               |   |                            |  
|Preferred
stock dividends declared                                                  |                      |   |                                                     |  |              |  | (5                | ) |                                               |   | (5                         | )
|Balance
at December 31, 2008                                                        |                      |   | $ 79                                                |  | $ 1,138      |  | $1,417            |   | $ (13                                         | ) | $ 2,621                    |  
|                                                                                    |                      |   |                                                     |  |              |  |                   |   |                                               |   |                            |  
|See
Notes to Consolidated Financial Statements.                                    













80







|                                                |                          |       |      |   |       |   |   |       |  
|----------------------------------------------- | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | -
|PACIFIC
ENTERPRISES AND SUBSIDIARIES           
|STATEMENTS
OF CONSOLIDATED INCOME              
|(Dollars
in millions)                          
|                                                | Years ended December 31,
|                                                | 2008                     | 2007  | 2006
|                                                |                         
|Operating
revenues                              | $                        | 4,768 |      | $ | 4,282 |   | $ | 4,181 |  
|                                                |                          |       |      |   |       |   |   |       |  
|Operating
expenses                              |                          |       |      |   |       |   |   |       |  
|Cost
of natural gas                             |                          | 2,841 |      |   | 2,420 |   |   | 2,410 |  
|Operation
and maintenance                       |                          | 1,077 |      |   | 1,022 |   |   | 949   |  
|Depreciation                                    |                          | 280   |      |   | 281   |   |   | 267   |  
|Franchise
fees and other taxes                  |                          | 135   |      |   | 125   |   |   | 121   |  
|Gains
on sale of assets                         |                          | --    |      |   | (2    | ) |   | (5    | )
|Total
operating expenses                        |                          | 4,333 |      |   | 3,846 |   |   | 3,742 |  
|                                                |                          |       |      |   |       |   |   |       |  
|Operating
income                                |                          | 435   |      |   | 436   |   |   | 439   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Other
income (expense), net                     |                          | 1     |      |   | (4    | ) |   | (2    | )
|Interest
income                                 |                          | 22    |      |   | 51    |   |   | 64    |  
|Interest
expense                                |                          | (65   | )    |   | (76   | ) |   | (76   | )
|Income
before income taxes                      |                          | 393   |      |   | 407   |   |   | 425   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Income
tax expense                              |                          | 141   |      |   | 165   |   |   | 186   |  
|                                                |                          |       |      |   |       |   |   |       |  
|Net
income                                      |                          | 252   |      |   | 242   |   |   | 239   |  
|Preferred
dividend requirements                 |                          | 4     |      |   | 4     |   |   | 4     |  
|Earnings
applicable to common shares            | $                        | 248   |      | $ | 238   |   | $ | 235   |  
|                                               
|See
Notes to Consolidated Financial Statements.





81







|                                                |                                                                                     |                                    |       |        |       |      |       |              |       |              |  |  |  | 
|----------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------- | ----- | ------ | ----- | ---- | ----- | ------------ | ----- | ------------ |  |  |  | 
|PACIFIC
ENTERPRISES AND SUBSIDIARIES           
|CONSOLIDATED
BALANCE SHEETS                    
|(Dollars
in millions)                          
|                                                |                                                                                     |                                    |       |        |       |      |       | December 31, |       | December 31,
|                                                |                                                                                     |                                    |       |        |       | 2008 |       | 2007        
|                                                |                                                                                     |                                   
|ASSETS                                          |                                                                                     |                                    |       |        |       |      |       |             
|Current
assets:                                 |                                                                                     |                                    |       |        |       |      |       |             
|                                                | Cash
and cash equivalents                                                           |                                    | $     | 206    |       |      | $     | 59           |      
|                                                | Accounts
receivable  trade                                                         |                                    |       | 572    |       |      |       | 671          |      
|                                                | Accounts
receivable  other                                                         |                                    |       | 20     |       |      |       | 22           |      
|                                                | Due
from unconsolidated affiliates                                                  |                                    |       | 5      |       |      |       | 5            |      
|                                                | Income
taxes receivable                                                             |                                    |       | 108    |       |      |       | 37           |      
|                                                | Deferred
income taxes                                                               |                                    |       | --     |       |      |       | 33           |      
|                                                | Inventories                                                                         |                                    |       | 167    |       |      |       | 98           |      
|                                                | Other
regulatory assets                                                             |                                    |       | 18     |       |      |       | 40           |      
|                                                | Other                                                                               |                                    |       | 37     |       |      |       | 23           |      
|                                                |                                                                                     | Total
current assets               |       |        | 1,133 |      |       |              | 988   |             
|                                                |                                                                                     |                                    |       |        |       |      |       |              |       |             
|Other
assets:                                   |                                                                                     |                                    |       |        |       |      |       |             
|                                                | Due
from unconsolidated affiliates                                                  |                                    |       | 457    |       |      |       | 457          |      
|                                                | Regulatory
assets arising from pension and other postretirement benefit
obligations |                                    |       | 795    |       |      |       | --           |      
|                                                | Other
regulatory assets                                                             |                                    |       | 105    |       |      |       | 100          |      
|                                                | Pension
plan assets in excess of benefit obligations                                |                                    |       | --     |       |      |       | 62           |      
|                                                | Sundry                                                                              |                                    |       | 49     |       |      |       | 39           |      
|                                                |                                                                                     | Total
other assets                 |       |        | 1,406 |      |       |              | 658   |             
|                                                |                                                                                     |                                    |       |        |       |      |       |             
|Property,
plant and equipment:                  |                                                                                     |                                    |       |        |       |      |       |             
|                                                | Property,
plant and equipment                                                       |                                    |       | 8,816  |       |      |       | 8,448        |      
|                                                | Less
accumulated depreciation                                                       |                                    |       | (3,448 | )     |      |       | (3,292       | )    
|                                                |                                                                                     | Property,
plant and equipment, net |       |        | 5,368 |      |       |              | 5,156 |             
|Total
assets                                    |                                                                                     | $                                  | 7,907 |        |       | $    | 6,802 |             
|                                                |                                                                                     |                                    |       |        |       |      |       |             
|See
Notes to Consolidated Financial Statements. |                                                                                     |                                    |       |        |       |      |       |             







82







|                                                |                                                                                           |                                              |       |       |       |      |       |              |       |              |  |  |  | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------- | ----- | ----- | ----- | ---- | ----- | ------------ | ----- | ------------ |  |  |  | 
|PACIFIC
ENTERPRISES AND SUBSIDIARIES           
|CONSOLIDATED
BALANCE SHEETS                    
|(Dollars
in millions)                          
|                                                |                                                                                           |                                              |       |       |       |      |       | December 31, |       | December 31,
|                                                |                                                                                           |                                              |       |       |       | 2008 |       | 2007        
|                                                |                                                                                           |                                             
|LIABILITIES
AND SHAREHOLDERS' EQUITY            |                                                                                           |                                              |       |       |       |      |       |             
|Current
liabilities:                            |                                                                                           |                                              |       |       |       |      |       |             
|                                                | Accounts
payable  trade                                                                  |                                              | $     | 257   |       |      | $     | 300          |      
|                                                | Accounts
payable  other                                                                  |                                              |       | 163   |       |      |       | 130          |      
|                                                | Due
to unconsolidated affiliates                                                          |                                              |       | 106   |       |      |       | 125          |      
|                                                | Deferred
income taxes                                                                     |                                              |       | 6     |       |      |       | --           |      
|                                                | Regulatory
balancing accounts, net                                                        |                                              |       | 221   |       |      |       | 183          |      
|                                                | Customer
deposits                                                                         |                                              |       | 114   |       |      |       | 90           |      
|                                                | Accrued
compensation and benefits                                                         |                                              |       | 92    |       |      |       | 87           |      
|                                                | Current
portion of long-term debt                                                         |                                              |       | 100   |       |      |       | --           |      
|                                                | Other                                                                                     |                                              |       | 213   |       |      |       | 223          |      
|                                                |                                                                                           | Total
current liabilities                    |       |       | 1,272 |      |       |              | 1,138 |             
|                                                |                                                                                           |                                              |       |       |       |      |       |             
|Long-term
debt                                  |                                                                                           |                                              | 1,270 |       |       |      | 1,113 |             
|                                                |                                                                                           |                                              |       |       |       |      |       |             
|Deferred
credits and other liabilities:         |                                                                                           |                                              |       |       |       |      |       |             
|                                                | Customer
advances for construction                                                        |                                              |       | 131   |       |      |       | 123          |      
|                                                | Pension
and other postretirement benefit obligations, net of plan assets                  |                                              |       | 823   |       |      |       | 58           |      
|                                                | Deferred
income taxes                                                                     |                                              |       | 157   |       |      |       | 102          |      
|                                                | Deferred
investment tax credits                                                           |                                              |       | 30    |       |      |       | 33           |      
|                                                | Regulatory
liabilities arising from removal obligations                                   |                                              |       | 1,218 |       |      |       | 1,187        |      
|                                                | Regulatory
liabilities arising from pension and other postretirement benefit
obligations  |                                              |       | --    |       |      |       | 34           |      
|                                                | Asset
retirement obligations                                                              |                                              |       | 581   |       |      |       | 562          |      
|                                                | Deferred
taxes refundable in rates                                                        |                                              |       | 214   |       |      |       | 231          |      
|                                                | Preferred
stock of subsidiary                                                             |                                              |       | 20    |       |      |       | 20           |      
|                                                | Deferred
credits and other                                                                |                                              |       | 251   |       |      |       | 285          |      
|                                                |                                                                                           | Total
deferred credits and other liabilities |       |       | 3,425 |      |       |              | 2,635 |             
|                                                |                                                                                           |                                              |       |       |       |      |       |             
|Commitments
and contingencies (Note 16)         |                                                                                           |                                              |       |       |       |      |       |             
|                                                |                                                                                           |                                              |       |       |       |      |       |             
|Shareholders'
equity:                           |                                                                                           |                                              |       |       |       |      |       |             
|                                                | Preferred
stock                                                                           |                                              |       | 80    |       |      |       | 80           |      
|                                                | Common
stock (600 million shares authorized; 84 million shares outstanding; no
par value) |                                              |       | 1,462 |       |      |       | 1,462        |      
|                                                | Retained
earnings                                                                         |                                              |       | 426   |       |      |       | 378          |      
|                                                | Accumulated
other comprehensive income (loss)                                             |                                              |       | (28   | )     |      |       | (4           | )    
|                                                | Total
shareholders' equity                                                                |                                              |       | 1,940 |       |      |       | 1,916        |      
|Total
liabilities and shareholders' equity      |                                                                                           | $                                            | 7,907 |       |       | $    | 6,802 |             
|                                                |                                                                                           |                                              |       |       |       |      |       |             
|See
Notes to Consolidated Financial Statements. |                                                                                           |                                              |       |       |       |      |       |             





83







|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|------------------------------------------------ | -------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------------ | ------------------------ | ---- | ---- | --- | ---- | ---- | --- | ---- | -
|PACIFIC
ENTERPRISES AND SUBSIDIARIES            
|STATEMENTS
OF CONSOLIDATED CASH FLOWS           
|(Dollars
in millions)                            |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 |                                                                                  |                               |                                                  | Years ended December 31,
|                                                 |                                                                                  | 2008                          |                                                  |                          | 2007 |      |     | 2006 |     
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM OPERATING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Net
income                                                                       | $                             | 252                                              |                          | $    | 242  |     | $    | 239  |    
|                                                 | Adjustments
to reconcile net income to net cash provided by operating
activities |                               |                                                  |                          |      |      |     |      |      |    
|                                                 |                                                                                  |                               | Depreciation                                     |                          | 280  |      |     | 281  |      |     | 267  |  
|                                                 |                                                                                  |                               | Deferred
income taxes and investment tax credits |                          | 92   |      |     | 10   |      |     | (26  | )
|                                                 |                                                                                  |                               | Gains
on sale of assets, net                     |                          | --   |      |     | (2   | )    |     | (5   | )
|                                                 |                                                                                  |                               | Other                                            |                          | (2   | )    |     | 2    |      |     | 3    |  
|                                                 | Quasi-reorganization
resolution                                                  |                               | --                                               |                          |      | --   |     |      | 12   |    
|                                                 | Changes
in other assets                                                          |                               | (30                                              | )                        |      | 4    |     |      | (2   | )  
|                                                 | Changes
in other liabilities                                                     |                               | (56                                              | )                        |      | 29   |     |      | 26   |    
|                                                 | Changes
in working capital components:                                           |                               |                                                  |                          |      |      |     |      |      |    
|                                                 |                                                                                  | Accounts
receivable           |                                                  | 102                      |      |      | (31 | )    |      | 52  |     
|                                                 |                                                                                  | Interest
receivable           |                                                  | --                       |      |      | 10  |      |      | (1  | )   
|                                                 |                                                                                  | Inventories                   |                                                  | (69                      | )    |      | 8   |      |      | 18  |     
|                                                 |                                                                                  | Other
current assets          |                                                  | (23                      | )    |      | (2  | )    |      | (7  | )   
|                                                 |                                                                                  | Accounts
payable              |                                                  | 7                        |      |      | (79 | )    |      | 83  |     
|                                                 |                                                                                  | Income
taxes                  |                                                  | (71                      | )    |      | 42  |      |      | 113 |     
|                                                 |                                                                                  | Due
to/from affiliates, net   |                                                  | (4                       | )    |      | 4   |      |      | (19 | )   
|                                                 |                                                                                  | Regulatory
balancing accounts |                                                  | 46                       |      |      | (13 | )    |      | 185 |     
|                                                 |                                                                                  | Customer
deposits             |                                                  | 24                       |      |      | 3   |      |      | 8   |     
|                                                 |                                                                                  | Other
current liabilities     |                                                  | 24                       |      |      | (17 | )    |      | (35 | )   
|                                                 |                                                                                  |                               | Net
cash provided by operating activities        |                          | 572  |      |     | 491  |      |     | 911  |  
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM INVESTING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Expenditures
for property, plant and equipment                                   |                               | (454                                             | )                        |      | (457 | )   |      | (413 | )  
|                                                 | Decrease
(increase) in loans to affiliates, net                                  |                               | 136                                              |                          |      | (34  | )   |      | (145 | )  
|                                                 | Proceeds
from sale of assets                                                     |                               | --                                               |                          |      | 2    |     |      | 11   |    
|                                                 | Other                                                                            |                               | (1                                               | )                        |      | --   |     |      | (1   | )  
|                                                 |                                                                                  |                               | Net
cash used in investing activities            |                          | (319 | )    |     | (489 | )    |     | (548 | )
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM FINANCING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Common
dividends paid                                                            |                               | (350                                             | )                        |      | (150 | )   |      | (150 | )  
|                                                 | Preferred
dividends paid                                                         |                               | (4                                               | )                        |      | (4   | )   |      | (4   | )  
|                                                 | Issuances
of long-term debt                                                      |                               | 250                                              |                          |      | --   |     |      | --   |    
|                                                 | Decrease
in short-term debt, net                                                 |                               | --                                               |                          |      | --   |     |      | (88  | )  
|                                                 | Other                                                                            |                               | (2                                               | )                        |      | --   |     |      | --   |    
|                                                 |                                                                                  |                               | Net
cash used in financing activities            |                          | (106 | )    |     | (154 | )    |     | (242 | )
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|Increase
(decrease) in cash and cash equivalents |                                                                                  | 147                           |                                                  |                          | (152 | )    |     | 121  |     
|Cash
and cash equivalents, January 1             |                                                                                  | 59                            |                                                  |                          | 211  |      |     | 90   |     
|Cash
and cash equivalents, December 31           | $                                                                                | 206                           |                                                  | $                        | 59   |      | $   | 211  |     
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|See
Notes to Consolidated Financial Statements.  |                                                                                  |                               |                                                  |                          |      |      |     |      |     





84







|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------- | --- | ------------------------ | ---- | --- | --- | ---- | -- | -- |  | 
|PACIFIC
ENTERPRISES AND SUBSIDIARIES            
|STATEMENTS
OF CONSOLIDATED CASH FLOWS           
|(Dollars
in millions)                            |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 |                                                                                           |                                               |     | Years ended December 31,
|                                                 |                                                                                           | 2008                                          |     |                          | 2007 |     |     | 2006 |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 |                                                                                           | Interest
payments, net of amounts capitalized | $   | 61                       |      | $   | 72  |      | $  | 69 | 
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|                                                 |                                                                                           | Income
tax payments, net of refunds           | $   | 120                      |      | $   | 114 |      | $  | 99 | 
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|SUPPLEMENTAL
DISCLOSURE OF NONCASH ACTIVITIES    |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 | Increase
(decrease) in accounts payable from investments in property, plant and
equipment | $                                             | (17 | )                        | $    | 5   |     | $    | 4  |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|                                                 | Dividends
declared but not paid                                                           | $                                             | 1   |                          | $    | 151 |     | $    | 51 |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|See
Notes to Consolidated Financial Statements.  |                                                                                           |                                               |     |                          |      |     |     |      |   







85









|                                                                                    |  |                      |   |                 |  |              |   |                   |   |                                               |   |                            |  
|----------------------------------------------------------------------------------- |  | -------------------- | - | --------------- |  | ------------ | - | ----------------- | - | --------------------------------------------- | - | -------------------------- | -
|PACIFIC
ENTERPRISES AND SUBSIDIARIES                                               
|STATEMENTS
OF CONSOLIDATED COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS
EQUITY
|Years
ended December 31, 2008, 2007 and 2006                                       
|(Dollars
in millions)                                                               |  | Comprehensive Income |   | Preferred Stock |  | Common Stock |   | Retained Earnings |   | Accumulated Other Comprehensive Income (Loss) |   | Total Shareholders' Equity |  
|Balance
at December 31, 2005                                                        |  |                      |   | $ 80            |  | $ 1,453      |   | $ 306             |   | $ (5                                          | ) | $ 1,834                    |  
|Net
income                                                                          |  | $ 239                |   |                 |  |              |   | 239               |   |                                               |   | 239                        |  
|Pension
adjustment                                                                  |  | 2                    |   |                 |  |              |   |                   |   | 2                                             |   | 2                          |  
|Comprehensive
income                                                                |  | $ 241                |   |                 |  |              |   |                   |   |                                               |   |                            |  
|Adoption
of FASB Statement No. 158                                                  |  |                      |   |                 |  |              |   |                   |   | (2                                            | ) | (2                         | )
|Quasi-reorganization
adjustment                                                     |  |                      |   |                 |  | 11           |   |                   |   |                                               |   | 11                         |  
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |   | (4                | ) |                                               |   | (4                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |   | (150              | ) |                                               |   | (150                       | )
|Balance
at December 31, 2006                                                        |  |                      |   | 80              |  | 1,464        |   | 391               |   | (5                                            | ) | 1,930                      |  
|Adoption
of FIN 48                                                                  |  |                      |   |                 |  |              |   | (1                | ) |                                               |   | (1                         | )
|Net
income                                                                          |  | $ 242                |   |                 |  |              |   | 242               |   |                                               |   | 242                        |  
|Financial
instruments                                                               |  | 1                    |   |                 |  |              |   |                   |   | 1                                             |   | 1                          |  
|Comprehensive
income                                                                |  | $ 243                |   |                 |  |              |   |                   |   |                                               |   |                            |  
|Quasi-reorganization
adjustment                                                     |  |                      |   |                 |  | (2           | ) |                   |   |                                               |   | (2                         | )
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |   | (4                | ) |                                               |   | (4                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |   | (250              | ) |                                               |   | (250                       | )
|Balance
at December 31, 2007                                                        |  |                      |   | 80              |  | 1,462        |   | 378               |   | (4                                            | ) | 1,916                      |  
|Net
income                                                                          |  | $ 252                |   |                 |  |              |   | 252               |   |                                               |   | 252                        |  
|Financial
instruments                                                               |  | (25                  | ) |                 |  |              |   |                   |   | (25                                           | ) | (25                        | )
|Pension
adjustment                                                                  |  | 1                    |   |                 |  |              |   |                   |   | 1                                             |   | 1                          |  
|Comprehensive
income                                                                |  | $ 228                |   |                 |  |              |   |                   |   |                                               |   |                            |  
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |   | (4                | ) |                                               |   | (4                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |   | (200              | ) |                                               |   | (200                       | )
|Balance
at December 31, 2008                                                        |  |                      |   | $ 80            |  | $ 1,462      |   | $ 426             |   | $
(28                                         | ) | $ 1,940                    |  
|                                                                                   
|See
Notes to Consolidated Financial Statements.                                    













86







|                                                 |                          |       |      |   |       |   |   |       |  
|------------------------------------------------ | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | -
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES
|STATEMENTS
OF CONSOLIDATED INCOME               
|(Dollars
in millions)                           
|                                                 | Years ended December 31,
|                                                 | 2008                     | 2007  | 2006
|                                                 |                         
|Operating
revenues                               | $                        | 4,768 |      | $ | 4,282 |   | $ | 4,181 |  
|                                                 |                          |       |      |   |       |   |   |       |  
|Operating
expenses                               |                          |       |      |   |       |   |   |       |  
|Cost
of natural gas                              |                          | 2,841 |      |   | 2,420 |   |   | 2,410 |  
|Operation
and maintenance                        |                          | 1,078 |      |   | 1,021 |   |   | 949   |  
|Depreciation                                     |                          | 280   |      |   | 281   |   |   | 267   |  
|Franchise
fees and other taxes                   |                          | 135   |      |   | 125   |   |   | 121   |  
|Gains
on sale of assets                          |                          | --    |      |   | (2    | ) |   | (5    | )
|Total
operating expenses                         |                          | 4,334 |      |   | 3,845 |   |   | 3,742 |  
|                                                 |                          |       |      |   |       |   |   |       |  
|Operating
income                                 |                          | 434   |      |   | 437   |   |   | 439   |  
|                                                 |                          |       |      |   |       |   |   |       |  
|Other
income (expense), net                      |                          | 2     |      |   | (3    | ) |   | (1    | )
|Interest
income                                  |                          | 11    |      |   | 27    |   |   | 29    |  
|Interest
expense                                 |                          | (62   | )    |   | (70   | ) |   | (70   | )
|Income
before income taxes                       |                          | 385   |      |   | 391   |   |   | 397   |  
|                                                 |                          |       |      |   |       |   |   |       |  
|Income
tax expense                               |                          | 140   |      |   | 160   |   |   | 173   |  
|                                                 |                          |       |      |   |       |   |   |       |  
|Net
income                                       |                          | 245   |      |   | 231   |   |   | 224   |  
|Preferred
dividend requirements                  |                          | 1     |      |   | 1     |   |   | 1     |  
|Earnings
applicable to common shares             | $                        | 244   |      | $ | 230   |   | $ | 223   |  
|                                                
|See
Notes to Consolidated Financial Statements. 





87







|                                                 |                                                                                     |                                    |       |              |       |   |       |        |       | 
|------------------------------------------------ | ----------------------------------------------------------------------------------- | ---------------------------------- | ----- | ------------ | ----- | - | ----- | ------ | ----- | 
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES
|CONSOLIDATED
BALANCE SHEETS                     
|(Dollars
in millions)                            |                                                                                     |                                    |       |             
|                                                 |                                                                                     | December 31,                       |       | December 31,
|                                                 |                                                                                     | 2008                               |       | 2007        
|                                                 |                                                                                     |                                    |      
|ASSETS                                           |                                                                                     |                                   
|Current
assets:                                  |                                                                                     |                                    |       |              |       |   |       |       
|                                                 | Cash
and cash equivalents                                                           |                                    | $     | 206          |       |   | $     | 59     |      
|                                                 | Accounts
receivable  trade                                                         |                                    |       | 572          |       |   |       | 671    |      
|                                                 | Accounts
receivable  other                                                         |                                    |       | 20           |       |   |       | 22     |      
|                                                 | Due
from unconsolidated affiliates                                                  |                                    |       | --           |       |   |       | 129    |      
|                                                 | Income
taxes receivable                                                             |                                    |       | 41           |       |   |       | --     |      
|                                                 | Deferred
income taxes                                                               |                                    |       | --           |       |   |       | 33     |      
|                                                 | Inventories                                                                         |                                    |       | 167          |       |   |       | 98     |      
|                                                 | Other
regulatory assets                                                             |                                    |       | 18           |       |   |       | 40     |      
|                                                 | Other                                                                               |                                    |       | 37           |       |   |       | 22     |      
|                                                 |                                                                                     | Total
current assets               |       |              | 1,061 |   |       |        | 1,074 | 
|                                                 |                                                                                     |                                    |       |              |       |   |       |       
|Other
assets:                                    |                                                                                     |                                    |       |              |       |   |       |       
|                                                 |                                                                                     |                                    |       |              |       |   |       |        |      
|                                                 | Regulatory
assets arising from pension and other postretirement benefit
obligations |                                    |       | 795          |       |   |       | --     |      
|                                                 | Other
regulatory assets                                                             |                                    |       | 105          |       |   |       | 100    |      
|                                                 | Pension
plan assets in excess of benefit obligations                                |                                    |       | --           |       |   |       | 62     |      
|                                                 | Sundry                                                                              |                                    |       | 24           |       |   |       | 16     |      
|                                                 |                                                                                     | Total
other assets                 |       |              | 924   |   |       |        | 178   | 
|                                                 |                                                                                     |                                    |       |              |       |   |       |       
|Property,
plant and equipment:                   |                                                                                     |                                    |       |              |       |   |       |       
|                                                 | Property,
plant and equipment                                                       |                                    |       | 8,814        |       |   |       | 8,446  |      
|                                                 | Less
accumulated depreciation and amortization                                      |                                    |       | (3,448       | )     |   |       | (3,292 | )    
|                                                 |                                                                                     | Property,
plant and equipment, net |       |              | 5,366 |   |       |        | 5,154 | 
|Total
assets                                     |                                                                                     | $                                  | 7,351 |              |       | $ | 6,406 |       
|                                                 |                                                                                     |                                    |       |              |       |   |       |       
|See
Notes to Consolidated Financial Statements.  |                                                                                     |                                    |       |              |       |   |       |       







88







|                                                 |                                                                                           |                                              |       |              |       |   |       |       |       | 
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | -------------------------------------------- | ----- | ------------ | ----- | - | ----- | ----- | ----- | 
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES
|CONSOLIDATED
BALANCE SHEETS                     
|(Dollars
in millions)                            |                                                                                           |                                              |       |             
|                                                 |                                                                                           | December 31,                                 |       | December 31,
|                                                 |                                                                                           | 2008                                         |       | 2007        
|                                                 |                                                                                           |                                              |      
|LIABILITIES
AND SHAREHOLDERS' EQUITY             |                                                                                           |                                             
|Current
liabilities:                             |                                                                                           |                                              |       |              |       |   |       |      
|                                                 | Accounts
payable  trade                                                                  |                                              | $     | 257          |       |   | $     | 300   |      
|                                                 | Accounts
payable  other                                                                  |                                              |       | 163          |       |   |       | 130   |      
|                                                 | Due
to unconsolidated affiliates                                                          |                                              |       | 23           |       |   |       | 171   |      
|                                                 | Deferred
income taxes                                                                     |                                              |       | 6            |       |   |       | --    |      
|                                                 | Income
taxes payable                                                                      |                                              |       | --           |       |   |       | 26    |      
|                                                 | Regulatory
balancing accounts, net                                                        |                                              |       | 221          |       |   |       | 183   |      
|                                                 | Customer
deposits                                                                         |                                              |       | 114          |       |   |       | 90    |      
|                                                 | Accrued
compensation and benefits                                                         |                                              |       | 92           |       |   |       | 87    |      
|                                                 | Current
portion of long-term debt                                                         |                                              |       | 100          |       |   |       | --    |      
|                                                 | Other                                                                                     |                                              |       | 211          |       |   |       | 223   |      
|                                                 |                                                                                           | Total
current liabilities                    |       |              | 1,187 |   |       |       | 1,210 | 
|                                                 |                                                                                           |                                              |       |              |       |   |       |      
|Long-term
debt                                   |                                                                                           |                                              | 1,270 |              |       |   | 1,113 |      
|                                                 |                                                                                           |                                              |       |              |       |   |       |      
|Deferred
credits and other liabilities:          |                                                                                           |                                              |       |              |       |   |       |      
|                                                 | Customer
advances for construction                                                        |                                              |       | 131          |       |   |       | 123   |      
|                                                 | Pension
and other postretirement benefit obligations, net of plan assets                  |                                              |       | 823          |       |   |       | 58    |      
|                                                 | Deferred
income taxes                                                                     |                                              |       | 167          |       |   |       | 117   |      
|                                                 | Deferred
investment tax credits                                                           |                                              |       | 30           |       |   |       | 33    |      
|                                                 | Regulatory
liabilities arising from removal obligations                                   |                                              |       | 1,218        |       |   |       | 1,187 |      
|                                                 | Regulatory
liabilities arising from pension and other postretirement benefit
obligations  |                                              |       | --           |       |   |       | 34    |      
|                                                 | Asset
retirement obligations                                                              |                                              |       | 581          |       |   |       | 562   |      
|                                                 | Deferred
taxes refundable in rates                                                        |                                              |       | 214          |       |   |       | 231   |      
|                                                 | Deferred
credits and other                                                                |                                              |       | 240          |       |   |       | 268   |      
|                                                 |                                                                                           | Total
deferred credits and other liabilities |       |              | 3,404 |   |       |       | 2,613 | 
|                                                 |                                                                                           |                                              |       |              |       |   |       |      
|Commitments
and contingencies (Note 16)          |                                                                                           |                                              |       |              |       |   |       |      
|                                                 |                                                                                           |                                              |       |              |       |   |       |      
|Shareholders
equity:                            |                                                                                           |                                              |       |              |       |   |       |      
|                                                 | Preferred
stock                                                                           |                                              |       | 22           |       |   |       | 22    |      
|                                                 | Common
stock (100 million shares authorized; 91 million shares outstanding; no
par value) |                                              |       | 866          |       |   |       | 866   |      
|                                                 | Retained
earnings                                                                         |                                              |       | 630          |       |   |       | 586   |      
|                                                 | Accumulated
other comprehensive income (loss)                                             |                                              |       | (28          | )     |   |       | (4    | )    
|                                                 |                                                                                           | Total
shareholders' equity                   |       |              | 1,490 |   |       |       | 1,470 | 
|Total
liabilities and shareholders' equity       |                                                                                           | $                                            | 7,351 |              |       | $ | 6,406 |      
|                                                 |                                                                                           |                                              |       |              |       |   |       |      
|See
Notes to Consolidated Financial Statements.  |                                                                                           |                                              |       |              |       |   |       |      





89







|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|------------------------------------------------ | -------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------------ | ------------------------ | ---- | ---- | --- | ---- | ---- | --- | ---- | -
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES
|STATEMENTS
OF CONSOLIDATED CASH FLOWS           
|(Dollars
in millions)                            |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 |                                                                                  |                               |                                                  | Years ended December 31,
|                                                 |                                                                                  | 2008                          |                                                  |                          | 2007 |      |     | 2006 |     
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM OPERATING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Net
income                                                                       | $                             | 245                                              |                          | $    | 231  |     | $    | 224  |    
|                                                 | Adjustments
to reconcile net income to net cash provided by operating
activities |                               |                                                  |                          |      |      |     |      |      |    
|                                                 |                                                                                  |                               | Depreciation                                     |                          | 280  |      |     | 281  |      |     | 267  |  
|                                                 |                                                                                  |                               | Deferred
income taxes and investment tax credits |                          | 87   |      |     | 8    |      |     | (24  | )
|                                                 |                                                                                  |                               | Gains
on sale of assets, net                     |                          | --   |      |     | (2   | )    |     | (5   | )
|                                                 |                                                                                  |                               | Other                                            |                          | 2    |      |     | 5    |      |     | 6    |  
|                                                 | Changes
in other assets                                                          |                               | (33                                              | )                        |      | --   |     |      | (5   | )  
|                                                 | Changes
in other liabilities                                                     |                               | (51                                              | )                        |      | 37   |     |      | 31   |    
|                                                 | Changes
in working capital components:                                           |                               |                                                  |                          |      |      |     |      |      |    
|                                                 |                                                                                  | Accounts
receivable           |                                                  | 102                      |      |      | (31 | )    |      | 52  |     
|                                                 |                                                                                  | Interest
receivable           |                                                  | --                       |      |      | 10  |      |      | (1  | )   
|                                                 |                                                                                  | Inventories                   |                                                  | (69                      | )    |      | 8   |      |      | 18  |     
|                                                 |                                                                                  | Other
current assets          |                                                  | (23                      | )    |      | (2  | )    |      | (7  | )   
|                                                 |                                                                                  | Accounts
payable              |                                                  | 7                        |      |      | (79 | )    |      | 83  |     
|                                                 |                                                                                  | Income
taxes                  |                                                  | (67                      | )    |      | 38  |      |      | 98  |     
|                                                 |                                                                                  | Due
to/from affiliates, net   |                                                  | (6                       | )    |      | 1   |      |      | (22 | )   
|                                                 |                                                                                  | Regulatory
balancing accounts |                                                  | 46                       |      |      | (13 | )    |      | 185 |     
|                                                 |                                                                                  | Customer
deposits             |                                                  | 24                       |      |      | 3   |      |      | 8   |     
|                                                 |                                                                                  | Other
current liabilities     |                                                  | 24                       |      |      | (17 | )    |      | (35 | )   
|                                                 |                                                                                  |                               | Net
cash provided by operating activities        |                          | 568  |      |     | 478  |      |     | 873  |  
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM INVESTING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Expenditures
for property, plant and equipment                                   |                               | (454                                             | )                        |      | (457 | )   |      | (413 | )  
|                                                 | Decrease
(increase) in loans to affiliates, net                                  |                               | 136                                              |                          |      | (24  | )   |      | (111 | )  
|                                                 | Proceeds
from sale of assets                                                     |                               | --                                               |                          |      | 2    |     |      | 11   |    
|                                                 |                                                                                  |                               | Net
cash used in investing activities            |                          | (318 | )    |     | (479 | )    |     | (513 | )
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|CASH
FLOWS FROM FINANCING ACTIVITIES             |                                                                                  |                               |                                                  |                          |      |      |     |      |     
|                                                 | Common
dividends paid                                                            |                               | (350                                             | )                        |      | (150 | )   |      | (150 | )  
|                                                 | Preferred
dividends paid                                                         |                               | (1                                               | )                        |      | (1   | )   |      | (1   | )  
|                                                 | Issuances
of long-term debt                                                      |                               | 250                                              |                          |      | --   |     |      | --   |    
|                                                 | Decrease
in short-term debt, net                                                 |                               | --                                               |                          |      | --   |     |      | (88  | )  
|                                                 | Other                                                                            |                               | (2                                               | )                        |      | --   |     |      | --   |    
|                                                 |                                                                                  |                               | Net
cash used in financing activities            |                          | (103 | )    |     | (151 | )    |     | (239 | )
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|Increase
(decrease) in cash and cash equivalents |                                                                                  | 147                           |                                                  |                          | (152 | )    |     | 121  |     
|Cash
and cash equivalents, January 1             |                                                                                  | 59                            |                                                  |                          | 211  |      |     | 90   |     
|Cash
and cash equivalents, December 31           | $                                                                                | 206                           |                                                  | $                        | 59   |      | $   | 211  |     
|                                                 |                                                                                  |                               |                                                  |                          |      |      |     |      |      |     |      |  
|See
Notes to Consolidated Financial Statements.  |                                                                                  |                               |                                                  |                          |      |      |     |      |     





90







|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------- | --- | ------------------------ | ---- | --- | --- | ---- | -- | -- |  | 
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES
|STATEMENTS
OF CONSOLIDATED CASH FLOWS           
|(Dollars
in millions)                            |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 |                                                                                           |                                               |     | Years ended December 31,
|                                                 |                                                                                           | 2008                                          |     |                          | 2007 |     |     | 2006 |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 |                                                                                           | Interest
payments, net of amounts capitalized | $   | 58                       |      | $   | 66  |      | $  | 63 | 
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|                                                 |                                                                                           | Income
tax payments, net of refunds           | $   | 120                      |      | $   | 114 |      | $  | 99 | 
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|SUPPLEMENTAL
DISCLOSURE OF NONCASH ACTIVITIES    |                                                                                           |                                               |     |                          |      |     |     |      |   
|                                                 | Increase
(decrease) in accounts payable from investments in property, plant and
equipment | $                                             | (17 | )                        | $    | 5   |     | $    | 4  |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|                                                 | Dividends
declared but not paid                                                           | $                                             | --  |                          | $    | 150 |     | $    | 50 |   
|                                                 |                                                                                           |                                               |     |                          |      |     |     |      |    |    |  | 
|See
Notes to Consolidated Financial Statements.  |                                                                                           |                                               |     |                          |      |     |     |      |   







91







|                                                                                    |  |                      |   |                 |  |              |  |                   |   |                                               |   |                            |  
|----------------------------------------------------------------------------------- |  | -------------------- | - | --------------- |  | ------------ |  | ----------------- | - | --------------------------------------------- | - | -------------------------- | -
|SOUTHERN
CALIFORNIA GAS COMPANY AND SUBSIDIARIES                                   
|STATEMENTS
OF CONSOLIDATED COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS
EQUITY
|Years
ended December 31, 2008, 2007 and 2006                                       
|(Dollars
in millions)                                                               |  | Comprehensive Income |   | Preferred Stock |  | Common Stock |  | Retained Earnings |   | Accumulated Other Comprehensive Income (Loss) |   | Total Shareholders' Equity |  
|Balance
at December 31, 2005                                                        |  |                      |   | $ 22            |  | $ 866        |  | $ 534             |   | $ (5                                          | ) | $ 1,417                    |  
|Net
income                                                                          |  | $ 224                |   |                 |  |              |  | 224               |   |                                               |   | 224                        |  
|Pension
adjustment                                                                  |  | 2                    |   |                 |  |              |  |                   |   | 2                                             |   | 2                          |  
|Comprehensive
income                                                                |  | $ 226                |   |                 |  |              |  |                   |   |                                               |   |                            |  
|Adoption
of FASB Statement No. 158                                                  |  |                      |   |                 |  |              |  |                   |   | (2                                            | ) | (2                         | )
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |  | (1                | ) |                                               |   | (1                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |  | (150              | ) |                                               |   | (150                       | )
|Balance
at December 31, 2006                                                        |  |                      |   | 22              |  | 866          |  | 607               |   | (5                                            | ) | 1,490                      |  
|Adoption
of FIN 48                                                                  |  |                      |   |                 |  |              |  | (1                | ) |                                               |   | (1                         | )
|Net
income                                                                          |  | $ 231                |   |                 |  |              |  | 231               |   |                                               |   | 231                        |  
|Financial
instruments                                                               |  | 1                    |   |                 |  |              |  |                   |   | 1                                             |   | 1                          |  
|Comprehensive
income                                                                |  | $ 232                |   |                 |  |              |  |                   |   |                                               |   |                            |  
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |  | (1                | ) |                                               |   | (1                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |  | (250              | ) |                                               |   | (250                       | )
|Balance
at December 31, 2007                                                        |  |                      |   | 22              |  | 866          |  | 586               |   | (4                                            | ) | 1,470                      |  
|Net
income                                                                          |  | $ 245                |   |                 |  |              |  | 245               |   |                                               |   | 245                        |  
|Financial
instruments                                                               |  | (25                  | ) |                 |  |              |  |                   |   | (25                                           | ) | (25                        | )
|Pension
adjustment                                                                  |  | 1                    |   |                 |  |              |  |                   |   | 1                                             |   | 1                          |  
|Comprehensive
income                                                                |  | $ 221                |   |                 |  |              |  |                   |   |                                               |   |                            |  
|Preferred
stock dividends declared                                                  |  |                      |   |                 |  |              |  | (1                | ) |                                               |   | (1                         | )
|Common
stock dividends declared                                                     |  |                      |   |                 |  |              |  | (200              | ) |                                               |   | (200                       | )
|Balance
at December 31, 2008                                                        |  |                      |   | $ 22            |  | $ 866        |  | $ 630             |   | $ (28                                         | ) | $ 1,490                    |  
|                                                                                    |  |                      |   |                 |  |              |  |                   |   |                                               |   |                            |  
|See
Notes to Consolidated Financial Statements.                                    







92





SEMPRA
ENERGY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER FINANCIAL DATA

PRINCIPLES
OF CONSOLIDATION

Sempra
Energy

Sempra Energy's Consolidated
Financial Statements include the accounts of Sempra Energy, a California-based
Fortune 500 holding company, its consolidated subsidiaries, and a variable
interest entity. Sempra Energys principal subsidiaries are the following:

§

San
Diego Gas & Electric Company (SDG&E) and Southern California Gas Company
(SoCalGas), which we collectively refer to as the Sempra Utilities; and

§

Sempra
Global, which is the holding company for Sempra Commodities, Sempra Generation,
Sempra Pipelines & Storage, Sempra LNG and other, smaller businesses.

Sempra Energy uses the equity
method to account for investments in affiliated companies over which we have the
ability to exercise significant influence, but not control. We discuss our
investments in unconsolidated subsidiaries in Notes 3 and 4.

SDG&E

SDG&E's Consolidated
Financial Statements include its accounts, the accounts of its sole subsidiary,
SDG&E Funding LLC, and the accounts of Otay Mesa Energy Center LLC (Otay
Mesa VIE), a variable interest entity of which SDG&E is the primary
beneficiary, as discussed below under "Variable Interest Entities." SDG&Es
common stock is wholly owned by Enova Corporation, which is a wholly owned
subsidiary of Sempra Energy. The activities of SDG&E Funding LLC were
substantially complete in 2007, and the entity was dissolved in 2008.

Pacific
Enterprises and SoCalGas

The Consolidated Financial
Statements of Pacific Enterprises include the accounts of Pacific Enterprises
(PE) and its subsidiary, SoCalGas.  Sempra Energy wholly owns PEs common
stock and PE owns all of SoCalGas common stock. SoCalGas Consolidated
Financial Statements include its subsidiaries, which comprise less than one
percent of its consolidated financial position and results of operations.

PE's operations consist solely of
those of SoCalGas and additional items (e.g., cash, intercompany accounts and
equity) attributable to being a holding company for SoCalGas.

BASIS
OF PRESENTATION

This is a combined report of
Sempra Energy, SDG&E, PE and SoCalGas. We provide separate information for
SDG&E, PE and SoCalGas as required. When only information for SoCalGas is
provided, it is the same for PE. References in this report to "we," "our" and
"Sempra Energy Consolidated" are to Sempra Energy and its consolidated entities,
unless otherwise indicated by the context. We have eliminated intercompany
accounts and transactions within each set of consolidated financial
statements.

QUASI-REORGANIZATION

In 1993, PE effected a
quasi-reorganization for financial reporting purposes as of December 31, 1992. A
quasi-reorganization permits a company, for accounting purposes, to adjust its
financial statements and proceed on much the same basis as if it had been
legally reorganized. In 2006, PE favorably resolved certain liabilities
established in connection with the quasi-reorganization, resulting in increases
in common equity. Also in 2006, we reported cash



93





received
in 2006 from the resolution of an insurance claim related to
quasi-reorganization issues in Quasi-Reorganization Resolution on the Statements
of Consolidated Cash Flows. In 2007, an adjustment to the liabilities resulted
in a decrease to equity. The remaining liabilities of $11 million will be
resolved in future years. We believe the provisions established for these
matters are adequate.

USE
OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS

We prepare our financial
statements in conformity with accounting principles generally accepted in the
United States of America (GAAP). This requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, including the disclosure of contingent assets and
liabilities at the date of the financial statements. Although we believe the
estimates and assumptions are reasonable, actual amounts ultimately may differ
significantly from those estimates.

REGULATORY
MATTERS

Effects
of Regulation

The accounting policies of our
principal regulated utility subsidiaries, SDG&E and SoCalGas, conform with
GAAP for regulated enterprises and reflect the policies of the California Public
Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).

The Sempra Utilities prepare
their financial statements in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) 71, Accounting for the Effects of
Certain Types of Regulation(SFAS 71). Under SFAS 71, a regulated utility
records a regulatory asset if it is probable that, through the ratemaking
process, the utility will recover that asset from customers. To the extent that
recovery is no longer probable as a result of changes in regulation or the
utility's competitive position, the related regulatory assets are written off.
Regulatory liabilities represent amounts collected from customers in advance of
the actual expenditure by the utility. If the actual expenditures are less than
amounts previously collected from ratepayers, the excess would be refunded to
customers, generally by reducing future rates.

Mobile Gas Service Corporation
(Mobile Gas), a subsidiary of Sempra Pipelines & Storage acquired in October
2008, is a small regulated natural gas distribution utility in Southwest
Alabama. It also applies SFAS 71 to its operations.

We provide information concerning
regulatory assets and liabilities below in "Regulatory Balancing Accounts" and
"Regulatory Assets and Liabilities."

Regulatory
Balancing Accounts

The following table summarizes
our regulatory balancing accounts at December 31. The net payables (payables net
of receivables) will be returned to customers by reducing future rates.



|                                                        |                            |      |       |   |          |   |  |   |      |   |   |      |   |  |   |      |   |   |      |  
|------------------------------------------------------- | -------------------------- | ---- | ----- | - | -------- | - |  | - | ---- | - | - | ---- | - |  | - | ---- | - | - | ---- | -
|SUMMARY
OF REGULATORY BALANCING ACCOUNTS AT DECEMBER 31
|(Dollars
in millions)                                  
|                                                        | Sempra Energy Consolidated |      | SDG&E |   | SoCalGas
|                                                        |                            | 2008 |       |   | 2007     |   |  |   | 2008 |   |   | 2007 |   |  |   | 2008 |   |   | 2007 |  
|Over-collected                                          | $                          | 728  |       | $ | 721      |   |  | $ | 364  |   | $ | 455  |   |  | $ | 364  |   | $ | 266  |  
|Under-collected                                         |                            | (393 | )     |   | (240     | ) |  |   | (250 | ) |   | (157 | ) |  |   | (143 | ) |   | (83  | )
|Net
payable                                             | $                          | 335  |       | $ | 481      |   |  | $ | 114  |   | $ | 298  |   |  | $ | 221  |   | $ | 183  |  



Over- and under-collected
regulatory balancing accounts reflect the difference between customer billings
and recorded or CPUC-authorized costs, primarily commodity costs. Amounts in the
balancing accounts are recoverable or refundable in future rates, subject to
CPUC approval. Balancing account treatment eliminates the impact on earnings
from variances in the covered costs from authorized amounts. Absent balancing
account treatment,



94





variations
in operating and maintenance costs from amounts approved by the CPUC may
increase volatility in utility earnings.

We provide additional information
about regulatory matters in Notes 14 and 15.

Regulatory
Assets and Liabilities

We show the details of regulatory
assets and liabilities in the following table, and discuss each of them
separately below.



|                                                     |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |   |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------ | -- |  | ---- | ------ | - |  | 
|REGULATORY
ASSETS AND LIABILITIES AT DECEMBER 31    
|(Dollars
in millions)                                |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |       
|                                                     |                                                                                                                                                                                                                                                                                                                       | 2008 |        |    |  | 2007 |       
|SDG&E                                                |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |   | 
|Fixed-price
contracts and other derivatives          |                                                                                                                                                                                                                                                                                                                       | $    | 358    |    |  | $    | 361    |  
|Deferred
taxes recoverable in rates                  |                                                                                                                                                                                                                                                                                                                       |      | 369    |    |  |      | 312    |  
|Unamortized
loss on reacquired debt, net             |                                                                                                                                                                                                                                                                                                                       |      | 30     |    |  |      | 34     |  
|Pension
and other postretirement benefit obligations |                                                                                                                                                                                                                                                                                                                       |      | 393    | ** |  |      | 162    |  
|Removal
obligations*                                 |                                                                                                                                                                                                                                                                                                                       |      | (1,212 | )  |  |      | (1,335 | )
|Environmental
costs                                  |                                                                                                                                                                                                                                                                                                                       |      | 21     |    |  |      | 11     |  
|Other                                                |                                                                                                                                                                                                                                                                                                                       |      | 16     |    |  |      | 17     |  
|Total
SDG&E                                          |                                                                                                                                                                                                                                                                                                                       |      | (25    | )  |  |      | (438   | )
|                                                     |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |  
|SoCalGas                                             |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |   | 
|Environmental
costs                                  |                                                                                                                                                                                                                                                                                                                       |      | 36     |    |  |      | 43     |  
|Unamortized
loss on reacquired debt, net             |                                                                                                                                                                                                                                                                                                                       |      | 30     |    |  |      | 34     |  
|Removal
obligations*                                 |                                                                                                                                                                                                                                                                                                                       |      | (1,218 | )  |  |      | (1,187 | )
|Deferred
taxes refundable in rates                   |                                                                                                                                                                                                                                                                                                                       |      | (214   | )  |  |      | (231   | )
|Employee
benefit costs                               |                                                                                                                                                                                                                                                                                                                       |      | 46     |    |  |      | 41     |  
|Pension
and other postretirement benefit obligations |                                                                                                                                                                                                                                                                                                                       |      | 795    | ** |  |      | (34    | )
|Other                                                |                                                                                                                                                                                                                                                                                                                       |      | 8      |    |  |      | 21     |  
|Total
SoCalGas                                       |                                                                                                                                                                                                                                                                                                                       |      | (517   | )  |  |      | (1,313 | )
|                                                     |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |  
|Other
 Mobile Gas                                   |                                                                                                                                                                                                                                                                                                                       |      | (3     | )  |  |      | --     |  
|                                                     |                                                                                                                                                                                                                                                                                                                       |      |        |    |  |      |        |  
|Total
Sempra Energy Consolidated                     |                                                                                                                                                                                                                                                                                                                       | $    | (545   | )  |  | $    | (1,751 | )
|*                                                    | This
is related to SFAS 143, Accounting for Asset Retirement Obligations, which
we discuss below in "Asset Retirement Obligations."                                                                                                                                                                                  
|**                                                   | Recent
market turmoil resulted in significant losses in the value of assets in
pension and postretirement benefit plans. At the Sempra Utilities, the
impact of this loss in value is recoverable in rates, which caused an
increase in regulatory assets for pension and other postretirement benefit
plans in 2008.





95







|                                                        |                                        |        |          |   |                            |       |          |        |   |  |   |        |   |   |        |   |   |        |   |  | 
|------------------------------------------------------- | -------------------------------------- | ------ | -------- | - | -------------------------- | ----- | -------- | ------ | - |  | - | ------ | - | - | ------ | - | - | ------ | - |  | 
|NET
REGULATORY ASSETS (LIABILITIES) AS PRESENTED ON THE
|CONSOLIDATED
BALANCE SHEETS AT DECEMBER 31             
|(Dollars
in millions)                                   |                                        |        |         
|                                                        | 2008                                   |        | 2007    
|                                                        | Sempra Energy Consolidated             | SDG&E  | SoCalGas |   | Sempra Energy Consolidated | SDG&E | SoCalGas
|Current
regulatory assets                               | $                                      | 121    |          | $ | 102                        |       | $        | 18     |   |  | $ | 106    |   | $ | 66     |   | $ | 40     |  
|Noncurrent
regulatory assets                            |                                        | 1,986  |          |   | 1,085                      |       |          | 900    |   |  |   | 931    |   |   | 831    |   |   | 100    |  
|Current
regulatory liabilities*                         |                                        | (3     | )        |   | --                         |       |          | (3     | ) |  |   | (1     | ) |   | --     |   |   | (1     | )
|Noncurrent
regulatory liabilities                       |                                        | (2,649 | )        |   | (1,212                     | )     |          | (1,432 | ) |  |   | (2,787 | ) |   | (1,335 | ) |   | (1,452 | )
|Total                                                   | $                                      | (545   | )        | $ | (25                        | )     | $        | (517   | ) |  | $ | (1,751 | ) | $ | (438   | ) | $ | (1,313 | )
|*                                                       | Included
in Other Current Liabilities.



In the tables above:

§

Regulatory
assets arising from fixed-price contracts and other derivatives are offset by
corresponding liabilities arising from purchased power and natural gas
transportation contracts. The regulatory asset is reduced as payments are made
for commodities and services under these contracts.

§

Deferred
taxes recoverable/refundable in rates are based on current regulatory ratemaking
and income tax laws. SDG&E and SoCalGas expect to recover/refund net
regulatory assets/liabilities related to deferred income taxes over the lives of
the assets that give rise to the accumulated deferred income tax
liabilities/assets.

§

Regulatory
assets related to unamortized losses on reacquired debt are recovered over the
remaining original amortization periods of the loss on reacquired debt. These
periods range from 3 months to 19 years for SDG&E and from 4 to 17 years for
SoCalGas.

§

Regulatory
assets related to environmental costs represent the portion of our environmental
liability recognized at the end of the period in excess of the amount that has
been recovered through rates charged to customers. We expect this amount to be
recovered in future rates as expenditures are made.

§

Regulatory
assets related topension and other postretirement benefit obligations
are offset by corresponding liabilities and are being recovered in rates as the
costs are incurred.

All of these assets either earn a
return, generally at short-term rates, or the cash has not yet been expended and
the assets are offset by liabilities that do not incur a carrying cost.

FAIR
VALUE MEASUREMENTS

We apply recurring fair value
measurements to certain assets and liabilities, primarily nuclear
decommissioning trusts, marketable securities and other miscellaneous
derivatives. Prior to the formation of RBS Sempra Commodities LLP (RBS Sempra
Commodities) on April 1, 2008, as we discuss in Notes 3 and 4, we also applied
fair value measurements to trading derivatives and certain trading inventories.

The valuation techniques we use
to determine fair value are in accordance with SFAS 157, Fair Value
Measurements (SFAS 157).

SFAS 157 defines "fair value" as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price).

SFAS 157 requires that a fair
value measurement reflect the assumptions market participants would use in
pricing an asset or liability based on the best available information. These
assumptions include the risk inherent in a particular valuation technique (such
as a pricing model) and the risks inherent in the inputs to the model. SFAS 157
also clarifies that an issuer's credit standing should be considered when
measuring liabilities at fair value.



96





SFAS
157 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The three levels of the fair value hierarchy defined by SFAS 157
are as follows:

Level 1  Quoted prices
are available in active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Our Level 1 financial instruments primarily
consist of exchange-traded derivatives, listed equities and U.S. government
treasury securities.

Level 2  Pricing inputs
are other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable as of the reporting date. Level 2
includes those financial instruments that are valued using models or other
valuation methodologies. These models are primarily industry-standard models
that consider various assumptions, including:

§

quoted
forward prices for commodities

§

time
value

§

volatility
factors

§

current
market and contractual prices for the underlying instruments

§

other
relevant economic measures

Substantially all of these
assumptions are observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the marketplace. Our financial
instruments in this category include non-exchange-traded derivatives such as
over-the-counter (OTC) forwards and options.

Level 3  Pricing inputs
include significant inputs that are generally less observable from objective
sources. These inputs may be used with internally developed methodologies that
result in managements best estimate of fair value from the perspective of a
market participant.

We elected to early-adopt SFAS
157 in the first quarter of 2007. As required, we applied the provisions of SFAS
157 prospectively, except for the initial impact of certain items specified by
the pronouncement.

As required under SFAS 157, we
recorded the adjustments for these items as a transition adjustment to beginning
retained earnings in 2007. The transition adjustment to Sempra Energys
beginning retained earnings in 2007 was a gain of $12 million, net of income
tax. There was no transition adjustment as a result of the adoption of SFAS 157
at SDG&E or SoCalGas.

CASH
AND CASH EQUIVALENTS

Cash equivalents are highly
liquid investments with maturities of three months or less at the date of
purchase.

RESTRICTED
CASH

Restricted cash at Sempra Energy
was $27 million in 2008 and $1 million in 2007 at December 31. In 2008,
restricted cash represents funds held in trust for construction financing of
certain natural gas storage facilities of Sempra Pipelines & Storage. In
2007, restricted cash served as cash collateral for certain debt agreements.

COLLECTION
ALLOWANCES

We record allowances for the
collection of receivables and, prior to the sale of our commodities-marketing
businesses, realization of trading assets (discussed below under "Trading
Instruments"). The allowances for collection of receivables include allowances
for doubtful customer accounts and for other receivables. The changes in
allowances for collection of receivables and realization of trading assets are
shown in the table below:





97







|                                                           |  |   |      |                          |  |   |      |   |  |   |      |   | 
|---------------------------------------------------------- |  | - | ---- | ------------------------ |  | - | ---- | - |  | - | ---- | - | 
|COLLECTION
ALLOWANCES                                     
|(Dollars
in millions)                                     
|                                                           |  |   |      | Years ended December 31, | 
|                                                           |  |   | 2008 |                          |  |   | 2007 |   |  |   | 2006 |  
|Sempra
Energy Consolidated                                 |  |   |      |                          |  |   |      |   |  |   |      |  
|Allowances
for collection of receivables at January 1      |  | $ | 16   |                          |  | $ | 15   |   |  | $ | 15   |  
|Provisions
for uncollectible accounts                      |  |   | 36   |                          |  |   | 20   |   |  |   | 19   |  
|Write-offs
of uncollectible accounts                       |  |   | (25  | )                        |  |   | (19  | ) |  |   | (19  | )
|Acquisition
of EnergySouth (see Note 3)                    |  |   | 2    |                          |  |   | --   |   |  |   | --   |  
|Allowances
for collection of receivables at December 31    |  | $ | 29   |                          |  | $ | 16   |   |  | $ | 15   |  
|                                                           |  |   |      |                          |  |   |      |   |  |   |      |  
|Allowance
for realization of trading assets at January 1   |  | $ | 48   |                          |  | $ | 53   |   |  | $ | 64   |  
|Provisions
for (recovery of) uncollectible accounts        |  |   | 42   |                          |  |   | (2   | ) |  |   | 15   |  
|Write-offs
of uncollectible accounts                       |  |   | --   |                          |  |   | (3   | ) |  |   | (26  | )
|Sale
of commodities-marketing businesses (see Note 3)      |  |   | (90  | )                        |  |   | --   |   |  |   | --   |  
|Allowance
for realization of trading assets at December 31 |  | $ | --   |                          |  | $ | 48   |   |  | $ | 53   |  
|SDG&E                                                      |  |   |      |                          |  |   |      |   |  |   |      |  
|Allowances
for collection of receivables at January 1      |  | $ | 5    |                          |  | $ | 5    |   |  | $ | 4    |  
|Provisions
for uncollectible accounts                      |  |   | 12   |                          |  |   | 8    |   |  |   | 9    |  
|Write-offs
of uncollectible accounts                       |  |   | (11  | )                        |  |   | (8   | ) |  |   | (8   | )
|Allowances
for collection of receivables at December 31    |  | $ | 6    |                          |  | $ | 5    |   |  | $ | 5    |  
|SoCalGas                                                   |  |   |      |                          |  |   |      |   |  |   |      |  
|Allowances
for collection of receivables at January 1      |  | $ | 9    |                          |  | $ | 8    |   |  | $ | 9    |  
|Provisions
for uncollectible accounts                      |  |   | 23   |                          |  |   | 12   |   |  |   | 10   |  
|Write-offs
of uncollectible accounts                       |  |   | (14  | )                        |  |   | (11  | ) |  |   | (11  | )
|Allowances
for collection of receivables at December 31    |  | $ | 18   |                          |  | $ | 9    |   |  | $ | 8    |  

TRADING
INSTRUMENTS

Trading instruments on the 2007
Sempra Energy Consolidated Balance Sheet related to our commodities-marketing
businesses, which we sold into RBS Sempra Commodities in April 2008.  We
discuss this transaction in Note 3.

Trading assets and trading
liabilities (described further in Note 11) include

§

option
premiums paid and received

§

unrealized
gains and losses from exchange-traded futures and options

§

OTC
swaps, forwards and options

§

physical
commodities

Trading instruments are recorded
on a trade-date basis and the majority of such derivative instruments are
adjusted daily to current market value. Unrealized gains and losses on OTC
transactions reflect amounts that would be received from or paid to a third
party upon net settlement of the contracts. Unrealized gains and losses on OTC
transactions are reported separately as assets and liabilities unless a legal
right of setoff exists under an enforceable netting arrangement.

We discuss the valuation of
trading derivatives and commodity trading inventories in Note 11. Due to the
nature, size and timing of transactions, estimated values may differ
significantly from realized values. Changes in fair values are reflected in net
income. Although trading instruments may have scheduled maturities later than
one year, the actual settlement of these transactions can occur sooner. Because
of this, we classify trading assets and liabilities as current on the
Consolidated Balance Sheets.

Energy transportation and storage
contracts are recorded on an accrual basis, and energy commodity inventory is
recorded at the lower of cost or market. Fair value hedge accounting may be
applied to a portion of these inventories. Metals inventories are recorded at
fair value.



98





Trading
Securities

In the first quarter of 2008,
Sempra Commodities recorded $2 million of pretax losses related to trading
securities, including a pretax gain of $3 million resulting from sales and an
unrealized pretax loss of $5 million related to securities held at March 31,
2008. Sempra Commodities had securities of $16 million classified as trading
securities at December 31, 2007.

In 2007, Sempra Commodities
recorded $14 million of pretax gains related to trading securities, including a
pretax gain of $6 million resulting from sales, an unrealized pretax gain of $8
million from transfers to trading securities from available-for-sale securities
due to changes in their status, and an unrealized pretax loss of a negligible
amount related to securities held at December 31, 2007.

INVENTORIES

The Sempra Utilities value
natural gas inventory by the last-in first-out (LIFO) method. As inventories are
sold, differences between the LIFO valuation and the estimated replacement cost
are reflected in customer rates. Materials and supplies at the Sempra
Utilitiesare generally valued at the lower of average cost or
market.

At December 31, 2008, Sempra
Pipelines & Storage has $39 million of natural gas inventory recorded at
lower of average cost or market.



|                                  |                            |        |          |         |        |       
|--------------------------------- | -------------------------- | ------ | -------- | ------- | ------ | ------
|INVENTORY
BALANCES AT DECEMBER 31
|(Dollars
in millions)            
|                                  | Sempra Energy Consolidated | SDG&E  | SoCalGas
|                                  | 2008                       | 2007   | 2008     | 2007    | 2008   | 2007  
|Natural
gas                       | $  201                     | $  130 | $     -- | $    49 | $  143 | $   80
|Materials
and supplies            | 119                        | 94     | 62       | 64      | 24     | 18    
|Total                             | $  320                     | $  224 | $   62   | $  113  | $  167 | $   98

INCOME
TAXES

Income tax expense includes
current and deferred income taxes from operations during the year. In accordance
with SFAS 109, Accounting for Income Taxes(SFAS 109), we record deferred
income taxes for temporary differences between the book and the tax bases of
assets and liabilities.  Investment tax credits from prior years are
amortized to income by the Sempra Utilities over the estimated service lives of
the properties as required by the CPUC. At Sempra Global and Parent, investment
tax credits and other credits, mainly low-income housing and synthetic fuels tax
credits in 2007 and 2006, are recognized in income as earned.

We follow certain provisions of
SFAS 109 that require regulated enterprises to recognize

§

regulatory
assets to offset deferred tax liabilities if it is probable that the amounts
will be recovered from customers; and

§

regulatory
liabilities to offset deferred tax assets if it is probable that the amounts
will be returned to customers.

We also follow

§

Accounting
Principles Board (APB) Opinion 23, Accounting for Income Taxes -- Special
Areas, in recording deferred taxes for investments in foreign subsidiaries
and the undistributed earnings of foreign subsidiaries

§

Financial
Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(FIN 48)

We provide additional information
about income taxes in Note 8.



99





PROPERTY,
PLANT AND EQUIPMENT

Property, plant and equipment
primarily represents the buildings, equipment and other facilities used by the
Sempra Utilities to provide natural gas and electric utility services, and by
Sempra Generation, Sempra LNG and Sempra Pipelines & Storage. It also
reflects projects included in construction work in progress at these business
units.

Our plant costs include

§

labor

§

materials
and contract services

§

expenditures
for replacement parts incurred during a major maintenance outage of a generating
plant

Maintenance costs are expensed as
incurred.  The cost of most retired depreciable utility plant minus salvage
value is charged to accumulated depreciation.

The cost of our utility plant
includes an allowance for funds used during construction (AFUDC). AFUDC is
discussed below. The cost of non-utility plant includes capitalized interest.



|                                                           |                                              |      |                                                |      |      |                        |   |      |   |      |   |  | 
|---------------------------------------------------------- | -------------------------------------------- | ---- | ---------------------------------------------- | ---- | ---- | ---------------------- | - | ---- | - | ---- | - |  | 
|PROPERTY,
PLANT AND EQUIPMENT BY MAJOR FUNCTIONAL CATEGORY
|(Dollars
in billions)                                     
|                                                           | Property, Plant and Equipment atDecember 31, |      | Depreciation rates for years endedDecember 31,
|                                                           | 2008                                         | 2007 |                                                | 2008 | 2007 | 2006                  
|SDG&E:                                                     |                                              |      |                                                |      |      |                        |   |      |   |      |  
|Natural gas operations                                     | $                                            | 1.1  | $                                              | 1.1  |      | 2.80                   | % | 3.43 | % | 3.42 | %
|Electric distribution                                      |                                              | 4.2  |                                                | 4.0  |      | 3.95                   |   | 4.15 |   | 4.13 |  
|Electric transmission                                      |                                              | 1.5  |                                                | 1.4  |      | 2.67                   |   | 2.84 |   | 3.07 |  
|Electric generation                                        |                                              | 0.9  |                                                | 0.8  |      | 3.77                   |   | 3.67 |   | 4.44 |  
|Other electric                                             |                                              | 0.5  |                                                | 0.5  |      | 8.13                   |   | 8.50 |   | 8.70 |  
|Construction work in progress                              |                                              | 0.9  |                                                | 0.5  |      | NA                     |   | NA   |   | NA   |  
|Total SDG&E                                                |                                              | 9.1  |                                                | 8.3  |      |                        |   |      |   |      |  
|                                                           |                                              |      |                                                |      |      |                        |   |      |   |      |  
|SoCalGas:                                                  |                                              |      |                                                |      |      |                        |   |      |   |      |  
|Natural gas operations                                     |                                              | 8.5  |                                                | 8.2  |      | 3.49                   |   | 3.63 |   | 3.58 |  
|Other non-utility                                          |                                              | 0.1  |                                                | --   |      | 1.55                   |   | 4.28 |   | 3.47 |  
|Construction work in progress                              |                                              | 0.2  |                                                | 0.2  |      | NA                     |   | NA   |   | NA   |  
|Total SoCalGas                                             |                                              | 8.8  |                                                | 8.4  |      |                        |   |      |   |      |  
|                                                           |                                              |      |                                                |      |      |                        |   |      |   |      |  
|                                                           |                                              |      |                                                |      |      | Estimated Useful Lives
|Sempra Global and Parent:                                  |                                              |      |                                                |      |      |                        |   |      |   |      |  
|Land and land rights                                       |                                              | 0.2  |                                                | 0.1  |      | 25 to 50 years*       
|Machinery and equipment                                    |                                              |      |                                                |      |      |                        |   |      |   |      |  
|Generating plant                                           |                                              | 1.4  |                                                | 1.4  |      | 4 to 35 years         
|LNG** receipt terminal                                     |                                              | 1.0  |                                                | --   |      | 5 to 45 years         
|Pipelines                                                  |                                              | 0.8  |                                                | 0.3  |      | 4 to 50 years         
|Other                                                      |                                              | 0.1  |                                                | 0.3  |      | 3 to 10 years         
|Construction work in progress                              |                                              |      |                                                |      |      |                       
|LNG facilities                                             |                                              | 0.9  |                                                | 1.5  |      | NA                    
|Other                                                      |                                              | 0.7  |                                                | 0.4  |      | NA                    
|Other                                                      |                                              | 0.2  |                                                | 0.2  |      | 4 to 50 years         
|                                                           |                                              | 5.3  |                                                | 4.2  |      |                       
|Total
Sempra Energy Consolidated                           | $                                            | 23.2 | $                                              | 20.9 |      |                        |   |      |   |      |  
|*  Estimated
useful lives are for land rights             
|** Liquefied
natural gas                                  





100





Depreciation
expense is based on the straight-line method over the useful lives of the assets
or, for the Sempra Utilities, a shorter period prescribed by the CPUC.
Depreciation expense is computed using the straight-line method over the asset's
estimated original composite useful life or the remaining term of the site
leases, whichever is shorter.

The accumulated depreciation and
decommissioning amounts on our Consolidated Balance Sheets are as follows:



|                                                                          |                 |      |   |     
|------------------------------------------------------------------------- | --------------- | ---- | - | ----
|ACCUMULATED
DEPRECIATION AND DECOMMISSIONING AMOUNTS                     
|(Dollars
in billions)                                                    
|                                                                          | At December 31,
|                                                                          |                 | 2008 |   | 2007
|SDG&E:                                                                    |                 |      |   |     
|Accumulated
depreciation and decommissioning of utility plant in service: |                 |      |   |     
|Electric                                                                  | $               | 1.9  | $ | 1.8 
|Natural
gas                                                               |                 | 0.5  |   | 0.5 
|Total
SDG&E                                                               |                 | 2.4  |   | 2.3 
|                                                                          |                 |      |   |     
|SoCalGas:                                                                 |                 |      |   |     
|Accumulated
depreciation of natural gas utility plant in service          |                 | 3.4  |   | 3.3 
|Accumulated
depreciation  other non-utility                              |                 | 0.1  |   | --  
|Total
SoCalGas                                                            |                 | 3.5  |   | 3.3 
|                                                                          |                 |      |   |     
|Sempra
Global and Parent:                                                 |                 |      |   |     
|Accumulated
depreciation                                                  |                 | 0.4  |   | 0.4 
|Total
Sempra Energy Consolidated                                          | $               | 6.3  | $ | 6.0 



The Sempra Utilities finance
their construction projects with borrowed funds and equity funds. The CPUC
allows the recovery of the cost of these funds as part of the cost of
construction projects by recording AFUDC, which is calculated using rates
authorized by the CPUC. The Sempra Utilities recover the AFUDC from their
customers, plus earn a return on the allowance after the utility property is
placed in service.

Sempra Global businesses
capitalize interest costs incurred to finance capital projects under SFAS 34,
Capitalization of Interest Cost(SFAS 34). The Sempra Utilities
also capitalize certain interest costs under SFAS 34.



|                                  |                          |      |   |      |   |     
|--------------------------------- | ------------------------ | ---- | - | ---- | - | ----
|CAPITALIZED
FINANCING COSTS      
|(Dollars
in millions)            
|                                  | Years ended December 31,
|                                  |                          | 2008 |   | 2007 |   | 2006
|SDG&E:                            |                          |      |   |      |   |     
|AFUDC
related to debt             | $                        | 10   | $ | 7    | $ | 5   
|AFUDC
related to equity           |                          | 27   |   | 17   |   | 10  
|Other
capitalized financing costs |                          | 13   |   | 3    |   | 1   
|Total
SDG&E                       |                          | 50   |   | 27   |   | 16  
|                                  |                          |      |   |      |   |     
|SoCalGas:                         |                          |      |   |      |   |     
|AFUDC
related to debt             |                          | 3    |   | 2    |   | 2   
|AFUDC
related to equity           |                          | 8    |   | 5    |   | 6   
|Other
capitalized financing costs |                          | --   |   | 1    |   | 1   
|Total
SoCalGas                    |                          | 11   |   | 8    |   | 9   
|                                  |                          |      |   |      |   |     
|Sempra
Global:                    |                          |      |   |      |   |     
|Capitalized
financing costs       |                          | 87   |   | 96   |   | 56  
|Total
Sempra Energy Consolidated  | $                        | 148  | $ | 131  | $ | 81  





101





ASSETS
HELD FOR SALE

We classify assets as held for
sale when management approves and commits to a formal plan to actively market an
asset for sale and the sale is expected to close within the next twelve months.
Upon classifying an asset as held for sale, we record the asset at the lower of
its carrying value or its estimated fair value reduced for selling costs. We
cease to record depreciation expense on an asset when it is classified as held
for sale.

During 2008, management approved
and committed to a formal plan to dispose of certain Sempra Generation assets as
follows:

|                           |   |                  | 
|-------------------------- | - | ---------------- | 
|(Dollars
in millions)      |   | December 31,2008
|Gas
turbine                | $ | 34               | 
|Steam
turbine              |   | 6                | 
|Emission
reduction credits |   | 1                | 
|                           | $ | 41               | 



We classified these assets as
held for sale as of December 31, 2008. They are included in Other Current Assets
on the Consolidated Balance Sheets. For the years ended December 31, 2008 and
2007, there was no impairment of the assets held for sale nor do the assets held
for sale generate operating income. We continue to evaluate the assets in our
total portfolio for whether events or circumstances have occurred that may
affect recoverability or estimated useful life, and continue to pursue disposal
of our assets held for sale.

GOODWILL
AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill is the excess of the
purchase price over the fair value of the net assets of acquired companies.
Goodwill is not amortized but is tested annually on October 1 for impairment in
accordance with SFAS 142, Goodwill and Other Intangible Assets (SFAS
142).

As a result of the formation of
RBS Sempra Commodities (as we discuss in Notes 3 and 4), goodwill associated
with the commodities-marketing businesses that were a part of our Sempra
Commodities segment was reclassified to Investment in RBS Sempra Commodities LLP
on the Consolidated Balance Sheets.

In connection with the
acquisition of EnergySouth in October 2008, as we discuss in Note 3, Sempra
Pipelines & Storage recorded goodwill of $67 million.

Goodwill included in Goodwill and
Other Intangible Assets on the Sempra Energy Consolidated Balance Sheets is
recorded as follows:



|                           |   |                   |  |                   |     | 
|-------------------------- | - | ----------------- |  | ----------------- | --- | 
|GOODWILL                  
|(Dollars
in millions)     
|                           |   | December 31, 2008 |  | December 31, 2007
|Sempra
Commodities         | $ | --                |  | $                 | 164 | 
|Sempra
Pipelines & Storage |   | 67                |  |                   | --  | 
|Parent
and Other           |   | 6                 |  |                   | 6   | 
|                           | $ | 73                |  | $                 | 170 | 



Goodwill related to our other
unconsolidated subsidiaries, primarily those located in South America, is
included in Other Investments on the Sempra Energy Consolidated Balance Sheets.
These amounts, before foreign-currency translation adjustments, were $254
million at both December 31, 2008 and 2007. Including foreign-currency
translation adjustments, these amounts were

§

$213
million at December 31, 2008

§

$262
million at December 31, 2007



102





We
provide additional information concerning the impairment of investments in
unconsolidated subsidiaries in Note 4.

Other
Intangible Assets

Sempra Pipelines & Storage
recorded $460 million of intangible assets in connection with the acquisition of
EnergySouth. These intangible assets represent storage and development rights
related to the Bay Gas and Mississippi Hub natural gas storage facilities and
were recorded at estimated fair value as of the date of the acquisition using
discounted cash flows analysis. Our important assumptions in determining fair
value include estimated future cash flows, the estimated useful life of the
intangible assets and our use of appropriate discount rates. We are amortizing
these intangible assets over their estimated useful lives as shown in the table
below.

Intangible assets included in
Goodwill and Other Intangible Assets on the Sempra Energy Consolidated Balance
Sheets are recorded as follows:



|                              |                             |   |                   |   |                   |    | 
|----------------------------- | --------------------------- | - | ----------------- | - | ----------------- | -- | 
|OTHER
INTANGIBLE ASSETS      
|(Dollars
in millions)        
|                              | Amortization period (years) |   | December 31, 2008 |   | December 31, 2007
|Storage
rights                | 46                          | $ | 138               |   | $                 | -- | 
|Development
rights            | 50                          |   | 322               |   |                   | -- | 
|Other                         | 15 yrs to indefinite        |   | 9                 |   |                   | 9  | 
|Total                         |                             |   | 469               |   |                   | 9  | 
|Less
accumulated amortization |                             |   | (3                | ) |                   | -- | 
|Total                         |                             | $ | 466               |   | $                 | 9  | 



Amortization expense related to
the above intangible assets was $3 million in 2008 and a negligible amount in
2007. We estimate the aggregate amortization expense for the next five years to
be $9 million per year.

LONG-LIVED
ASSETS

In accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived Assets(SFAS
144), we periodically evaluate whether events or circumstances have occurred
that may affect the recoverability or the estimated useful lives of long-lived
assets, the definition of which includes intangible assets subject to
amortization in accordance with SFAS 142, but does not include unconsolidated
subsidiaries. Impairment of long-lived assets occurs when the estimated future
undiscounted cash flows are less than the carrying amount of the assets. If that
comparison indicates that the assets' carrying value may be permanently
impaired, the potential impairment is measured based on the difference between
the carrying amount and the fair value of the assets. This calculation is
performed at the lowest level for which separately identifiable cash flows
exist.

We provide additional information
about impairment of long-lived assets in Note 5.

VARIABLE
INTEREST ENTITIES

FIN 46 (revised December 2003),
Consolidation of Variable Interest Entities - an interpretationof ARB
No. 51 (FIN 46(R)), requires an enterprise to consolidate a variable
interest entity (VIE), as defined in FIN 46(R), if the company is the primary
beneficiary of a VIEs activities. Our determination of whether we are the
primary beneficiary is based upon qualitative and quantitative analyses, which
assess

§

the
purpose and design of the VIE;

§

the
nature of the VIE's risks and the risks we absorb; and

§

whether
the variable interest holders will absorb a majority of the VIE's expected
losses or receive a majority of its expected residual returns (or both).



103





SDG&E
has a 10-year agreement to purchase power to be generated at the Otay Mesa
Energy Center (OMEC), a 573-megawatt (MW) generating facility currently under
construction and expected to be in commercial operation in the fourth quarter of
2009. SDG&E will supply all of the natural gas to fuel the power plant and
purchase its electric generation output (i.e. tolling). The agreement provides
SDG&E with the option to purchase the power plant at the end of the contract
term in 2019, or upon earlier termination of the purchase power agreement, at a
predetermined price subject to adjustments based on performance of the facility.
If SDG&E does not exercise its option, under certain circumstances, it may
be required to purchase the power plant at a predetermined price.

As defined in FIN 46(R), the
facility owner, Otay Mesa Energy Center LLC (OMEC LLC), is a VIE (Otay Mesa
VIE), of which SDG&E is the primary beneficiary. SDG&E has no OMEC LLC
voting rights and does not operate OMEC.

Based upon our analysis,
SDG&E absorbs the majority of risk from the Otay Mesa VIE under the
combination of the tolling agreement and the put and call options. Accordingly,
we and SDG&E have consolidated Otay Mesa VIE since the second quarter of
2007. The CPUC has approved an additional financial return to SDG&E to
compensate it for the effect on its financial ratios from the requirement to
consolidate Otay Mesa VIE in accordance with FIN 46(R). Otay Mesa VIE's equity
of $128 million and $135 million is included in Minority Interests at December
31, 2008 and 2007, respectively, on the Sempra Energy and SDG&E Consolidated
Balance Sheets.

OMEC LLC has a project finance
credit facility with third party lenders, secured by its assets, that provides
for up to $377 million for the construction of OMEC. SDG&E is not a party to
the credit agreement and does not have any additional implicit or explicit
financial responsibility to Otay Mesa VIE. The loan matures in April 2019.
Borrowings under the facility bear interest at rates varying with market rates.
OMEC LLC had $256 million of outstanding borrowings under this facility at
December 31, 2008. In addition, OMEC LLC has entered into interest-rate swap
agreements to moderate its exposure to interest-rate changes on this facility.
We provide additional information concerning the interest-rate swaps in Note 11.

The Consolidated Financial
Statements of Sempra Energy and SDG&E include the following amounts
associated with Otay Mesa VIE:



|                                            |   |                          |   |      |      |  
|------------------------------------------- | - | ------------------------ | - | ---- | ---- | -
|AMOUNTS
ASSOCIATED WITH OTAY MESA VIE      
|(Dollars
in millions)                       |   |                          |  
|                                            |   | December 31,             |  
|                                            |   | 2008                     |   |      | 2007 |  
|Cash
and cash equivalents                   | $ | 11                       |   | $    | 1    |  
|Other
current assets                        |   | 23                       |   |      | 3    |  
|Total
current assets                        |   | 34                       |   |      | 4    |  
|Property,
plant and equipment               |   | 464                      |   |      | 232  |  
|Sundry                                      |   | 8                        |   |      | 9    |  
|Total
assets                                | $ | 506                      |   | $    | 245  |  
|                                            |   |                          |   |      |      |  
|Accounts
payable                            | $ | 35                       |   | $    | 15   |  
|Current
portion of long-term debt           |   | 2                        |   |      | --   |  
|Other
current liabilities                   |   | 13                       |   |      | 2    |  
|Long-term
debt                              |   | 254                      |   |      | 70   |  
|Fixed-price
contracts and other derivatives |   | 73                       |   |      | 16   |  
|Minority
interest                           |   | 128                      |   |      | 135  |  
|Other                                       |   | 1                        |   |      | 7    |  
|Total
liabilities and shareholders equity  | $ | 506                      |   | $    | 245  |  
|                                            |   |                          |   |      |      |  
|                                            |   | Years ended December 31, |  
|                                            |   | 2008                     |   | 2007 |     
|Loss
on interest-rate swaps                 | $ | (54                      | ) | $    | (17  | )
|Minority
interest                           |   | 54                       |   |      | 17   |  
|Other
income, net                           |   | --                       |   |      | --   |  
|Net
income                                  | $ | --                       |   | $    | --   |  





104





Contracts,
under which SDG&E acquires power from generation facilities otherwise
unrelated to SDG&E, could result in a requirement for SDG&E to
consolidate the entity that owns the facility. In accordance with FIN 46(R),
SDG&E continues the process of determining if it has any such situations
and, if so, gathering the information that would be needed to perform the
consolidation. However, such information has not been made available to us and
an evaluation of variable interests has not been completed for these entities
that are grandfathered pursuant to FIN 46(R). The effects of any required
consolidation are not expected to significantly affect the financial position,
results of operations or liquidity of SDG&E.

ASSET
RETIREMENT OBLIGATIONS

We account for tangible
long-lived assets in accordance with SFAS 143, Accounting for Asset
Retirement Obligations (SFAS 143), and FIN 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB Statement No. 143
(FIN 47). SFAS 143 and FIN 47 require us to record an asset retirement
obligation for the present value of liabilities of future costs expected to be
incurred when assets are retired from service, if the retirement process is
legally required and if a reasonable estimate of fair value can be made. We
record the estimated retirement cost over the life of the related asset by
depreciating the present value of the obligation (measured at the time of the
asset's acquisition) and accreting the discount until the liability is
settled.Rate-regulated entities may record regulatory assets or
liabilities as a result of the timing difference between the recognition of
costs as recorded in accordance with SFAS 143 and FIN 47, and costs recovered
through the rate-making process. We have recorded a regulatory liability to show
that the Sempra Utilities have collected funds from customers more quickly and
for larger amounts than SFAS 143 and FIN 47 would accrete the retirement
liability and depreciate the asset.

We have recorded asset retirement
obligations related to various assets including:

|                   |                                                          
|------------------ | ---------------------------------------------------------
|SDG&E and SoCalGas
|                   | §
fuel
and storage tanks                                 
|                   | §
natural
gas distribution system                        
|                   | §
hazardous
waste storage facilities                     
|                   | §
asbestos-containing
construction materials             
|SDG&E             
|                   | §
decommissioning
of nuclear power facilities            
|                   | §
electric
distribution and transmission systems         
|                   | §
site
restoration of a former power plant               
|SoCalGas          
|                   | §
natural
gas transmission pipeline                      
|                   | §
underground
natural gas storage facilities and wells   
|Sempra Global     
|                   | §
certain
power generation plants (natural gas and solar)
|                   | §
natural
gas distribution and transportation systems    
|                   | §
LNG
regasification plant                               





105





The
changes in asset retirement obligations are as follows:



|                                        |                                                                                                                       |       |              |   |              |   |   |      |   |   |      |   |   |      |   |   |      |   | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ----- | ------------ | - | ------------ | - | - | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | 
|CHANGES
IN ASSET RETIREMENT OBLIGATIONS
|(Dollars
in millions)                  
|                                        | Sempra Energy Consolidated                                                                                            |       | SDG&E        |   | SoCalGas     |  
|                                        | December 31,                                                                                                          |       | December 31, |   | December 31, |  
|                                        |                                                                                                                       | 2008  |              |   | 2007         |   |   | 2008 |   |   | 2007 |   |   | 2008 |   |   | 2007 |  
|                                        |                                                                                                                       |       |              |   |              |   |   |      |   |   |      |   |   |      |   |   |      |  
|Balance
as of January 1*                | $                                                                                                                     | 1,158 |              | $ | 1,163        |   | $ | 568  |   | $ | 483  |   | $ | 577  |   | $ | 669  |  
|Accretion
expense                       |                                                                                                                       | 74    |              |   | 78           |   |   | 37   |   |   | 35   |   |   | 36   |   |   | 41   |  
|Liabilities
incurred                    |                                                                                                                       | --    |              |   | 2            |   |   | --   |   |   | 1    |   |   | --   |   |   | 1    |  
|Payments                                |                                                                                                                       | (11   | )            |   | (21          | ) |   | (10  | ) |   | (20  | ) |   | (1   | ) |   | (1   | )
|Revision
to estimated cash flows        |                                                                                                                       | (57   | )            |   | (64          | ) |   | (41  | ) |   | 69   |   |   | (17  | ) |   | (133 | )
|Additions                               |                                                                                                                       | 7     |              |   | --           |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Acquisition
of EnergySouth (see Note 3) |                                                                                                                       | 6     |              |   | --           |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Balance
as of December 31*              | $                                                                                                                     | 1,177 |              | $ | 1,158        |   | $ | 554  |   | $ | 568  |   | $ | 595  |   | $ | 577  |  
|*                                       | The
current portions of the obligations are included in Other Current
Liabilities on the Consolidated Balance
Sheets.

LEGAL
FEES

Legal fees that are associated
with a past event for which a liability has been recorded are accrued when it is
probable that fees also will be incurred.

COMPREHENSIVE
INCOME

Comprehensive income includes all
changes in the equity of a business enterprise (except those resulting from
investments by owners and distributions to owners), including:

§

foreign-currency
translation adjustments

§

amortization
of net actuarial loss and prior service cost related to pension and other
postretirement benefits plans

§

changes
in minimum pension liability

§

certain
hedging activities



106





The
Statements of Consolidated Comprehensive Income and Changes in Shareholders'
Equity show the changes in the components of other comprehensive income. The
components of Accumulated Other Comprehensive Income (Loss), shown net of income
taxes, and the related income tax expense (benefit) at December 31, 2008 and
2007 are as follows:



|                                                  |                                               |      |                              |  |      |      |      |  |   |     |   |  |   |     |  
|------------------------------------------------- | --------------------------------------------- | ---- | ---------------------------- |  | ---- | ---- | ---- |  | - | --- | - |  | - | --- | -
|ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS) AND
|ASSOCIATED
INCOME TAX EXPENSE (BENEFIT)          
|(Dollars
in millions)                             |                                               |      |                             
|                                                  | Accumulated Other Comprehensive Income (Loss) |      | Income Tax Expense (Benefit)
|                                                  | 2008                                          |      | 2007                         |  | 2008 |      | 2007
|Sempra Energy Consolidated                        |                                               |      |                              |  |      |      |      |  |   |     |   |  |   |     |  
|Foreign
currency translation loss                 | $                                             | (378 | )                            |  | $    | (238 | )    |  | $ | --  |   |  | $ | --  |  
|Financial
instruments                             |                                               | (40  | )                            |  |      | (24  | )    |  |   | (25 | ) |  |   | (11 | )
|Unrealized
gains on available-for-sale securities |                                               | 2    |                              |  |      | 28   |      |  |   | 1   |   |  |   | 16  |  
|Unamortized
net actuarial loss                    |                                               | (99  | )                            |  |      | (72  | )    |  |   | (68 | ) |  |   | (50 | )
|Unamortized
prior service credit                  |                                               | 2    |                              |  |      | 5    |      |  |   | 2   |   |  |   | 4   |  
|Balance
as of December 31                         | $                                             | (513 | )                            |  | $    | (301 | )    |  | $ | (90 | ) |  | $ | (41 | )
|SDG&E                                             |                                               |      |                              |  |      |      |      |  |   |     |   |  |   |     |  
|Unamortized
net actuarial loss                    | $                                             | (13  | )                            |  | $    | (16  | )    |  | $ | (8  | ) |  | $ | (11 | )
|Unamortized
prior service credit                  |                                               | 1    |                              |  |      | 1    |      |  |   | 1   |   |  |   | 1   |  
|Financial
instruments                             |                                               | (1   | )                            |  |      | (1   | )    |  |   | (1  | ) |  |   | (1  | )
|Balance
as of December 31                         | $                                             | (13  | )                            |  | $    | (16  | )    |  | $ | (8  | ) |  | $ | (11 | )
|SoCalGas                                          |                                               |      |                              |  |      |      |      |  |   |     |   |  |   |     |  
|Unamortized
net actuarial loss                    | $                                             | (5   | )                            |  | $    | (6   | )    |  | $ | (4  | ) |  | $ | (4  | )
|Unamortized
prior service credit                  |                                               | 1    |                              |  |      | 1    |      |  |   | 1   |   |  |   | 1   |  
|Financial
instruments                             |                                               | (24  | )                            |  |      | 1    |      |  |   | (16 | ) |  |   | 1   |  
|Balance
as of December 31                         | $                                             | (28  | )                            |  | $    | (4   | )    |  | $ | (19 | ) |  | $ | (2  | )

REVENUES

Sempra
Utilities

The Sempra Utilities generate
revenues primarily from deliveries to their customers of electricity by
SDG&E and natural gas by both SoCalGas and SDG&E, and from related
services. They record these revenues under the accrual method and recognize them
upon delivery and performance. They also record revenue from incentive awards,
which is recognized upon approval of the award by the CPUC. We provide
additional discussion on utility incentive awards in Note 14.

Under an operating agreement with
the California Department of Water Resources (DWR), SDG&E acts as a limited
agent on behalf of the DWR in the administration of energy contracts, including
natural gas procurement functions under the DWR contracts allocated to
SDG&E's customers. The legal and financial responsibilities associated with
these activities continue to reside with the DWR. Therefore, the commodity costs
associated with long-term contracts allocated to SDG&E from the DWR (and the
revenues to recover those costs) are not included in our Statements of
Consolidated Income. We provide discussion on electric industry restructuring
related to the DWR in Note 14.

On a monthly basis, SoCalGas
accrues natural gas storage contract revenues, which consist of reservation,
storage and injection charges based on negotiated agreements with terms of up to
15 years.



107





The
table below shows the total revenues from the Sempra Utilities in Sempra
Energy's Statements of Consolidated Income, which are net of sales taxes, for
each of the last three years. The revenues include amounts for services rendered
but unbilled (approximately one-half month's deliveries) at the end of each
year.



|                                                               |                                 |      |      |   |     |  |   |     |  | 
|-------------------------------------------------------------- | ------------------------------- | ---- | ---- | - | --- |  | - | --- |  | 
|TOTAL
SEMPRA UTILITIES REVENUES AT SEMPRA ENERGY CONSOLIDATED*
|(Dollars
in billions)                                          |                                
|                                                               | Years ended December 31,       
|                                                               | 2008                            | 2007 | 2006
|Natural
gas revenues                                           | $                               | 5.4  |      | $ | 4.9 |  | $ | 4.8 | 
|Electric
revenues                                              |                                 | 2.6  |      |   | 2.2 |  |   | 2.1 | 
|Total                                                          | $                               | 8.0  |      | $ | 7.1 |  | $ | 6.9 | 
|*                                                              | Excludes
intercompany revenues.



As discussed in Note 15,
beginning April 1, 2008, the SDG&E and SoCalGas core natural gas supply
portfolios were combined and are managed by SoCalGas. Effective as of that date,
SoCalGas procures natural gas for SDG&Es core customers. Core customers are
primarily residential and small commercial and industrial customers. This core
gas procurement function is considered a shared service, therefore amounts
related to SDG&E are not included in SoCalGas' income statement.

We provide additional information
concerning utility revenue recognition in "Regulatory Matters" above.

Sempra
Global

Sempra
Commodities

As we discuss in Notes 3 and 4,
on April 1, 2008, our commodities-marketing businesses, previously wholly owned
subsidiaries of Sempra Energy, were sold into RBS Sempra Commodities, a
partnership jointly owned by Sempra Energy and The Royal Bank of Scotland.
Therefore, beginning April 1, 2008, we account for our earnings in the
partnership under the equity method. RBS Sempra Commodities generates most of
its revenues from trading and marketing activities in natural gas, electricity,
petroleum, petroleum products, base metals and other commodities. RBS Sempra
Commodities quotes bid and ask prices to end users and other market makers. It
also earns trading profits as a dealer by structuring and executing
transactions. Principal transaction revenues are recognized on a trade-date
basis and include realized gains and losses and the net change in unrealized
gains and losses.

RBS Sempra Commodities uses
derivative instruments (which we discuss further in Note 11) to reduce its
exposure to unfavorable changes in market prices. Non-derivative contracts are
accounted for on an accrual basis and the related profit or loss is recognized
as the contracts are settled.

Sempra
Generation

Sempra Generation generates
revenues primarily from selling electricity to governmental and wholesale power
marketing entities. These revenues are recognized as the electricity is
delivered. In each of 2008, 2007 and 2006, Sempra Generation's electricity sales
to the DWR accounted for a significant portion of its revenues. Sempra
Generations revenues also include net realized gains and losses and the net
change in the fair value of unrealized gains and losses on derivative contracts
for power and natural gas.

Sempra
Pipelines & Storage

Sempra Pipelines & Storage
has consolidated foreign subsidiaries in Mexico that recognize revenues on the
sale, transportation and distribution of natural gas as deliveries are made.
Sempra Pipelines & Storage's natural gas storage and transportation
operations recognize revenues when they provide services in accordance with
contractual agreements for the storage and transportation services.



108





Sempra
LNG

Sempra LNG recognizes revenues on
the sale of natural gas as deliveries are made and under capacity agreements as
regasification services are performed. Sempra LNGs revenues also include net
realized gains and losses and the net change in the fair value of unrealized
gains and losses on derivative contracts for natural gas.

OTHER
COST OF SALES

Other Cost of Sales primarily
includes the transportation and storage costs incurred at Sempra Commodities
prior to April 1, 2008 and transportation costs incurred at Sempra LNG.

OPERATION
AND MAINTENANCE EXPENSES

Operation and Maintenance
includes operating and maintenance costs, and general and administrative costs,
which consist primarily of personnel costs, purchased materials and services,
and rent.

FOREIGN
CURRENCY TRANSLATION

Our foreign operations generally
use their local currency as their functional currency. The assets and
liabilities of our foreign operations are translated into U.S. dollars at
current exchange rates at the end of the reporting period, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments do not enter into the calculation of net income or
retained earnings (unless the operation is being discontinued), but are
reflected in Comprehensive Income and in Accumulated Other Comprehensive Income
(Loss), a component of shareholders' equity.

To reflect the fluctuations in
the values of functional currencies of Sempra Pipelines & Storages South
American investments accounted for under the equity method, the following
adjustments were made to the carrying value of these investments (dollars in
millions):

|           |  |                    |                                             |      |       
|---------- |  | ------------------ | ------------------------------------------- | ---- | ------
|           |  |                    | Upward (downward) adjustment to investments
|Investment |  | Currency           | 2008                                        | 2007 | 2006  
|Chile      |  | Chilean
Peso       | $ (101)                                     | $ 29 | $ (15)
|Peru       |  | Peruvian
Nuevo Sol | (7)                                         | 8    | 7     
|Argentina  |  | Argentine
Peso     | (8)                                         | (2)  | (2)   



These noncash adjustments did not
affect net income, but they did affect Comprehensive Income and Accumulated
Other Comprehensive Income (Loss). Smaller adjustments have been made to other
operations where the U.S. dollar is not the functional currency. We provide
additional information concerning these investments in Note 4.

Currency transaction gains and
losses in a currency other than the entity's functional currency are included in
the calculation of consolidated net income at Sempra Energy as follows:



|                                  |                          |      |      
|--------------------------------- | ------------------------ | ---- | -----
|                                  | Years ended December 31,
|(Dollars
in millions)             | 2008                     | 2007 | 2006 
|Currency
transaction gains (loss) | $ (2)                    | $ -- | $ (1)





109





TRANSACTIONS
WITH AFFILIATES

Loans
to Unconsolidated Affiliates

In December 2001, Sempra
Pipelines & Storage issued two U.S. dollar-denominated loans to affiliates:
$35 million to Camuzzi Gas Pampeana S.A. and $22 million to Camuzzi Gas del Sur
S.A. These companies are affiliates of Sempra Pipelines & Storages
Argentine investments discussed in Note 4. In June 2006, Sempra Pipelines &
Storage collected the outstanding balance from Camuzzi Gas Pampeana S.A. The
loan to Camuzzi Gas del Sur S.A. has a $25 million balance outstanding at a
variable interest rate (11.05 percent at December 31, 2008). The loan is due in
June 2009 and is fully reserved at December 31, 2008.

Loans
from Unconsolidated Affiliates

At December 31, 2008 and 2007,
Sempra Pipelines & Storage had notes payable due to Chilquinta Energía
Finance Co. LLC, an unconsolidated affiliate. These notes are secured by Sempra
Pipelines & Storages investments in Chilquinta Energía S.A. and Luz del Sur
S.A.A. (Luz del Sur), which we discuss in Note 4. The amounts due are as
follows:



|                                                     |  |              |     |      |     |     |  | 
|---------------------------------------------------- |  | ------------ | --- | ---- | --- | --- |  | 
|SEMPRA
ENERGY - LOANS FROM UNCONSOLIDATED AFFILIATES
|(Dollars
in millions)                                |  |             
|                                                     |  | December 31,
|                                                     |  | 2008         |     | 2007
|6.57%
Note due April 1, 2008                         |  | $            | --  |      | $   | 60  | 
|6.73%
Note due April 1, 2011                         |  | 100          |     |      | 100 |    
|Total                                                |  | $            | 100 |      | $   | 160 | 





110





Other
Affiliate Transactions

Sempra Energy, SDG&E and
SoCalGas provide certain services to each other, which are charged an allocable
share of the cost of such services. Amounts due to/from affiliates are as
follows:



|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |      |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --- | - | ---- | ---- | -
|AMOUNTS
DUE TO AND FROM AFFILIATES AT SDG&E, PE AND SOCALGAS
|(Dollars
in millions)                                       
|                                                             | December 31,                                                                                                                                                                                                                                               
|                                                             |                                                                                                                                                                                                                                                             | 2008 |     |   | 2007 |     
|SDG&E                                                        |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Current:                                                     |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Due
from Sempra Energy                                                                                                                                                                                                                                      | $    | 20  |   | $    | --   |  
|                                                             | Due
from SoCalGas                                                                                                                                                                                                                                           |      | 8   |   |      | 21   |  
|                                                             | Due
from various affiliates                                                                                                                                                                                                                                 |      | 1   |   |      | 1    |  
|                                                             | $                                                                                                                                                                                                                                                           | 29   |     | $ | 22   |     
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |      |  
|                                                             | Due
to various affiliates                                                                                                                                                                                                                                   | $    | 1   |   | $    | 1    |  
|                                                             | Due
to Sempra Energy                                                                                                                                                                                                                                        |      | --  |   |      | 9    |  
|                                                             | $                                                                                                                                                                                                                                                           | 1    |     | $ | 10   |     
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Income
taxes due to (from) Sempra Energy*                                                                                                                                                                                                                   | $    | 7   |   | $    | (38  | )
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Noncurrent:                                                  |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Promissory
note due from Sempra Energy, variable rate based on short-term commercial
paper rate (0.12% at December 31, 2008)                                                                                                                                | $    | 4   |   | $    | 5    |  
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Pacific
Enterprises                                          |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Current:                                                     |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Due
from various affiliates                                                                                                                                                                                                                                 | $    | 5   |   | $    | 5    |  
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |      |  
|                                                             | Due
to affiliate                                                                                                                                                                                                                                            | $    | 83  |   | $    | 82   |  
|                                                             | Due
to (from) Sempra Energy                                                                                                                                                                                                                                 |      | 15  |   |      | (128 | )
|                                                             | Due
to SDG&E                                                                                                                                                                                                                                                |      | 8   |   |      | 21   |  
|                                                             | Dividends
payable to Sempra Energy                                                                                                                                                                                                                          |      | --  |   |      | 150  |  
|                                                             | $                                                                                                                                                                                                                                                           | 106  |     | $ | 125  |     
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Income
taxes due to (from) Sempra Energy*                                                                                                                                                                                                                   | $    | (66 | ) | $    | 4    |  
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Noncurrent:                                                  |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Promissory
note due from Sempra Energy, variable rate based on short-term commercial
paper rate (0.12% at December 31, 2008)                                                                                                                                | $    | 457 |   | $    | 457  |  
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |      |  
|SoCalGas                                                     |                                                                                                                                                                                                                                                             |      |     |   |      |     
|Current:                                                     |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Due
from Sempra Energy                                                                                                                                                                                                                                      | $    | --  |   | $    | 129  |  
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |      |  
|                                                             | Due
to Sempra Energy                                                                                                                                                                                                                                        | $    | 15  |   | $    | --   |  
|                                                             | Due
to SDG&E                                                                                                                                                                                                                                                |      | 8   |   |      | 21   |  
|                                                             | Dividends
payable to PE                                                                                                                                                                                                                                     |      | --  |   |      | 150  |  
|                                                             | $                                                                                                                                                                                                                                                           | 23   |     | $ | 171  |     
|                                                             |                                                                                                                                                                                                                                                             |      |     |   |      |     
|                                                             | Income
taxes due to Sempra Energy*                                                                                                                                                                                                                          | $    | 1   |   | $    | 67   |  
|*                                                            | SDG&E,
PE and SoCalGas are included in the consolidated income tax return of
Sempra Energy and are allocated income tax expense from Sempra Energy in
an amount equal to that which would result from the companies' having
always filed a separate return. |     





111





Revenues
from unconsolidated affiliates at the Sempra Utilities are as follows:



|                                                                |   |      |  |   |      |  |   |      | 
|--------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
|REVENUES
FROM UNCONSOLIDATED AFFILIATES AT THE SEMPRA UTILITIES
|(Dollars
in millions)                                           |   |      |  |   |      |  |   |      | 
|                                                                |   | 2008 |  |   | 2007 |  |   | 2006 | 
|SDG&E                                                           | $ | 11   |  | $ | 13   |  | $ | 15   | 
|SoCalGas                                                        |   | 36   |  |   | 68   |  |   | 52   | 

Transactions
with RBS Sempra Commodities

Several of our business units
engage in transactions with RBS Sempra Commodities. Amounts in our Consolidated
Financial Statements related to these transactions are as follows:



|                                                                         |                                                                                                                                                                                                                                                                                                                                    |  |       |     |   |  |  | 
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | --- | - |  |  | 
|AMOUNTS
RECORDED FOR TRANSACTIONS WITH RBS SEMPRA COMMODITIES           
|(Dollars
in millions)                                                    |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         |                                                                                                                                                                                                                                                                                                                                    |  | 2008* |    
|Revenues:                                                                |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         | SoCalGas                                                                                                                                                                                                                                                                                                                           |  | $     | 12  |  
|                                                                         | Sempra
Commodities                                                                                                                                                                                                                                                                                                                 |  |       | 8   |  
|                                                                         | Sempra
Generation                                                                                                                                                                                                                                                                                                                  |  |       | 23  |  
|                                                                         | Sempra
LNG**                                                                                                                                                                                                                                                                                                                       |  |       | 33  |  
|                                                                         | Total
revenues                                                                                                                                                                                                                                                                                                                     |  | $     | 76  |  
|                                                                         |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|Cost
of natural gas:                                                     |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         | SoCalGas                                                                                                                                                                                                                                                                                                                           |  | $     | 22  |  
|                                                                         | Sempra
Pipelines & Storage                                                                                                                                                                                                                                                                                                         |  |       | 34  |  
|                                                                         | Total
cost of natural gas                                                                                                                                                                                                                                                                                                          |  | $     | 56  |  
|                                                                        
|December 31, 2008                                                       
|Fixed
price contracts and other derivatives  Current Asset (Liability): |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         | Sempra
Generation                                                                                                                                                                                                                                                                                                                  |  | $     | 35  |  
|                                                                         | Sempra
LNG                                                                                                                                                                                                                                                                                                                         |  |       | (44 | )
|                                                                         | Total                                                                                                                                                                                                                                                                                                                              |  | $     | (9  | )
|                                                                         |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|Due
to unconsolidated affiliates:                                        |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         | Sempra
Generation                                                                                                                                                                                                                                                                                                                  |  | $     | 6   |  
|                                                                         | Sempra
Commodities                                                                                                                                                                                                                                                                                                                 |  |       | 29  |  
|                                                                         | Sempra
Pipelines & Storage                                                                                                                                                                                                                                                                                                         |  |       | 3   |  
|                                                                         |                                                                                                                                                                                                                                                                                                                                    |  | $     | 38  |  
|Due
from unconsolidated affiliates:                                      |                                                                                                                                                                                                                                                                                                                                    |  |       |    
|                                                                         | Sempra
Commodities                                                                                                                                                                                                                                                                                                                 |  | $     | 1   |  
|                                                                         | Sempra
LNG                                                                                                                                                                                                                                                                                                                         |  |       | 1   |  
|                                                                         | Parent
and other                                                                                                                                                                                                                                                                                                                   |  |       | 2   |  
|                                                                         | Total                                                                                                                                                                                                                                                                                                                              |  | $     | 4   |  
|*                                                                        | Nine
months beginning April 1, 2008, when the partnership was
formed.                                                                                                                                                                                                                                                             
|**                                                                       | Includes
$10 million related to a marketing agreement with RBS Sempra Commodities
which is subject to mark-to-market accounting. Under this agreement, which
extends for five years beginning September 1, 2009, RBS Sempra Commodities
will market natural gas that Sempra LNG purchases and does not sell under
other contracts.

Revenues
and Expenses with Unconsolidated Affiliates

For the quarter ended March 31,
2008, and for the full years 2007 and 2006, Sempra Commodities recorded $55
million, $303 million and $173 million, respectively, of sales to unconsolidated
affiliates. In addition, in 2006, Sempra Commodities recorded $29 million of
purchases from and $95 million in sales to Topaz Power Partners



112





(Topaz),
then an equity method investment of Sempra Energy. Topaz sold its power plant
assets in July 2006, as discussed in Note 4.

DIVIDENDS
AND LOANS AT THE SEMPRA UTILITIES

The CPUCs regulation of the
Sempra Utilities capital structures limits the amounts that are available for
dividends and loans to Sempra Energy.  At December 31, 2008, SDG&E
could have provided a total of approximately $150 million to Sempra Energy
through dividends and loans. No amounts were available from SoCalGas at December
31, 2008.

OTHER
INCOME (EXPENSE), NET

Other Income (Expense), Net on
the Statements of Consolidated Income consists of the following:

|                                                    |                                                                                                                                                                                                                                               |      |      |   |     |   |   |    |   | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ---- | - | --- | - | - | -- | - | 
|OTHER
INCOME (EXPENSE), NET                        
|(Dollars
in millions)                              
|                                                    | Years ended December 31,                                                                                                                                                                                                                     
|                                                    | 2008                                                                                                                                                                                                                                          | 2007 | 2006
|Sempra
Energy Consolidated                          |                                                                                                                                                                                                                                               |      |      |   |     |   |   |    |  
|Allowance
for equity funds used during construction | $                                                                                                                                                                                                                                             | 35   |      | $ | 22  |   | $ | 16 |  
|Regulatory
interest, net                            |                                                                                                                                                                                                                                               | (9   | )    |   | (13 | ) |   | (9 | )
|Investment
earnings (losses)*                       |                                                                                                                                                                                                                                               | (53  | )    |   | 27  |   |   | 27 |  
|Gain
on interest-rate swaps                         |                                                                                                                                                                                                                                               | 1    |      |   | 24  |   |   | -- |  
|Mexican
peso exchange losses**                      |                                                                                                                                                                                                                                               | (57  | )    |   | --  |   |   | -- |  
|Sundry,
net                                         |                                                                                                                                                                                                                                               | 29   |      |   | 30  |   |   | 9  |  
|Total                                               | $                                                                                                                                                                                                                                             | (54  | )    | $ | 90  |   | $ | 43 |  
|SDG&E                                               |                                                                                                                                                                                                                                               |      |      |   |     |   |   |    |  
|Allowance
for equity funds used during construction | $                                                                                                                                                                                                                                             | 27   |      | $ | 17  |   | $ | 10 |  
|Regulatory
interest, net                            |                                                                                                                                                                                                                                               | (5   | )    |   | (7  | ) |   | (3 | )
|Sundry,
net                                         |                                                                                                                                                                                                                                               | 3    |      |   | 1   |   |   | 1  |  
|Total                                               | $                                                                                                                                                                                                                                             | 25   |      | $ | 11  |   | $ | 8  |  
|SoCalGas
and PE                                     |                                                                                                                                                                                                                                               |      |      |   |     |   |   |    |  
|Allowance
for equity funds used during construction | $                                                                                                                                                                                                                                             | 8    |      | $ | 5   |   | $ | 6  |  
|Regulatory
interest, net                            |                                                                                                                                                                                                                                               | (4   | )    |   | (6  | ) |   | (6 | )
|Sundry,
net                                         |                                                                                                                                                                                                                                               | (2   | )    |   | (2  | ) |   | (1 | )
|Total
at SoCalGas                                   |                                                                                                                                                                                                                                               | 2    |      |   | (3  | ) |   | (1 | )
|Additional
at PE:                                   |                                                                                                                                                                                                                                               |      |      |   |     |   |   |    |  
|Preferred
dividends of SoCalGas                     |                                                                                                                                                                                                                                               | (1   | )    |   | (1  | ) |   | (1 | )
|Total                                               | $                                                                                                                                                                                                                                             | 1    |      | $ | (4  | ) | $ | (2 | )
|*                                                   | Represents
investment earnings (losses) on dedicated assets in support of our
executive retirement and deferred compensation plans. These amounts are
partially offset by corresponding changes in compensation expense related
to the plans.
|**                                                  | These
losses were largely offset by Mexican tax benefits arising from
fluctuations in the US dollar/Mexican peso exchange rate and inflation
rate.                                                                                           





113







NOTE
2. NEW ACCOUNTING STANDARDS

We describe below recent
pronouncements that have had or may have a significant effect on our financial
statements. We do not discuss recent pronouncements that are not anticipated to
have a significant impact on or are unrelated to our financial condition,
results of operations, or disclosures.

SEMPRA
ENERGY, SDG&E AND SOCALGAS

SFAS 161, "Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB
Statement No. 133" (SFAS 161): SFAS 161 expands the disclosure
requirements in SFAS 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133).

SFAS 161 requires disclosures
about the following:

§

qualitative
objectives and strategies for using derivatives;

§

quantitative
disclosures of fair value amounts, and gains and losses on derivative
instruments and related hedged items; and

§

credit-risk-related
contingent features in derivative agreements.

SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Our 2009 financial statements will include the additional
disclosures.

SFAS 160, "Noncontrolling
Interests in Consolidated Financial Statements  an amendment of ARB
No. 51" (SFAS 160):SFAS 160 amends Accounting Research Bulletin
(ARB) No. 51,Consolidated Financial Statements, to establish accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent.

SFAS 160 provides guidance on the
following:

§

how
to report noncontrolling interests in a subsidiary in consolidated financial
statements;

§

the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest; and

§

changes
in a parents ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.

The pronouncement also requires
disclosures that clearly identify and distinguish between the interest of the
parent and the interests of the noncontrolling owners. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15,
2008 and early adoption is prohibited. SFAS 160 must be applied prospectively,
except for presentation and disclosure requirements for existing minority
interests. These requirements must be applied retrospectively. Our 2009
financial statements will include the adoption of SFAS 160.

SFAS 141 (revised 2007),
"Business Combinations" (SFAS 141(R)):SFAS 141(R) applies to all
transactions or events in which an entity obtains control of one or more
businesses, including those combinations achieved without transfer of
consideration. In the context of a business combination, SFAS 141(R) establishes
principles and requirements for how the acquirer recognizes the following:

§

assets
acquired, including goodwill

§

assumed
liabilities

§

noncontrolling
interest in the acquired entity

§

contractual
contingencies

§

contingent
consideration



114





SFAS
141(R) requires that the acquirer in a business combination achieved in stages
recognize identifiable assets and liabilities at the full amounts of their fair
values. This statement also establishes disclosure requirements that will enable
users to evaluate the nature and financial effect of the business combination.
SFAS 141(R) applies to us for business combinations with an acquisition date on
or after January 1, 2009. Early adoption is prohibited.

FASB Staff Position (FSP)
FAS 132(R)-1, "Employers Disclosures about Postretirement Benefit Plan Assets"
(FSP FAS 132(R)-1): FSP FAS 132(R)-1 requires disclosure about the
assets held in postretirement benefit plans, including a breakdown by the level
of the assets and a reconciliation of any change in Level 3 assets during the
year. It requires that disclosures include information about the following:

§

valuation
inputs, with detailed disclosure required about Level 3 assets

§

asset
categories, broken down to relevant detail

§

concentration
of risk in plan assets

FSP FAS 132(R)-1 applies
prospectively for fiscal years ending after December 15, 2009.  Early
application is permitted. We are in the process of evaluating the effect of this
statement on our financial statement disclosures.

FSP FAS 140-4 and FIN
46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities" (FSP FAS 140-4 and
FIN 46(R)-8):  This FSP amends SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, to require additional disclosure about transfers of financial
assets and variable interests in qualifying special-purpose entities. It also
amends FIN 46(R) to require certain disclosures about an entitys involvement
with variable interest entities, as follows:

§

details
of the entitys involvement (both explicit and implicit arrangements) with the
variable interest entity

§

financial
or other support provided to the variable interest entity which was not
contractually required and the primary reasons for providing the support

§

the
methodology for determining the primary beneficiary and any changes in prior
consolidation conclusions

§

the
terms of any arrangements (both explicit and implicit) that could require the
primary beneficiary to provide financial support to the variable interest
entity

This FSP is effective for fiscal
years ending after December 15, 2008. We provide the additional required
disclosure in Note 1.

FSP FAS 157-3, "Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active" (FSP FAS 157-3):FSP FAS 157-3 clarifies and illustrates the
application of SFAS 157for financial assets in an inactive market. It
became effective when issued on October 10, 2008 and applied to periods for
which financial statements had not yet been issued. Revisions to the fair value
estimates resulting from the adoption of the FSP are to be accounted for as a
change in estimate, so that any effects on the fair value measurements would be
recognized in the period of adoption. Our application of FSP FAS 157-3 impacted
neither financial asset fair values nor their classification in the fair value
hierarchy. Additional disclosure is provided in Note 11.

FSP FIN 39-1, "Amendment of
FASB Interpretation No. 39" (FSP FIN 39-1): FSP FIN 39-1 amends certain
paragraphs of FIN No. 39, Offsetting of Amounts Related to Certain
Contracts, to permit an entity to report all derivatives recorded at fair
value on the balance sheet net of any associated fair value cash collateral when
the derivative and cash collateral are with the same counterparty under a master
netting arrangement. We adopted FSP FIN 39-1 effective January 1, 2008. We
applied FSP FIN 39-1 as a change in accounting principle by applying it
retrospectively. The consolidated balance sheets herein reflect the offsetting
of net derivative positions with fair value amounts for cash collateral with the
same counterparty when management believes a legal right of setoff exists.
Accordingly, December 31, 2007 amounts for Sempra Energy and SDG&E have been
reclassified to conform to this presentation. The adoption had a negligible
impact on SoCalGas' financial statements.



115





SEMPRA
ENERGY

FSP FAS 133-1 and FIN 45-4,
"Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161" (FSP FAS 133-1 and FIN 45-4):
FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require sellers of credit
derivatives to disclose information so that financial statement users can assess
the potential effect of derivative instruments on the companys financial
position, financial performance and cash flows. This FSP also amends FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to require guarantors to
disclose the current status of the guarantees performance risk. The FSP is
effective prospectively for annual or interim reporting periods ending after
November 15, 2008. Sempra Energy is a guarantor under certain arrangements and
we provide the required disclosure in Notes 4 and 6.

FSP EITF 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" (FSP EITF 03-6-1): FSP EITF 03-6-1 states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities. As such, they are required to be included when computing earnings
per share (EPS) under the two-class method described in SFAS 128, Earnings
per Share. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. All prior-period EPS data are to
be adjusted retrospectively to conform with the provisions of this FSP. Early
application is not permitted. We do not expect the adoption of FSP EITF 03-6-1
to have a material impact on our EPS.

EITF Issue No. 08-6,
"Equity Method Investment Accounting Considerations" (EITF 08-6):  EITF 08-6 clarifies accounting and impairment considerations
involving equity method investments. It provides the following guidance:

§

an
entity shall measure an equity method investment at its accumulated cost;

§

an
equity method investor should not separately test an investees underlying
assets for impairment; and

§

an
equity method investees issuance of shares should be accounted for by the
equity method investor as if it sold a proportionate share of its
investment.

The statement is effective
prospectively for fiscal years beginning after December 15, 2008. We are in the
process of evaluating the effects of this statement on our financial position
and results of operations.

EITF Issue No. 08-5,
"Issuers Accounting for Liabilities Measured at Fair Value with a Third-Party
Credit Enhancement" (EITF 08-5):EITF 08-5 provides that an issuer of a
liability with a third-party credit enhancement that is inseparable from the
liability may not include the effect of the credit enhancement in the fair value
measurement of the liability. EITF 08-5 is effective prospectively for reporting
periods beginning after December 15, 2008. We do not expect the effects of
adopting EITF 08-5 to have a material impact on our financial position or
results of operations.

NOTE
3.  RECENT INVESTMENT ACTIVITY

SEMPRA
COMMODITIES

On April 1, 2008, Sempra Energy
and The Royal Bank of Scotland (RBS) completed the formation of RBS Sempra
Commodities, a partnership to own and operate the commodities-marketing
businesses previously operated through wholly owned subsidiaries of Sempra
Energy.  Our initial equity contribution to the partnership was $1.6
billion.  RBS made an initial equity contribution of $1.665 billion and is
committed to provide any additional funding required for the ongoing operations
of the partnerships businesses.  As a result of the transaction, we
received approximately $1.2 billion in cash, net of our contribution and
including cash withdrawn from the businesses in anticipation of the transaction.
 We recorded an after-tax gain of $67 million on the transaction.

We provide additional information
about this transaction in Notes 4 and 6.



116





SEMPRA
GENERATION

We provide information about
investment activity at Sempra Generation in Notes 4 and 5.

SEMPRA
PIPELINES & STORAGE

In October 2008, Sempra Pipelines
& Storage acquired EnergySouth, an energy services holding company based in
Mobile, Alabama for $511 million in cash and the assumption of debt.
 Principal holdings of EnergySouth include EnergySouth Midstream and Mobile
Gas. As a natural gas distribution utility, Mobile Gas serves approximately
93,000 customers in southwest Alabama. In December 2008, EnergySouth Midstream
changed its name to Sempra Midstream.

Sempra Midstream is the general
partner and 91-percent owner of Bay Gas Storage Company (Bay Gas) and owned 60
percent of Mississippi Hub, LLC (Mississippi Hub) through December 31, 2008. On
January 16, 2009, Sempra Midstream acquired the remaining 40-percent ownership
interest of Mississippi Hub for $94 million.

Assets and liabilities assumed as
of the acquisition date are:



|                      |                                                                                                                    |                           |     |     |  |  |  | 
|--------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------- | --- | --- |  |  |  | 
|(Dollars
in millions) | September 30, 2008                                                                                                
|ASSETS                |                                                                                                                    |                           |    
|Current
assets:       |                                                                                                                    |                           |    
|                      | Cash                                                                                                               | $                         | 16  |    
|                      | Accounts
receivable                                                                                                |                           | 31  |    
|                      | Other
current assets                                                                                               |                           | 121 |    
|                      |                                                                                                                    | Total
current assets      |     | 168 | 
|                      |                                                                                                                    |                           |     |     | 
|                      | Property,
plant and equipment                                                                                      |                           | 609 |    
|                      | Goodwill
and other intangible assets                                                                               |                           | 527 | *  
|                      | Other
noncurrent assets                                                                                            |                           | 19  |    
|Total
assets          | $                                                                                                                  | 1,323                     |    
|                      |                                                                                                                    |                           |     |     | 
|LIABILITIES           |                                                                                                                    |                           |    
|Current
liabilities:  |                                                                                                                    |                           |    
|                      | Accounts
payable                                                                                                   | $                         | 85  |    
|                      | Current
portion of long-term debt                                                                                  |                           | 212 |    
|                      | Other
current liabilities                                                                                          |                           | 43  |    
|                      |                                                                                                                    | Total
current liabilities |     | 340 | 
|                      |                                                                                                                    |                           |     |     | 
|                      | Deferred
income taxes                                                                                              |                           | 243 |    
|                      | Long-term
debt                                                                                                     |                           | 114 |    
|                      | Minority
interest                                                                                                  |                           | 86  |    
|                      | Other
noncurrent liabilities                                                                                       |                           | 29  |    
|Total
liabilities     | $                                                                                                                  | 812                       |    
|Net
assets acquired   | $                                                                                                                  | 511                       |    
|*                     | As
a result of the acquisition, we recorded $67 million of goodwill, none of
which is deductible for tax purposes.



The results of operations for
EnergySouth from October 1, 2008 to December 31, 2008 are included in our
Statements of Consolidated Income and Cash Flows.

We provide further information
regarding the other intangibles acquired in Note 1.

We discuss Sempra Pipelines &
Storages investment in Rockies Express Pipeline LLC (Rockies Express) in Note
4.



117







NOTE
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

We account for investments under
the equity method when we have an ownership interest of 20 to 50 percent. In
these cases, our pro rata shares of the subsidiaries net assets are included in
Other Investments and in Investment in RBS Sempra Commodities LLP on the
Consolidated Balance Sheets. These investments are adjusted for our share of
each investees earnings or losses, dividends, and other comprehensive income or
loss.

Equity in earnings of
unconsolidated subsidiaries that is recorded before income tax is reported in
Equity Earnings (Losses)  RBS Sempra Commodities LLP and in Equity Earnings
(Losses)  Other on the Statements of Consolidated Income. Equity earnings
recorded net of income tax recorded by the subsidiary are reported in Equity
Earnings (Losses), Net of Income Tax, on the Statements of Consolidated Income.

The carrying value of
unconsolidated subsidiaries is evaluated for impairment based on the
requirements of APB Opinion 18, The Equity Method of Accounting for
Investments in Common Stock(APB 18). We account for certain investments in
housing partnerships made before May 19, 1995 under the cost method, whereby the
costs were amortized over ten years based on the expected residual value. We
have no unconsolidated subsidiaries where our ability to influence or control an
investee differs from our ownership percentage.

We summarize our investment
balances and earnings below:



|                                                                       |                                                                                                                                                                                    |                                        |                            |       |       |       |    |       |  | 
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------------------- | ----- | ----- | ----- | -- | ----- |  | 
|EQUITY
METHOD AND OTHER INVESTMENTS ON THE CONSOLIDATED BALANCE
SHEETS
|(Dollars
in millions)                                                 
|                                                                       |                                                                                                                                                                                    |                                        | Investment at December 31,
|                                                                       |                                                                                                                                                                                    |                                        |                            | 2008  |       | 2007  |   
|Sempra
Commodities:                                                    |                                                                                                                                                                                    |                                        |                            |       |       |       |   
|                                                                       | Investment
in RBS Sempra Commodities LLP                                                                                                                                           |                                        |                            | $     | 2,082 | $     | -- |      
|                                                                       |                                                                                                                                                                                    |                                        |                            |       |       |       |   
|Other
equity method investments:                                       |                                                                                                                                                                                    |                                        |                            |       |       |       |   
|                                                                       | Sempra
Pipelines & Storage:                                                                                                                                                        |                                        |                            |       |       |       |    |      
|                                                                       |                                                                                                                                                                                    | Chilquinta
Energía                     |                            |       | $     | 364   | $  | 497   | 
|                                                                       |                                                                                                                                                                                    | Luz
del Sur                            |                            |       |       | 183   |    | 182   | 
|                                                                       |                                                                                                                                                                                    | Rockies
Express                        |                            |       |       | 249   |    | 97    | 
|                                                                       | Sempra
Generation:                                                                                                                                                                 |                                        |                            |       |       |       |    |      
|                                                                       |                                                                                                                                                                                    | Elk
Hills Power                        |                            |       |       | 198   |    | 205   | 
|                                                                       | Sempra
Commoditiesother investments                                                                                                                                               |                                        |                            |       | --    |       | 32 |      
|                                                                       | Housing
partnerships                                                                                                                                                               |                                        |                            |       | 30    |       | 46 |      
|                                                                       |                                                                                                                                                                                    | Total
other equity method investments* |                            |       |       | 1,024 |    | 1,059 | 
|Cost
method investmentshousing partnerships                           |                                                                                                                                                                                    |                                        |                            | 13    |       | 15    |   
|Other**                                                                |                                                                                                                                                                                    |                                        |                            | 129   |       | 229   |   
|Total                                                                  |                                                                                                                                                                                    |                                        | $                          | 1,166 | $     | 1,303 |   
|*                                                                      | Includes
$60 million in Other Current Assets on the Consolidated Balance Sheets at
December 31, 2007.                                                                             
|**                                                                     | Other
includes Sempra Pipelines & Storages $128 million investment in bonds
(discussed in Note 6) and, at December 31, 2007, available-for-sale
securities at Sempra Commodities.





118







|                                                                   |                          |      |      |   |     |   |   |      |  
|------------------------------------------------------------------ | ------------------------ | ---- | ---- | - | --- | - | - | ---- | -
|EQUITY
METHOD INVESTMENTS ON THE STATEMENTS OF CONSOLIDATED INCOME
|(Dollars
in millions)                                              |                         
|                                                                   | Years ended December 31,
|                                                                   | 2008                     | 2007 | 2006
|Earnings
(losses) recorded before tax:                             |                          |      |      |   |     |   |   |      |  
|RBS
Sempra Commodities LLP                                         | $                        | 383  |      | $ | --  |   | $ | --   |  
|                                                                   |                          |      |      |   |     |   |   |      |  
|Elk
Hills Power                                                    | $                        | 8    |      | $ | 9   |   | $ | 1    |  
|Topaz
Power Partners:                                              |                          |      |      |   |     |   |   |      |  
|Earnings
from operations                                           |                          | --   |      |   | --  |   |   | 9    |  
|Gain
on sale of power plants                                       |                          | --   |      |   | --  |   |   | 344  |  
|Housing
partnerships                                               |                          | (14  | )    |   | (14 | ) |   | (17  | )
|Rockies
Express                                                    |                          | 43   |      |   | (4  | ) |   | 1    |  
|                                                                   | $                        | 37   |      | $ | (9  | ) | $ | 338  |  
|Earnings
(losses) recorded net of tax:                             |                          |      |      |   |     |   |   |      |  
|Chilquinta
Energía                                                 | $                        | 28   |      | $ | 28  |   | $ | 25   |  
|Luz
del Sur                                                        |                          | 31   |      |   | 27  |   |   | 24   |  
|Sodigas
Pampeana and Sodigas Sur:                                  |                          |      |      |   |     |   |   |      |  
|Earnings
from operations                                           |                          | 1    |      |   | 4   |   |   | 6    |  
|Impairment
loss, net of tax benefit of $86                         |                          | --   |      |   | --  |   |   | (221 | )
|Sempra
Commodities:                                                |                          |      |      |   |     |   |   |      |  
|Gain
on sale of investments                                        |                          | --   |      |   | 30  |   |   | --   |  
|Earnings
from operations                                           |                          | 3    |      |   | 10  |   |   | (16  | )
|                                                                   | $                        | 63   |      | $ | 99  |   | $ | (182 | )



For equity method investments,
costs in excess of equity in net assets (goodwill) were $213 million at December
31, 2008 and $262 million at December 31, 2007. Costs in excess of the
underlying equity in net assets will continue to be reviewed for impairment in
accordance with APB 18. Descriptive information concerning these investments
follows.

SEMPRA
COMMODITIES

RBS Sempra Commodities is a
United Kingdom limited liability partnership formed to own and operate the
commodities-marketing businesses previously operated through wholly owned
subsidiaries of Sempra Energy, as we discuss in Note 3. We account for our
investment in RBS Sempra Commodities under the equity method.  Our share of
partnership earnings is reported in the Sempra Commodities segment. Subject to
certain limited exceptions, partnership pretax income is allocated each year as
follows:

§

First,
we receive a preferred 15-percent return on our adjusted equity capital.

§

Next,
RBS receives a preferred 15-percent return on any capital in excess of capital
attributable to us that is required by the U.K. Financial Services Authority to
be maintained by RBS in respect of the operations of the partnership.

§

Next,
we receive 70 percent of the next $500 million in pretax income; RBS receives
the remaining 30 percent.

§

Then,
we receive 30 percent and RBS receives 70 percent of any remaining pretax
income.

§

Any
losses of the partnership are shared equally between us and RBS.

For the nine months ended
December 31, 2008, we had $383 million of pretax equity earnings from RBS Sempra
Commodities. The partnership income that is distributable to us on an annual
basis is computed on the partnership's basis of accounting, International
Financial Reporting Standards (IFRS) as adopted by the European Union. For the
nine months ended December 31, 2008, this distributable income, on an IFRS
basis, is $389 million. In 2008, we received distributions of $85 million from
the partnership, as provided in the partnership agreement to fund estimated
income tax payments.



119





We
have indemnified the partnership for certain litigation and tax liabilities
related to the businesses purchased by the partnership. We recorded these
obligations at a fair value of $5 million on April 1, 2008, the date we formed
the partnership. The fair value of the indemnity provided to RBS Sempra
Commodities has not significantly changed since April 1, 2008.

We provide information regarding
the Sempra Commodities segment at December 31, 2008 and 2007 in Note 17.

The following tables show
summarized financial information for RBS Sempra Commodities (on a GAAP basis):



|                                  |  |                                    |       | 
|--------------------------------- |  | ---------------------------------- | ----- | 
|RBS
SEMPRA COMMODITIES           
|SUMMARIZED
FINANCIAL INFORMATION 
|(Dollars
in millions)             |  |                                   
|                                  |  | Nine months endedDecember 31, 2008
|Gross
revenues                    |  | $                                  | 2,051 | 
|Gross
profit                      |  |                                    | 1,370 | 
|Income
from continuing operations |  |                                    | 592   | 
|Net
income                        |  |                                    | 592   | 
|                                  |  |                                    |       | 
|                                  |  | At December 31, 2008              
|Current
assets                    |  | $                                  | 8,713 | 
|Noncurrent
assets                 |  |                                    | 516   | 
|Current
liabilities               |  |                                    | 5,581 | 



Investments
in Other Unconsolidated Subsidiaries

In February 2007, Sempra
Commodities sold its interests in an equity method investment, along with a
related cost-basis investment, receiving cash and a 12.7-percent interest
in a newly formed entity. The after-tax gain on this transaction, recorded
in Equity Earnings (Losses), Net of Income Tax, on the Statements of
Consolidated Income, was $30 million.

Available-for-Sale
Securities

Sempra Commodities had $80
million of available-for-sale securities included in Other Investments at
December 31, 2007. At December 31, 2007, the balance in Accumulated Other
Comprehensive Income (Loss) related to these securities was $28 million net of
income tax, comprised of $28 million of unrealized gains and a negligible amount
of unrealized losses.

Sempra Commodities recorded
purchases of available-for-sale securities of $1 million in the first quarter of
2008 and $12 million in the year 2007. Sempra Commodities had no sales of
available-for-sale securities in 2008 prior to the formation of the joint
venture. Sempra Commodities sold $20 million of available-for-sale securities in
2007, yielding proceeds of $54 million. The cost basis of the sales was
determined by the specific identification method and pretax gains of $34 million
were realized as a result of the sales in 2007. There was no impairment of
available-for-sale securities in 2008.

SEMPRA
GENERATION

The 550-MW Elk Hills Power (Elk
Hills) plant located near Bakersfield, California began commercial operations in
July 2003. Elk Hills is 50-percent owned by Sempra Generation.

In July 2004, Topaz, a 50/50
joint venture between Sempra Generation and Riverstone Holdings, acquired ten
Texas power plants from American Electric Power (AEP), including the 632-MW
coal-fired Coleto Creek Power Station (Coleto Creek) and three natural gas and
oil-fired plants in Laredo, San Benito and Corpus Christi, Texas. In July 2006,
Sempra Generation and Riverstone Holdings sold Coleto Creek for a total of $1.15
billion in cash. The majority of the proceeds from the sale were distributed by
Topaz as a dividend to Sempra Generation and Riverstone Holdings. The sale of
the plant resulted in a pretax gain of $353 million for Sempra Generation, which
was reported



120





in
Equity Earnings (Losses)Other, on the Statements of Consolidated Income. In a separate
transaction, also in July 2006, Sempra Generation sold its interests in the
natural gas plants that it acquired in connection with the Coleto Creek plant.
An impairment loss of $9 million pretax related to the sale of the natural gas
plants was recorded in 2006. In accordance with GAAP, because our interests in
Topaz are reported under the equity method, they are not reported as a
discontinued operation.

The following table shows
summarized financial information for Topaz and ignores any reclassifications
necessary for discontinued operations reporting by Topaz:



|                                           |                              |     | 
|------------------------------------------ | ---------------------------- | --- | 
|SUMMARIZED
FINANCIAL INFORMATION FOR TOPAZ
|(Dollars
in millions)                      |                             
|                                           | Year ended December 31, 2006
|Gross
revenues                             | $                            | 212 | 
|Gross
profit                               |                              | 71  | 
|Income
from operations                     |                              | 21  | 
|Gain
on sale of assets                     |                              | 705 | 
|Net
income                                 |                              | 726 | 

SEMPRA
PIPELINES & STORAGE

In 2006, Sempra Pipelines &
Storage consummated an agreement with Kinder Morgan Energy Partners, L.P. (KMP)
to jointly pursue through Rockies Express the development of a proposed natural
gas pipeline, the Rockies Express Pipeline (REX), that would link producing
areas in the Rocky Mountain region to the upper Midwest and the eastern United
States. Currently, KMP, Sempra Pipelines & Storage and ConocoPhillips
(Conoco) own interests of 51 percent, 25 percent and 24 percent, respectively,
in Rockies Express. Upon completion of construction of the pipeline, Conoco will
acquire an additional one-percent interest from KMP. We made contributions to
Rockies Express of $150 million in 2008 and $100 million in 2007. Through
financing received by Rockies Express in 2006, Sempra Pipelines & Storage
and KMP were repaid their initial capital contributions, which was reported in
Distributions from Investments on the Statements of Consolidated Cash Flows. We
provide additional information in Note 6.

Sempra Pipelines & Storage
owns a 50-percent interest in Chilquinta Energía S.A., a Chilean electric
utility, and a 38-percent interest in Luz del Sur, a Peruvian electric utility.
Sempra Pipelines & Storage also owns 43 percent of two Argentine natural gas
utility holding companies, Sodigas Pampeana and Sodigas Sur. As a result of the
devaluation of the Argentine peso at the end of 2001 and subsequent changes in
the value of the peso, Sempra Pipelines & Storage has reduced the carrying
value of its investment downward by a cumulative total of $270 million as of
December 31, 2008. These noncash adjustments, based on fluctuations in the value
of the Argentine peso, did not affect net income, but were recorded in
Comprehensive Income and Accumulated Other Comprehensive Income (Loss).

The related Argentine economic
decline and government responses (including Argentinas unilateral, retroactive
abrogation of utility agreements early in 2002) continue to adversely affect the
operations of these Argentine utilities. In 2002, Sempra Pipelines & Storage
initiated arbitration proceedings at the International Center for the Settlement
of Investment Disputes (ICSID) under the 1994 Bilateral Investment Treaty
between the United States and Argentina for recovery of the diminution of the
value of its investments that has resulted from Argentine governmental actions.
In September 2007, the tribunal officially closed the arbitration proceedings
and awarded us compensation of $172 million, which includes interest up to the
award date. In January 2008, Argentina filed an action at the ICSID seeking to
annul the award. We will not recognize the award until collectibility is
assured.

In December 2006, we decided to
sell our Argentine investments, and we continue to actively pursue their sale.
We adjusted our investments to estimated fair value and recorded a noncash
impairment charge to fourth quarter 2006 net income of $221 million. The charge
to net income is reported in Equity Earnings (Losses), Net of Income Tax, on the
Statements of Consolidated Income.



121





The
following tables show summarized financial information for Sodigas Pampeana and
Sodigas Sur:



|                                                                    |                          |     |                 |     |      |     |  |   |     |     |  |  | 
|------------------------------------------------------------------- | ------------------------ | --- | --------------- | --- | ---- | --- |  | - | --- | --- |  |  | 
|SODIGAS
PAMPEANA AND SODIGAS SUR  SUMMARIZED FINANCIAL INFORMATION
|(Dollars
in millions)                                               |                         
|                                                                    | Years ended December 31,
|                                                                    | 2008                     |     | 2007            |     | 2006
|Gross
revenues                                                      | $                        | 232 |                 |     | $    | 227 |  |   | $   | 215 | 
|Gross
profit                                                        |                          | 110 |                 |     |      | 111 |  |   |     | 97  | 
|Income
from operations                                              |                          | 12  |                 |     |      | 21  |  |   |     | 17  | 
|Gain
on sale of assets                                              |                          | 1   |                 |     |      | 1   |  |   |     | 1   | 
|Net
income                                                          |                          | 4   |                 |     |      | 14  |  |   |     | 11  | 
|                                                                    |                          |     |                 |     |      |     |  |   |     |     | 
|                                                                    |                          |     | At December 31,
|                                                                    |                          |     | 2008            |     | 2007
|Current
assets                                                      |                          |     | $               | 93  |      |     |  | $ | 117 |     | 
|Noncurrent
assets                                                   |                          |     |                 | 323 |      |     |  |   | 332 |     | 
|Current
liabilities                                                 |                          |     |                 | 192 |      |     |  |   | 198 |     | 
|Noncurrent
liabilities                                              |                          |     |                 | 25  |      |     |  |   | 38  |     | 



SEMPRA
FINANCIAL

Prior to June 2006, Sempra
Financial invested as a limited partner in affordable-housing properties. Sempra
Financials portfolio included 1,300 properties throughout the United
States that provided income tax benefits (primarily from income tax credits)
generally over 10-year periods.

In June 2006, Sempra Financial
effectively sold the majority of its interests in affordable-housing projects to
an unrelated party for $83 million subject to certain guarantees. Because of the
guarantees, the transaction has been recorded as a financing transaction rather
than as a sale, and we continue to consolidate the investments in the housing
partnerships. The transaction almost completely eliminated the income tax
benefits from the affordable-housing investments.

OTHER
EQUITY METHOD INFORMATION

We present aggregated information
below for:

§

Chilquinta
Energía

§

Luz
del Sur

§

Elk
Hills Power

§

Rockies
Express

§

Sempra
Commodities' investments (prior to the formation of RBS Sempra Commodities)

§

Sempra
Energys housing partnerships (accounted for under the equity method)



122







|                                |                          |       |                 |  |      |       |  |  |   |       | 
|------------------------------- | ------------------------ | ----- | --------------- |  | ---- | ----- |  |  | - | ----- | 
|OTHER
EQUITY METHOD INFORMATION
|(Dollars
in millions)          
|                                | Years ended December 31,
|                                | 2008                     |       | 2007            |  | 2006
|Gross
revenues                  | $                        | 1,852 |                 |  | $    | 1,570 |  |  | $ | 1,458 | 
|Gross
profit                    |                          | 487   |                 |  |      | 456   |  |  |   | 480   | 
|Income
from operations          |                          | 234   |                 |  |      | 225   |  |  |   | 284   | 
|Gain
(loss) on sale of assets   |                          | (46   | )               |  |      | 7     |  |  |   | 9     | 
|Net
income                      |                          | 171   |                 |  |      | 138   |  |  |   | 246   | 
|                                |                          |       |                 |  |      |       |  |  |   |       | 
|                                |                          |       | At December 31, | 
|                                |                          |       | 2008            |  |      | 2007  | 
|Current
assets                  |                          |       |                 |  | $    | 795   |  |  | $ | 921   | 
|Noncurrent
assets               |                          |       |                 |  |      | 2,091 |  |  |   | 2,256 | 
|Current
liabilities             |                          |       |                 |  |      | 324   |  |  |   | 494   | 
|Noncurrent
liabilities          |                          |       |                 |  |      | 519   |  |  |   | 936   | 

NOTE
5. DISCONTINUED OPERATIONS

In the second quarter of 2006,
Sempra Generation sold its 305-MW, coal-fired Twin Oaks Power plant (Twin Oaks)
in Texas for $479 million in cash. Also in the second quarter, Sempra Generation
completed the sales of Energy Services, which provided energy-saving facilities,
and Facilities Management, which managed building heating and cooling
facilities, for a total of $95 million in cash.

In the third quarter of 2006,
Sempra Generation sold its exploration and production subsidiary, Sempra Energy
Production Company (SEPCO), for $225 million in cash.

In June 2006, in line with our
previously announced plan to focus resources on the development of our core
businesses, we decided to sell Bangor Gas and Frontier Energy, Sempra Pipelines
& Storages natural gas distribution companies located in Maine and North
Carolina, respectively. In accordance with SFAS 144, we recorded an after-tax
impairment loss of $40 million in 2006. The sales of Frontier Energy and Bangor
Gas were completed on September 30, and November 30, 2007, respectively, for a
total of $5 million in cash.

In accordance with SFAS 144, we
have reported the above operations as discontinued for all periods presented in
our Consolidated Financial Statements.

We summarize the income statement
information concerning our discontinued operations in the table below.



|                                             |  |                          |      |   |   |      |  
|-------------------------------------------- |  | ------------------------ | ---- | - | - | ---- | -
|DISCONTINUED
OPERATIONS                     
|(Dollars
in millions)                       
|                                             |  | Years ended December 31,
|                                             |  |                          | 2007 |   |   | 2006 |  
|Revenues                                     |  | $                        | 10   |   | $ | 89   |  
|                                             |  |                          |      |   |   |      |  
|Income
from operations, before income taxes  |  | $                        | 2    |   | $ | 20   |  
|Impairment
loss                              |  |                          | --   |   |   | (68  | )
|Income
tax expense (benefit)                 |  |                          | 4    |   |   | (20  | )
|Consolidated
state tax adjustment            |  |                          | --   |   |   | 1    |  
|                                             |  |                          | (2   | ) |   | (27  | )
|                                             |  |                          |      |   |   |      |  
|Gain
(loss) on disposal, before income taxes |  |                          | (2   | ) |   | 525  |  
|Income
tax expense                           |  |                          | 23   |   |   | 174  |  
|Consolidated
state tax adjustment            |  |                          | 1    |   |   | (9   | )
|                                             |  |                          | (24  | ) |   | 342  |  
|                                             |  | $                        | (26  | ) | $ | 315  |  



123







| |  |  |  |  |  |  | 
| |  |  |  |  |  |  | 

NOTE
6. DEBT AND CREDIT FACILITIES

COMMITTED
LINES OF CREDIT

At December 31, 2008, Sempra
Energy had $4.3 billion in committed lines of credit to provide liquidity and to
support commercial paper and variable-rate demand notes - the major components
of which are detailed below. Available unused credit on these lines at December
31, 2008 was $2.9 billion.

Due to the sale of the
commodities-marketing businesses as discussed in Note 3, these amounts exclude
lines of credit associated with Sempra Commodities, some of which we continue to
guarantee, as we discuss below in "RBS Sempra Commodities." By the end of June
2008, RBS had replaced Sempra Energy as guarantor on all uncommitted lines of
credit associated with Sempra Commodities. To the extent that Sempra Energy's
credit support arrangements, including Sempra Commodities' committed facilities,
have not been terminated or replaced, RBS has indemnified Sempra Energy for any
claims or losses arising in connection with those arrangements.

Sempra
Global

Sempra Global has a $2.5 billion,
three-year syndicated revolving credit agreement expiring in 2011. Citibank,
N.A. serves as administrative agent for the syndicate of 18 lenders. No single
bank has greater than a 10.7 percent share. The facility also provides for
issuance of up to $300 million of letters of credit on behalf of Sempra Global
with the amount of borrowings otherwise available under the facility reduced by
the amount of outstanding letters of credit.

Sempra Energy guarantees Sempra
Globals obligations under the credit facility. Borrowings bear interest at
benchmark rates plus a margin that varies with market index rates and Sempra
Energys credit ratings. The facility also requires Sempra Energy to maintain a
ratio of total indebtedness to total capitalization (as defined in the
agreement) of no more than 65% at the end of each quarter.

At December 31, 2008, Sempra
Global had letters of credit of $17 million outstanding and no outstanding
borrowings under the facility. The facility provides support for $1.1 billion of
commercial paper outstanding at December 31, 2008. At December 31, 2008, $600
million of the commercial paper outstanding has been reclassified to long-term
debt based on managements intent and ability to maintain this level of
borrowing on a long-term basis either supported by this credit facility or by
issuing long-term debt. This reclassification had no impact on cash flows.

Sempra
Generation

Sempra Generation has a $1
billion, three-year syndicated revolving credit agreement expiring in 2011.
Citibank, N.A. serves as administrative agent for the syndicate of 17 lenders.
No single bank has greater than a 10.7 percent share.

Sempra Energy guarantees Sempra
Generations obligations under the credit facility. Borrowings bear interest at
benchmark rates plus a margin that varies with market index rates and Sempra
Energy's credit ratings. The facility also requires Sempra Energy to maintain a
ratio of total indebtedness to total capitalization (as defined in the
agreement) of no more than 65% at the end of each quarter.

At December 31, 2008, Sempra
Generation had no outstanding borrowings under the facility.

Sempra
Utilities

SDG&E and SoCalGas have a
combined $800 million, three-year syndicated revolving credit agreement expiring
in 2011. JPMorgan Chase Bank serves as administrative agent for the syndicate of
17 lenders. No single bank has greater than a 9.9 percent share. The agreement
permits each utility to individually borrow up to $600 million, subject to a
combined limit of $800 million for both utilities. It also provides for the
issuance of letters of credit on behalf of each utility subject to a combined
letter of credit commitment of $200 million for both utilities. The amount of
borrowings otherwise available under the facility is reduced by the amount of
outstanding letters of credit.



124





Borrowings
under the facility bear interest at benchmark rates plus a margin that varies
with market index rates and the borrowing utility's credit rating. The agreement
also requires each utility to maintain a ratio of total indebtedness to total
capitalization (as defined in the agreement) of no more than 65% at the end of
each quarter.

Each utilitys obligations under
the agreement are individual obligations, and a default by one utility would not
constitute a default by the other utility or preclude borrowings by, or the
issuance of letters of credit on behalf of, the other utility.

At December 31, 2008, SDG&E
and SoCalGas had no outstanding borrowings under this facility. SDG&E had
$110 million of outstanding letters of credit and $237 million of variable-rate
demand notes outstanding supported by this facility at December 31, 2008.

RBS
Sempra Commodities

RBS is obligated to provide RBS
Sempra Commodities with all growth capital, working-capital requirements and
credit support. However, as a transitional measure, we continue to provide
back-up guarantees for a portion of RBS Sempra Commodities trading obligations
and for certain credit facilities with third party lenders pending novation
(legal transfer) of the remaining trading obligations to RBS. Some of these
back-up guarantees may continue for a prolonged period of time. RBS has fully
indemnified us for any claims or losses in connection with these arrangements.
RBS has been greatly affected by the world-wide turmoil in banking and became
indirectly controlled by the government of the United Kingdom on December 1,
2008.

RBS Sempra Commodities net
trading liabilities and credit facilities supported by Sempra Energys
guarantees at December 31, 2008 were

§

$1.1
billion of net trading liabilities consisting of guaranteed trading obligations
net of collateral. The amount of guaranteed net trading liabilities varies from
day to day with the value of the trading obligations and related collateral.

§

$500
million under a three-year revolving credit facility expiring in May 2009.

Sempra Energy also has guaranteed
$344 million of $1.72 billion of RBS Sempra Commodities' commitments under an
additional credit facility expiring September 29, 2010. Extensions of credit
under the committed facility are limited to and secured by a borrowing base
consisting of receivables, inventories and other joint venture assets that are
valued at varying percentages of current market value. At December 31, 2008, the
gross market value of the borrowing base assets was $2.9 billion. The facility
will be reduced and end as the borrowing base assets are transferred to RBS as
established by the joint venture agreement.

OTHER
GUARANTEES

As discussed in Note 4, Sempra
Energy, Conoco and KMP currently hold 25 percent, 24 percent and 51 percent
ownership interests, respectively, in Rockies Express. Rockies Express is
constructing a natural gas pipeline to link natural gas producing areas in the
Rocky Mountain region to the upper Midwest and the eastern United States.
Rockies Express has a $2 billion, five-year credit facility expiring in 2011
that provides for revolving extensions of credit that are guaranteed by Sempra
Energy, Conoco and KMP in proportion to their respective ownership percentages.

Borrowings under the facility
bear interest at rates varying with market rates plus a margin that varies with
the credit ratings of the lowest-rated guarantor. The facility requires each
guarantor to comply with various financial and other covenants comparable to
those contained in its senior unsecured credit facilities. In the case of Sempra
Energy, the primary requirement is that we maintain a ratio of total
indebtedness to total capitalization (as defined in the facility) of no more
than 65 percent at the end of each quarter. Rockies Express had $1.6 billion of
outstanding borrowings under this facility at December 31, 2008. In addition,
Rockies Express had $600 million of floating rate notes outstanding at December
31, 2008 and maturing in September 2009 that are guaranteed by Sempra Energy,
Conoco and KMP in proportion to their respective ownership percentages. The fair
value to us of these guarantees is negligible.



125





WEIGHTED
AVERAGE INTEREST RATE

The weighted average interest
rate on the total short-term debt outstanding at Sempra Energy, including
commercial paper borrowings classified as long-term, was 4.985 percent at
December 31, 2008.

LONG-TERM
DEBT

The following tables show the detail and maturities of
long-term debt outstanding:



|                                                          |                                                                                                    |              |       |       |  |       |       | 
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------ | ----- | ----- |  | ----- | ----- | 
|LONG-TERM
DEBT                                            |                                                                                                    |             
|(Dollars
in millions)                                     |                                                                                                    |             
|                                                          |                                                                                                    | December 31,
|                                                          |                                                                                                    |              | 2008  |       |  | 2007  |      
|SDG&E                                                     |                                                                                                    |              |       |       |  |       |      
|First
mortgage bonds:                                     |                                                                                                    |              |       |       |  |       |      
|                                                          | 6.8%
June 1, 2015                                                                                  |              | $     | 14    |  | $     | 14    | 
|                                                          | 5.3%
November 15, 2015                                                                             |              |       | 250   |  |       | 250   | 
|                                                          | Variable
rate (1% at December 31, 2008) July 2018 (1)                                              |              |       | 161   |  |       | 161   | 
|                                                          | 5.85%
June 1, 2021 (1)                                                                             |              |       | 60    |  |       | 60    | 
|                                                          | 6%
June 1, 2026                                                                                    |              |       | 250   |  |       | 250   | 
|                                                          | 5%
to 5.25% December 1, 2027 (1)                                                                   |              |       | 150   |  |       | 150   | 
|                                                          | 2.516%
to 2.832% January and February 2034 (1) (2)                                                 |              |       | 176   |  |       | 176   | 
|                                                          | 5.35%
May 15, 2035                                                                                 |              |       | 250   |  |       | 250   | 
|                                                          | 6.125%
September 15, 2037                                                                          |              |       | 250   |  |       | 250   | 
|                                                          | Variable
rate (1.45% at December 31, 2008) May 1, 2039 (1)                                         |              |       | 75    |  |       | 75    | 
|                                                          |                                                                                                    |              |       | 1,636 |  |       | 1,636 | 
|Other
long-term debt (unsecured, unless otherwise noted): |                                                                                                    |              |       |       |  |       |      
|                                                          | 5.9%
June 1, 2014                                                                                  |              |       | 130   |  |       | 130   | 
|                                                          | 5.3%
July 1, 2021 (1)                                                                              |              |       | 39    |  |       | 39    | 
|                                                          | 5.5%
December 1, 2021 (1)                                                                          |              |       | 60    |  |       | 60    | 
|                                                          | 4.9%
March 1, 2023 (1)                                                                             |              |       | 25    |  |       | 25    | 
|                                                          | OMEC
LLC project financing at 6.2% payable 2009 through April 2019 (secured by
project assets) (3) |              |       | 256   |  |       | 63    | 
|                                                          | Other                                                                                              |              |       | --    |  |       | 7     | 
|                                                          |                                                                                                    |              | 510   |       |  | 324   |      
|                                                          |                                                                                                    |              | 2,146 |       |  | 1,960 |      
|Current
portion of long-term debt                         |                                                                                                    |              | (2    | )     |  | --    |      
|Unamortized
discount on long-term debt                    |                                                                                                    |              | (2    | )     |  | (2    | )    
|Total
SDG&E                                               |                                                                                                    |              | 2,142 |       |  | 1,958 |      





|                                                                                |                                                             |                                               |       |       |     |       |       |     | 
|------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------- | ----- | ----- | --- | ----- | ----- | --- | 
|SoCalGas                                                                        |                                                             |                                               |       |       |     |       |      
|First
mortgage bonds:                                                           |                                                             |                                               |       |       |     |       |      
|                                                                                | Variable
rate (2.37% at December 31, 2008) December 1, 2009 |                                               |       | 100   |     |       | 100   |    
|                                                                                | 4.375%
January 15, 2011                                     |                                               |       | 100   |     |       | 100   |    
|                                                                                | Variable
rates after fixed-to-floating rate swaps           |                                               |       |       |     |       |       |    
|                                                                                |                                                             | (2.05%
at December 31, 2008) January 15, 2011 |       |       | 150 |       |       | 150 | 
|                                                                                | 4.8%
October 1, 2012                                        |                                               |       | 250   |     |       | 250   |    
|                                                                                | 5.5%
March 15, 2014                                         |                                               |       | 250   |     |       | --    |    
|                                                                                | 5.45%
April 15, 2018                                        |                                               |       | 250   |     |       | 250   |    
|                                                                                | 5.75%
November 15, 2035                                     |                                               |       | 250   |     |       | 250   |    
|                                                                                |                                                             |                                               |       | 1,350 |     |       | 1,100 |    
|Other
long-term debt (unsecured):                                               |                                                             |                                               |       |       |     |       |      
|                                                                                | 4.75%
May 14, 2016 (1)                                      |                                               |       | 8     |     |       | 8     |    
|                                                                                | 5.67%
January 18, 2028                                      |                                               |       | 5     |     |       | 5     |    
|Market
value adjustments for interest-rate swap, net (expires January 18,
2011) |                                                             |                                               | 9     |       |     | 2     |      
|                                                                                |                                                             |                                               | 22    |       |     | 15    |      
|                                                                                |                                                             |                                               | 1,372 |       |     | 1,115 |      
|Current
portion of long-term debt                                               |                                                             |                                               | (100  | )     |     | --    |      
|Unamortized
discount on long-term debt                                          |                                                             |                                               | (2    | )     |     | (2    | )    
|Total
SoCalGas                                                                  |                                                             |                                               | 1,270 |       |     | 1,113 |      





126







|                                                         |                                                                                                                           |   |       |     |   |       |     |  |  |  | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | - | ----- | --- | - | ----- | --- |  |  |  | 
|Other
Sempra Energy                                      |                                                                                                                           |   |       |     |   |       |    
|First
mortgage bonds:                                    |                                                                                                                           |   |       |     |   |       |    
|                                                         | 6.9%
payable 2009 through 2017                                                                                            |   |       | 8   |   |       | --  | 
|                                                         | 8.75%
payable 2009 through 2022                                                                                           |   |       | 9   |   |       | --  | 
|                                                         | 7.48%
payable 2009 through 2023                                                                                           |   |       | 7   |   |       | --  | 
|                                                         |                                                                                                                           |   | 24    |     |   | --    |    
|Other
long-term debt (unsecured unless otherwise noted): |                                                                                                                           |   |       |     |   |       |    
|                                                         | Commercial
paper borrowings at variable rates, classified as long-term debt (5.22%
weighted average at December 31, 2008) |   |       | 600 |   |       | --  | 
|                                                         | 9.8%
Notes February 15, 2019                                                                                              |   |       | 500 |   |       | --  | 
|                                                         | 6.15%
Notes June 15, 2018                                                                                                 |   |       | 500 |   |       | --  | 
|                                                         | 6%
Notes February 1, 2013                                                                                                 |   |       | 400 |   |       | 400 | 
|                                                         | Notes
at variable rates after fixed-to-floating swap (5.06% at December 31,
2008) March 1, 2010                           |   |       | 300 |   |       | 300 | 
|                                                         | 4.75%
Notes May 15, 2009                                                                                                  |   |       | 300 |   |       | 300 | 
|                                                         | 8.9%
Notes November 15, 2013                                                                                              |   |       | 250 |   |       | --  | 
|                                                         | 7.95%
Notes March 1, 2010                                                                                                 |   |       | 200 |   |       | 200 | 
|                                                         | 6.3%
Notes December 31, 2021 (1)                                                                                          |   |       | 128 |   |       | 128 | 
|                                                         | Employee
Stock Ownership Plan                                                                                             |   |       |     |   |       |     | 
|                                                         | Bonds
at 5.781% (fixed through July 1, 2010) November 1, 2014 (1)                                                         |   |       | 50  |   |       | 50  | 
|                                                         | Bonds
at variable rates (5.26% at December 31, 2008) November 1, 2014 (1)                                                 |   |       | 22  |   |       | 33  | 
|                                                         | Notes
at 2.87% to 5.05% payable 2010 through 2013 (1)                                                                     |   |       | 58  |   |       | 41  | 
|                                                         | Industrial
development bond at variable rates (1.05% at December 31, 2008) August 1,
2037, secured (1)                    |   |       | 55  |   |       | --  | 
|                                                         | Debt
incurred to acquire limited partnerships, secured by real estate, at 8.05%
January 15, 2009                          |   |       | 2   |   |       | 9   | 
|                                                         | 8.45%
Notes payable 2009 through 2017, secured                                                                            |   |       | 39  |   |       | --  | 
|                                                         | Other
debt                                                                                                                |   |       | 1   |   |       | 21  | 
|                                                         | Market
value adjustments for interest-rate swap, net (expiring March 1,
2010)                                             |   |       | 15  |   |       | 9   | 
|                                                         |                                                                                                                           |   | 3,420 |     |   | 1,491 |    
|                                                         |                                                                                                                           |   | 3,444 |     |   | 1,491 |    
|Current
portion of long-term debt                        |                                                                                                                           |   | (308  | )   |   | (7    | )  
|Unamortized
discount on long-term debt                   |                                                                                                                           |   | (4    | )   |   | (2    | )  
|Total
other Sempra Energy                                |                                                                                                                           |   | 3,132 |     |   | 1,482 |    
|Total
Sempra Energy Consolidated                         |                                                                                                                           | $ | 6,544 |     | $ | 4,553 |    
|(1)                                                      | Callable
long-term debt.                                                                                                 
|(2)                                                      | After
floating-to-fixed rate swaps expiring in 2009.                                                                     
|(3)                                                      | After
floating-to-fixed rate swaps expiring in 2019.                                                                     





|                              |                                                            |       |       |  |          |   |       |                     |  |   |                                  |  |  |   |       |  | 
|----------------------------- | ---------------------------------------------------------- | ----- | ----- |  | -------- | - | ----- | ------------------- |  | - | -------------------------------- |  |  | - | ----- |  | 
|MATURITIES
OF LONG-TERM DEBT*
|(Dollars
in millions)        
|                              |                                                            | SDG&E |       |  | SoCalGas |   |       | Other Sempra Energy |  |   | Total Sempra Energy Consolidated
|2009                          |                                                            | $     | 2     |  |          | $ | 100   |                     |  | $ | 308                              |  |  | $ | 410  
|2010                          |                                                            |       | 7     |  |          |   | --    |                     |  |   | 520                              |  |  |   | 527  
|2011                          |                                                            |       | 7     |  |          |   | 250   |                     |  |   | 29                               |  |  |   | 286  
|2012                          |                                                            |       | 7     |  |          |   | 250   |                     |  |   | 12                               |  |  |   | 269  
|2013                          |                                                            |       | 7     |  |          |   | --    |                     |  |   | 672                              |  |  |   | 679  
|Thereafter                    |                                                            |       | 2,116 |  |          |   | 763   |                     |  |   | 1,888                            |  |  |   | 4,767
|Total                         |                                                            | $     | 2,146 |  |          | $ | 1,363 |                     |  | $ | 3,429                            |  |  | $ | 6,938
|*                             | Excludes
market value adjustments for interest-rate
swaps.



Various long-term obligations
totaling $3.6 billion at Sempra Energy at December 31, 2008 are unsecured.This includes unsecured long-term obligations totaling $254million
at SDG&E and $13 million at SoCalGas.



127





In
November 2008, Sempra Energy publicly offered and sold $250 million of
8.9-percent notes maturing in 2013 and $500 million of 9.8-percent notes
maturing in 2019.

In June 2008, Sempra Energy
publicly offered and sold $500 million of 6.15-percent notes, maturing in 2018.

CALLABLE
LONG-TERM DEBT

At the option of Sempra Energy,
SDG&E and SoCalGas, certain debt is callable subject to premiums at various
dates:



|                                                |   |       |  |   |          |  |   |                     |  |   |                                 
|----------------------------------------------- | - | ----- |  | - | -------- |  | - | ------------------- |  | - | --------------------------------
|CALLABLE
LONG-TERM DEBT                        
|(Dollars
in millions)                          
|                                                |   | SDG&E |  |   | SoCalGas |  |   | Other Sempra Energy |  |   | Total Sempra Energy Consolidated
|2009                                            | $ | 472   |  | $ | --       |  | $ | 262                 |  | $ | 734                             
|2010                                            |   | --    |  |   | --       |  |   | 50                  |  |   | 50                              
|2013                                            |   | 45    |  |   | --       |  |   | --                  |  |   | 45                              
|after
2013                                      |   | 229   |  |   | 8        |  |   | --                  |  |   | 237                             
|Total                                           | $ | 746   |  | $ | 8        |  | $ | 312                 |  | $ | 1,066                           
|Callable
bonds subject to make-whole provisions | $ | 1,000 |  | $ | 1,250    |  | $ | 2,513               |  | $ | 4,763                           



In addition, the OMEC LLC project
financing loan, discussed in Note 1, with $256 million of borrowings at December
31, 2008, may be prepaid at the borrowers option.

FIRST
MORTGAGE BONDS

The Sempra Utilities issue first
mortgage bonds which are secured by a lien on utility plant. The Sempra
Utilities may issue additional first mortgage bonds upon compliance with the
provisions of their bond agreements (indentures). These indentures require,
among other things, the satisfaction of pro forma earnings-coverage tests on
first mortgage bond interest and the availability of sufficient mortgaged
property to support the additional bonds, after giving effect to prior bond
redemptions. The most restrictive of these tests (the property test) would
permit the issuance, subject to CPUC authorization, of an additional $2.9
billion of first mortgage bonds at SDG&E and $324 million at SoCalGas at
December 31, 2008.

In November 2008, SoCalGas
publicly offered and sold $250 million of 5.50-percent first mortgage bonds
maturing in 2014.

INDUSTRIAL
DEVELOPMENT BONDS

During 2008, Sempra Energy
purchased $413 million of industrial development bonds, net of sales and
purchases with SDG&E as the cash flow needs of each entity changed.
SDG&E purchased $488 million of the bonds during 2008, and sold $228 million
to Sempra Energy during 2008. The bonds were initially issued as insured,
auction-rate securities, the proceeds of which were loaned to SDG&E, and are
repaid with payments from SDG&E first mortgage bonds that have terms
corresponding to those of the industrial development bonds that they secure.

In December 2008, SDG&E
remarketed $237 million of these industrial development bonds. These included
$75 million remarketed at an initial daily floating-rate of 0.65 percent
(maturing in 2039), and $161 million remarketed for a three-month term at a rate
of 1.00 percent (maturing in 2018).  Beginning in March 2009, the interest
rate on the $161 million series will be reset on a weekly basis.

The remaining industrial
development bonds, $24 million held by SDG&E and $152 million held by Sempra
Energy, are classified as available-for-sale securities and included in
Short-Term Investments on the Consolidated Balance Sheets at December 31, 2008.
Sempra Energy and SDG&E intend to remarketthe remaining bonds in early



128





2009
and to modify the credit support and liquidity requirements of the remaining
bonds in conjunction with their remarketing to investors.

In 2006, in order to reduce its
property tax, Sempra Pipelines & Storage incurred $128 million of long-term
debt related to the development of its Liberty Gas Storage (Liberty) facility in
Calcasieu Parish, Louisiana. The debt is payable to the Calcasieu Parish
Industrial Development Board. Related to the debt, we recorded bonds receivable
from the Industrial Development Board for the same amount. Both the financing
obligation and the bonds receivable have interest rates of 6.3 percent and are
due on December 31, 2021.

DEBT
OF EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND TRUST (TRUST)

The ESOP covers substantially all
Sempra Energy employees, including SDG&E and SoCalGas. The Trust is used to
fund part of the retirement savings plan described in Note 9. The notes of the
ESOP are payable by the Trust and mature in 2014.

In July 2007, $50 million of
these notes was repriced at an interest rate of 5.781 percent for a three-year
term ending July 1, 2010. The remaining $22 million of the notes is repriced
weekly and subject to repurchase at our option. ESOP debt was paid down by a
total of $32 million during the last three years when 739,220 shares of Sempra
Energy common stock were released from the Trust in order to fund employer
contributions to the Sempra Energy savings plan trust. Interest on the ESOP debt
amounted to $4 million in each of 2008, 2007 and 2006. Dividends used for debt
service amounted to $2 million in each of 2008, 2007 and 2006.

INTEREST-RATE
SWAPS

We discuss our fair value
interest-rate swaps and interest-rate swaps to hedge cash flows in Note 11.

NOTE
7. FACILITIES UNDER JOINT OWNERSHIP

San Onofre Nuclear Generating
Station (SONGS) and the Southwest Powerlink transmission line are owned jointly
by SDG&E with other utilities. SDG&Es interests at December 31, 2008
were as follows:



|                                          |  |       |     |                     |  |   |     |  
|----------------------------------------- |  | ----- | --- | ------------------- |  | - | --- | -
|(Dollars
in millions)                     |  | SONGS |     | Southwest
Powerlink
|Percentage
ownership                      |  |       | 20  | %                   |  |   | 91  | %
|Utility
plant in service                  |  | $     | 90  |                     |  | $ | 314 |  
|Accumulated
depreciation and amortization |  |       | 22  |                     |  |   | 176 |  
|Construction
work in progress             |  |       | 113 |                     |  |   | 7   |  



SDG&E, and each of the other
owners, holds its undivided interest as a tenant in common in the property. Each
owner is responsible for financing its share of each project and participates in
decisions concerning operations and capital expenditures.

SDG&Es share of operating
expenses is included in Sempra Energys and SDG&Es Statements of
Consolidated Income.

SONGS
DECOMMISSIONING

Objectives, work scope, and
procedures for the dismantling and decontamination of the SONGS units must meet
the requirements of the Nuclear Regulatory Commission (NRC), the Environmental
Protection Agency, the U.S. Department of the Navy (the land owner), the CPUC
and other regulatory bodies.

SDG&E's asset retirement
obligation related to decommissioning costs for the SONGS units was $445 million
at December 31, 2008. That amount includes the cost to decommission Units 2 and
3, and the remaining cost to



129





complete
the decommissioning of Unit 1, which is currently in progress. Southern
California Edison updates decommissioning cost studies every three years. In
January 2007, the CPUC approved the most recent update. Rate recovery of
decommissioning costs is allowed until the time that the costs are fully
recovered and is subject to adjustment every three years based on the costs
allowed by regulators. Collections are authorized to continue until 2022.

Unit 1 was permanently shut down
in 1992, and physical decommissioning began in January 2000. Most structures,
foundations and large components have been dismantled, removed and disposed of.
Spent nuclear fuel has been removed from the Unit 1 Spent Fuel Pool and stored
on-site in an independent spent fuel storage installation (ISFSI) licensed by
the NRC. The remaining major work will include dismantling, removal and disposal
of all remaining equipment and facilities (both nuclear and non-nuclear
components), and decontamination of the site. Southern California Edison expects
Phase I of decommissioning activities to be complete in the first quarter of
2009. The decommissioning of Unit 1 remaining structures (subsurface and
intake/discharge) will take place when Units 2 & 3 are decommissioned. The
ISFSI will be decommissioned after a permanent storage facility becomes
available and the U.S. Department of Energy (DOE) removes the spent fuel from
the site. The Unit 1 reactor vessel is expected to remain on site until Units 2
and 3 are decommissioned.

The amounts collected in rates
for SONGS' decommissioning are invested in externally managed trust funds.
Amounts held by the trusts are invested in accordance with CPUC regulations.
These trusts are shown on the Sempra Energy and SDG&E Consolidated Balance
Sheets at fair value with the offsetting credits recorded in Asset Retirement
Obligations and Regulatory Liabilities Arising from Removal Obligations.

The following table shows the
fair values and gross unrealized gains and losses for the securities held in the
trust funds.



|                                    |                              |      |  |   |                        |  |   |                         |   |   |                      | 
|----------------------------------- | ---------------------------- | ---- |  | - | ---------------------- |  | - | ----------------------- | - | - | -------------------- | 
|NUCLEAR
DECOMMISSIONING TRUSTS     
|(Dollars
in millions)              
|                                    |                              | Cost |  |   | Gross Unrealized Gains |  |   | Gross Unrealized Losses |   |   | Estimated Fair Value
|As
of December 31, 2008:            |                              |      |  |   |                        |  |   |                         |   |   |                     
|Debt
securities                     |                              |      |  |   |                        |  |   |                         |   |   |                     
|U.S.
government issues*             | $                            | 127  |  | $ | 28                     |  | $ | --                      |   | $ | 155                 
|Municipal
bonds**                   |                              | 69   |  |   | 1                      |  |   | (9                      | ) |   | 61                  
|Total
debt securities               |                              | 196  |  |   | 29                     |  |   | (9                      | ) |   | 216                 
|Equity
securities                   |                              | 251  |  |   | 105                    |  |   | (36                     | ) |   | 320                 
|Cash
and other securities***        |                              | 40   |  |   | 3                      |  |   | (2                      | ) |   | 41                  
|Total
available-for-sale securities | $                            | 487  |  | $ | 137                    |  | $ | (47                     | ) | $ | 577                 
|                                    |                              |      |  |   |                        |  |   |                         |   |   |                     
|                                    |                              |      |  |   |                        |  |   |                         |   |   |                     
|As
of December 31, 2007:            |                              |      |  |   |                        |  |   |                         |   |   |                     
|Debt
securities                     |                              |      |  |   |                        |  |   |                         |   |   |                     
|U.S.
government issues              | $                            | 168  |  | $ | 15                     |  | $ | --                      |   | $ | 183                 
|Municipal
bonds                     |                              | 77   |  |   | 1                      |  |   | (2                      | ) |   | 76                  
|Total
debt securities               |                              | 245  |  |   | 16                     |  |   | (2                      | ) |   | 259                 
|Equity
securities                   |                              | 204  |  |   | 234                    |  |   | (4                      | ) |   | 434                 
|Cash
and other securities           |                              | 44   |  |   | 2                      |  |   | --                      |   |   | 46                  
|Total
available-for-sale securities | $                            | 493  |  | $ | 252                    |  | $ | (6                      | ) | $ | 739                 
|*                                   | Maturity
dates are 2009-2038
|**                                  | Maturity
dates are 2009-2043
|***                                 | Maturity
dates are 2009-2049





130





The
following table shows the proceeds from sales of securities in the trusts and
gross realized gains and losses on those sales.



|                      |   |                          |   |   |      |   |   |      |  
|--------------------- | - | ------------------------ | - | - | ---- | - | - | ---- | -
|SALES
OF SECURITIES  
|(Dollars
in millions)
|                      |   | Years ended December 31,
|                      |   | 2008                     |   |   | 2007 |   |   | 2006 |  
|Proceeds
from sales   | $ | 458                      |   | $ | 578  |   | $ | 474  |  
|Gross
realized gains  |   | 18                       |   |   | 18   |   |   | 22   |  
|Gross
realized losses |   | (40                      | ) |   | (12  | ) |   | (13  | )



Net unrealized gains (losses) are
included in Regulatory Liabilities Arising from Removal Obligations on the
Consolidated Balance Sheets. We determine the cost of securities in the trusts
on the basis of specific identification.

The fair value of securities in
an unrealized loss position as of December 31, 2008 was $146 million. The
unrealized losses of $47 million were primarily caused by a negative market
environment. We do not consider these investments to be other than temporarily
impaired as of December 31, 2008.

Customer contribution amounts are
determined by the CPUC using estimates of after-tax investment returns,
decommissioning costs, and decommissioning cost escalation rates. Changes in
investment returns and decommissioning costs may result in a change in future
customer contributions.

We discuss the impact of SFAS 143
in Note 1. We provide additional information about SONGS in Notes 14 and 16.



131







NOTE
8. INCOME TAXES

Reconciliation of the U.S.
statutory federal income tax rates to the effective income tax rates are as
follows:

|                                                                         |  |  |      |                          |  |  |      |   |  |  |      |   | 
|------------------------------------------------------------------------ |  |  | ---- | ------------------------ |  |  | ---- | - |  |  | ---- | - | 
|RECONCILIATION
OF FEDERAL INCOME TAX RATES TO EFFECTIVE INCOME TAX RATES
|                                                                        
|                                                                         |  |  |      | Years ended December 31, | 
|                                                                         |  |  | 2008 |                          |  |  | 2007 |   |  |  | 2006 |  
|Sempra
Energy Consolidated                                               |  |  |      |                          |  |  |      |   |  |  |      |  
|Statutory
federal income tax rate                                        |  |  | 35   | %                        |  |  | 35   | % |  |  | 35   | %
|Utility
depreciation                                                     |  |  | 3    |                          |  |  | 3    |   |  |  | 2    |  
|State
income taxes, net of federal income tax benefit                    |  |  | 3    |                          |  |  | 4    |   |  |  | 4    |  
|Tax
credits                                                              |  |  | (1   | )                        |  |  | (3   | ) |  |  | (4   | )
|Allowance
for equity funds used during construction                      |  |  | (1   | )                        |  |  | (1   | ) |  |  | --   |  
|Foreign
income taxes                                                     |  |  | (2   | )                        |  |  | (1   | ) |  |  | (1   | )
|Resolution
of Internal Revenue Service audits                            |  |  | (2   | )                        |  |  | --   |   |  |  | (1   | )
|Utility
repair allowance                                                 |  |  | (1   | )                        |  |  | (1   | ) |  |  | (1   | )
|Self-developed
software expenditures                                     |  |  | (2   | )                        |  |  | (1   | ) |  |  | --   |  
|Mexican
foreign exchange and inflation effects                           |  |  | (2   | )                        |  |  | --   |   |  |  | --   |  
|Other,
net                                                               |  |  | (1   | )                        |  |  | (1   | ) |  |  | (1   | )
|Effective
income tax rate                                                |  |  | 29   | %                        |  |  | 34   | % |  |  | 33   | %
|SDG&E                                                                    |  |  |      |                          |  |  |      |   |  |  |      |  
|Statutory
federal income tax rate                                        |  |  | 35   | %                        |  |  | 35   | % |  |  | 35   | %
|Depreciation                                                             |  |  | 4    |                          |  |  | 5    |   |  |  | 5    |  
|State
income taxes, net of federal income tax benefit                    |  |  | 5    |                          |  |  | 5    |   |  |  | 5    |  
|Allowance
for equity funds used during construction                      |  |  | (2   | )                        |  |  | (1   | ) |  |  | (1   | )
|Resolution
of Internal Revenue Service audits                            |  |  | (3   | )                        |  |  | (3   | ) |  |  | 2    |  
|Utility
repair allowance                                                 |  |  | (2   | )                        |  |  | (2   | ) |  |  | (2   | )
|Self-developed
software expenditures                                     |  |  | (3   | )                        |  |  | (2   | ) |  |  | --   |  
|Regulatory
reserve release                                               |  |  | --   |                          |  |  | (2   | ) |  |  | --   |  
|Other,
net                                                               |  |  | (2   | )                        |  |  | (3   | ) |  |  | (5   | )
|Effective
income tax rate                                                |  |  | 32   | %                        |  |  | 32   | % |  |  | 39   | %
|PE                                                                       |  |  |      |                          |  |  |      |   |  |  |      |  
|Statutory
federal income tax rate                                        |  |  | 35   | %                        |  |  | 35   | % |  |  | 35   | %
|Depreciation                                                             |  |  | 5    |                          |  |  | 6    |   |  |  | 6    |  
|State
income taxes, net of federal income tax benefit                    |  |  | 4    |                          |  |  | 5    |   |  |  | 6    |  
|Self-developed
software expenditures                                     |  |  | (3   | )                        |  |  | (1   | ) |  |  | --   |  
|Other,
net                                                               |  |  | (5   | )                        |  |  | (4   | ) |  |  | (3   | )
|Effective
income tax rate                                                |  |  | 36   | %                        |  |  | 41   | % |  |  | 44   | %
|SoCalGas                                                                 |  |  |      |                          |  |  |      |   |  |  |      |  
|Statutory
federal income tax rate                                        |  |  | 35   | %                        |  |  | 35   | % |  |  | 35   | %
|Depreciation                                                             |  |  | 6    |                          |  |  | 6    |   |  |  | 6    |  
|State
income taxes, net of federal income tax benefit                    |  |  | 4    |                          |  |  | 5    |   |  |  | 6    |  
|Self-developed
software expenditures                                     |  |  | (3   | )                        |  |  | (1   | ) |  |  | --   |  
|Other,
net                                                               |  |  | (6   | )                        |  |  | (4   | ) |  |  | (3   | )
|Effective
income tax rate                                                |  |  | 36   | %                        |  |  | 41   | % |  |  | 44   | %



The geographic components of
Income from Continuing Operations Before Income Taxes and Equity in Earnings of
Certain Unconsolidated Subsidiaries at Sempra Energy are as follows:



|                      |  |                          |       |  |  |   |       |  |  |   |       | 
|--------------------- |  | ------------------------ | ----- |  |  | - | ----- |  |  | - | ----- | 
|                      |  | Years ended December 31,
|(Dollars
in millions) |  |                          | 2008  |  |  |   | 2007  |  |  |   | 2006  | 
|Domestic              |  | $                        | 1,244 |  |  | $ | 1,282 |  |  | $ | 1,682 | 
|Foreign               |  |                          | 244   |  |  |   | 268   |  |  |   | 232   | 
|Total                 |  | $                        | 1,488 |  |  | $ | 1,550 |  |  | $ | 1,914 | 



132







| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 



The components of income tax
expense are as follows:



|                                |  |                          |      |   |  |   |      |   |  |   |      |  
|------------------------------- |  | ------------------------ | ---- | - |  | - | ---- | - |  | - | ---- | -
|INCOME
TAX EXPENSE             
|(Dollars
in millions)          
|                                |  | Years ended December 31,
|                                |  |                          | 2008 |   |  |   | 2007 |   |  |   | 2006 |  
|Sempra
Energy Consolidated      |  |                          |      |   |  |   |      |   |  |   |      |  
|Current:                        |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  | $                        | (10  | ) |  | $ | 247  |   |  | $ | 416  |  
|State                           |  |                          | 28   |   |  |   | 77   |   |  |   | 96   |  
|Foreign                         |  |                          | 96   |   |  |   | 51   |   |  |   | 52   |  
|Total                           |  |                          | 114  |   |  |   | 375  |   |  |   | 564  |  
|Deferred:                       |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  |                          | 359  |   |  |   | 124  |   |  |   | 90   |  
|State                           |  |                          | 29   |   |  |   | (5   | ) |  |   | (36  | )
|Foreign                         |  |                          | (59  | ) |  |   | 36   |   |  |   | 28   |  
|Total                           |  |                          | 329  |   |  |   | 155  |   |  |   | 82   |  
|Deferred
investment tax credits |  |                          | (5   | ) |  |   | (6   | ) |  |   | (5   | )
|Total
income tax expense        |  | $                        | 438  |   |  | $ | 524  |   |  | $ | 641  |  
|SDG&E                           |  |                          |      |   |  |   |      |   |  |   |      |  
|Current:                        |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  | $                        | 25   |   |  | $ | 131  |   |  | $ | 209  |  
|State                           |  |                          | 23   |   |  |   | 44   |   |  |   | 73   |  
|Total                           |  |                          | 48   |   |  |   | 175  |   |  |   | 282  |  
|Deferred:                       |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  |                          | 107  |   |  |   | (24  | ) |  |   | (87  | )
|State                           |  |                          | 8    |   |  |   | (14  | ) |  |   | (40  | )
|Total                           |  |                          | 115  |   |  |   | (38  | ) |  |   | (127 | )
|Deferred
investment tax credits |  |                          | (2   | ) |  |   | (2   | ) |  |   | (3   | )
|Total
income tax expense        |  | $                        | 161  |   |  | $ | 135  |   |  | $ | 152  |  
|PE                              |  |                          |      |   |  |   |      |   |  |   |      |  
|Current:                        |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  | $                        | 28   |   |  | $ | 122  |   |  | $ | 168  |  
|State                           |  |                          | 21   |   |  |   | 33   |   |  |   | 44   |  
|Total                           |  |                          | 49   |   |  |   | 155  |   |  |   | 212  |  
|Deferred:                       |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  |                          | 89   |   |  |   | 15   |   |  |   | (17  | )
|State                           |  |                          | 6    |   |  |   | (2   | ) |  |   | (6   | )
|Total                           |  |                          | 95   |   |  |   | 13   |   |  |   | (23  | )
|Deferred
investment tax credits |  |                          | (3   | ) |  |   | (3   | ) |  |   | (3   | )
|Total
income tax expense        |  | $                        | 141  |   |  | $ | 165  |   |  | $ | 186  |  
|SoCalGas                        |  |                          |      |   |  |   |      |   |  |   |      |  
|Current:                        |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  | $                        | 31   |   |  | $ | 119  |   |  | $ | 156  |  
|State                           |  |                          | 22   |   |  |   | 33   |   |  |   | 41   |  
|Total                           |  |                          | 53   |   |  |   | 152  |   |  |   | 197  |  
|Deferred:                       |  |                          |      |   |  |   |      |   |  |   |      |  
|Federal                         |  |                          | 85   |   |  |   | 14   |   |  |   | (15  | )
|State                           |  |                          | 5    |   |  |   | (3   | ) |  |   | (6   | )
|Total                           |  |                          | 90   |   |  |   | 11   |   |  |   | (21  | )
|Deferred
investment tax credits |  |                          | (3   | ) |  |   | (3   | ) |  |   | (3   | )
|Total
income tax expense        |  | $                        | 140  |   |  | $ | 160  |   |  | $ | 173  |  





133





Details
of accumulated deferred income taxes at December 31 for Sempra Energy,
SDG&E, PE and SoCalGas are shown in the tables below:



|                                                                 |  |              |       |  |  |   |       | 
|---------------------------------------------------------------- |  | ------------ | ----- |  |  | - | ----- | 
|ACCUMULATED
DEFERRED INCOME TAXES FOR SEMPRA ENERGY CONSOLIDATED
|(Dollars in millions)                                           
|                                                                 |  | December 31,
|                                                                 |  |              | 2008  |  |  |   | 2007  | 
|Deferred
tax liabilities:                                        |  |              |       |  |  |   |       | 
|Differences
in financial and tax bases of depreciable and        |  |              |       |  |  |   |       | 
|amortizable
assets                                               |  | $            | 1,323 |  |  | $ | 864   | 
|Regulatory
balancing accounts                                    |  |              | 632   |  |  |   | 152   | 
|Unrealized
revenue                                               |  |              | 22    |  |  |   | 63    | 
|Loss
on reacquired debt                                          |  |              | 21    |  |  |   | 24    | 
|Property
taxes                                                   |  |              | 31    |  |  |   | 29    | 
|Other                                                            |  |              | 53    |  |  |   | 32    | 
|Total
deferred tax liabilities                                   |  |              | 2,082 |  |  |   | 1,164 | 
|Deferred
tax assets:                                             |  |              |       |  |  |   |       | 
|Investment
tax credits                                           |  |              | 37    |  |  |   | 42    | 
|Equity
losses                                                    |  |              | 6     |  |  |   | 34    | 
|Net
operating losses of separate state and foreign entities      |  |              | 77    |  |  |   | 125   | 
|Compensation-related
items                                       |  |              | 193   |  |  |   | 169   | 
|Postretirement
benefits                                          |  |              | 609   |  |  |   | 148   | 
|Other
deferred assets                                            |  |              | 4     |  |  |   | 34    | 
|State
income taxes                                               |  |              | 35    |  |  |   | 34    | 
|Bad
debt allowance                                               |  |              | 7     |  |  |   | 13    | 
|Litigation
and other accruals not yet deductible                 |  |              | 233   |  |  |   | 322   | 
|Total
deferred tax assets                                        |  |              | 1,201 |  |  |   | 921   | 
|Net
deferred income tax liability before valuation allowance     |  |              | 881   |  |  |   | 243   | 
|Valuation
allowance                                              |  |              | 34    |  |  |   | 41    | 
|Net
deferred income tax liability                                |  | $            | 915   |  |  | $ | 284   | 



|                                                                         |              |      |              |   |              |  |   |      |  |   |      |  |   |      |  |   |      | 
|------------------------------------------------------------------------ | ------------ | ---- | ------------ | - | ------------ |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- | 
|ACCUMULATED
DEFERRED INCOME TAXES FOR SDG&E, PE AND SOCALGAS            
|(Dollars
in millions)                                                   
|                                                                         | SDG&E        |      | PE           |   | SoCalGas     | 
|                                                                         | December 31, |      | December 31, |   | December 31, | 
|                                                                         |              | 2008 |              |   | 2007         |  |   | 2008 |  |   | 2007 |  |   | 2008 |  |   | 2007 | 
|Deferred
tax liabilities:                                                |              |      |              |   |              |  |   |      |  |   |      |  |   |      |  |   |      | 
|Differences
in financial and tax bases of utility plant and other assets | $            | 625  |              | $ | 481          |  | $ | 278  |  | $ | 206  |  | $ | 281  |  | $ | 210  | 
|Regulatory
balancing accounts                                            |              | 229  |              |   | 82           |  |   | 413  |  |   | 79   |  |   | 413  |  |   | 79   | 
|Loss
on reacquired debt                                                  |              | 10   |              |   | 11           |  |   | 13   |  |   | 14   |  |   | 13   |  |   | 14   | 
|Property
taxes                                                           |              | 20   |              |   | 19           |  |   | 13   |  |   | 12   |  |   | 13   |  |   | 12   | 
|Other                                                                    |              | --   |              |   | 5            |  |   | --   |  |   | 3    |  |   | --   |  |   | 3    | 
|Total
deferred tax liabilities                                           |              | 884  |              |   | 598          |  |   | 717  |  |   | 314  |  |   | 720  |  |   | 318  | 
|Deferred
tax assets:                                                     |              |      |              |   |              |  |   |      |  |   |      |  |   |      |  |   |      | 
|Postretirement
benefits                                                  |              | 173  |              |   | 78           |  |   | 357  |  |   | 48   |  |   | 359  |  |   | 48   | 
|Investment
tax credits                                                   |              | 18   |              |   | 20           |  |   | 21   |  |   | 23   |  |   | 21   |  |   | 23   | 
|Compensation-related
items                                               |              | 14   |              |   | 14           |  |   | 49   |  |   | 45   |  |   | 49   |  |   | 46   | 
|State
income taxes                                                       |              | 22   |              |   | 21           |  |   | 17   |  |   | 19   |  |   | 16   |  |   | 19   | 
|Other
accruals not yet deductible                                        |              | 37   |              |   | 27           |  |   | 74   |  |   | 99   |  |   | 75   |  |   | 93   | 
|Hedging
transaction                                                      |              | --   |              |   | --           |  |   | 16   |  |   | --   |  |   | 16   |  |   | --   | 
|Other                                                                    |              | 17   |              |   | 7            |  |   | 20   |  |   | 11   |  |   | 11   |  |   | 5    | 
|Total
deferred tax assets                                                |              | 281  |              |   | 167          |  |   | 554  |  |   | 245  |  |   | 547  |  |   | 234  | 
|Net
deferred income tax liability before valuation allowance             |              | 603  |              |   | 431          |  |   | 163  |  |   | 69   |  |   | 173  |  |   | 84   | 
|Valuation
allowance                                                      |              | 8    |              |   | 8            |  |   | --   |  |   | --   |  |   | --   |  |   | --   | 
|Net
deferred income tax liability                                        | $            | 611  |              | $ | 439          |  | $ | 163  |  | $ | 69   |  | $ | 173  |  | $ | 84   | 





134





The
net deferred income tax liabilities are recorded on the Consolidated Balance
Sheets at December 31 as follows:



|                                  |   |                            |   |   |       |   |   |      |   |   |          |   |   |      |  |   |      |   |   |      |  |   |      |  
|--------------------------------- | - | -------------------------- | - | - | ----- | - | - | ---- | - | - | -------- | - | - | ---- |  | - | ---- | - | - | ---- |  | - | ---- | -
|NET
DEFERRED INCOME TAX LIABILITY
|(Dollars
in millions)            
|                                  |   | Sempra Energy Consolidated |   |   | SDG&E |   |   | PE   |   |   | SoCalGas |  
|                                  |   | 2008                       |   |   | 2007  |   |   | 2008 |   |   | 2007     |   |   | 2008 |  |   | 2007 |   |   | 2008 |  |   | 2007 |  
|Current
(asset) liability         | $ | (31                        | ) | $ | (247  | ) | $ | (17  | ) | $ | (67      | ) | $ | 6    |  | $ | (33  | ) | $ | 6    |  | $ | (33  | )
|Noncurrent
liability              |   | 946                        |   |   | 531   |   |   | 628  |   |   | 506      |   |   | 157  |  |   | 102  |   |   | 167  |  |   | 117  |  
|Total                             | $ | 915                        |   | $ | 284   |   | $ | 611  |   | $ | 439      |   | $ | 163  |  | $ | 69   |   | $ | 173  |  | $ | 84   |  



At December 31, 2008, foreign
subsidiaries had $318million in unused net operating losses available to
reduce Sempra Energys future income taxes, primarily in Mexico. Significant
amounts of these losses become unavailable to reduce future income taxes
beginning in 2017 as our ability to apply them to future earnings expires.
Financial statement benefits were recorded on all but $54 million of these
losses, primarily by offsetting them against deferred tax liabilities with the
same expiration pattern and country of jurisdiction. No benefits were recorded
on the $54million because they were incurred in jurisdictions where
utilization is sufficiently in doubt. In 2008, the decrease in valuation
allowance compared to 2007 was primarily due to a reduction in state net
operating loss carryovers.

At December 31, 2008, Sempra
Energy had not provided for U.S. income taxes on $1 billion of foreign
subsidiaries' undistributed earnings since they are expected to be reinvested
indefinitely outside the United States. It is not possible to predict the amount
of U.S. income taxes that might be payable if these earnings were eventually
repatriated.

Sempra Commodities recorded
synthetic fuels tax credits of $32 million in 2007.

Following is a summary of
unrecognized tax benefits at December 31, 2008:



|                                                                                            |   |                            |  |   |       |  |   |              | 
|------------------------------------------------------------------------------------------- | - | -------------------------- |  | - | ----- |  | - | ------------ | 
|SUMMARY
OF UNRECOGNIZED TAX BENEFITS                                                       
|(Dollars
in millions)                                                                      
|                                                                                            |   | Sempra Energy Consolidated |  |   | SDG&E |  |   | PE/ SoCalGas | 
|Total                                                                                       | $ | 104                        |  | $ | 18    |  | $ | 19           | 
|Of
the total, amounts related to tax positions that, if recognized, in future
years, would: |   |                            |  |   |       |  |   |              | 
|decrease
the effective tax rate                                                             | $ | 64                         |  | $ | 17    |  | $ | --           | 
|increase
the effective tax rate                                                             | $ | 17                         |  | $ | 17    |  | $ | --           | 



Following is a reconciliation of
the unrecognized tax benefits from January 1, 2008 to December 31, 2008:



|                                            |                            |     |   |       |     |   |              |     |  
|------------------------------------------- | -------------------------- | --- | - | ----- | --- | - | ------------ | --- | -
|RECONCILIATION
OF UNRECOGNIZED TAX BENEFITS
|(Dollars
in millions)                      
|                                            | Sempra Energy Consolidated |     |   | SDG&E |     |   | PE/ SoCalGas |    
|Balance
as of January 1, 2008               | $                          | 131 |   | $     | 26  |   | $            | 40  |  
|Increase
in prior period tax positions      |                            | 23  |   |       | 2   |   |              | --  |  
|Decrease
in prior period tax positions      |                            | (4  | ) |       | --  |   |              | --  |  
|Increase
in current period tax positions    |                            | 4   |   |       | 3   |   |              | --  |  
|Decrease
in current period tax positions    |                            | (5  | ) |       | (1  | ) |              | --  |  
|Settlements
with taxing authorities         |                            | (38 | ) |       | (12 | ) |              | (21 | )
|Expirations
of statutes of limitations      |                            | (7  | ) |       | --  |   |              | --  |  
|Balance
as of December 31, 2008             | $                          | 104 |   | $     | 18  |   | $            | 19  |  





135





It is
reasonably possible that within the next 12 months unrecognized tax benefits
could decrease due to the following:



|                                                                                                |   |                            |   |   |       |  |   |              |  
|----------------------------------------------------------------------------------------------- | - | -------------------------- | - | - | ----- |  | - | ------------ | -
|(Dollars
in millions)                                                                           |   | Sempra Energy Consolidated |   |   | SDG&E |  |   | PE/ SoCalGas |  
|Expiration
of statutes of limitations on tax assessments                                        | $ | (6                         | ) | $ | --    |  | $ | (3           | )
|Potential
resolution of audit issues with various federal, state and foreign taxing
authorities |   | (17                        | ) |   | --    |  |   | --           |  
|Impact
of federal and state timing items affecting taxable income                               |   | (3                         | ) |   | --    |  |   | (3           | )
|                                                                                                | $ | (26                        | ) | $ | --    |  | $ | (6           | )



Effective January 1, 2007, our
policy is to recognize accrued interest and penalties on accrued tax balances as
components of tax expense. Prior to the adoption of FIN 48, we accrued interest
expense and penalties as components of tax expense and interest income as a
component of interest income. As of December 31, 2008, the following amounts
were accrued:



|                      |   |                            |  |   |       |  |   |              | 
|--------------------- | - | -------------------------- |  | - | ----- |  | - | ------------ | 
|(Dollars
in millions) |   | Sempra Energy Consolidated |  |   | SDG&E |  |   | PE/ SoCalGas | 
|Interest
expense      | $ | 18                         |  | $ | 2     |  | $ | 4            | 
|Penalties             |   | 1                          |  |   | --    |  |   | --           | 



Amounts accrued for interest
expense and penalties associated with income taxes are included in income tax
expense on the Statements of Consolidated Income and in various income tax
balances on the Consolidated Balance Sheets.

INCOME
TAX AUDITS

Sempra Energy is subject to U.S.
federal income tax as well as to income tax of multiple state and foreign
jurisdictions. We remain subject toexamination by U.S. federal and major state tax jurisdictions only for
years after 2001. Certain major foreign income tax returns from 1995 through the
present are open to examination.

In addition, we have filed state
refund claims for tax years back to 1998. The pre-2002 tax years are closed to
new issues; therefore, no additional tax may be assessed by the taxing
authorities for these years.

SDG&E, PE and SoCalGas are
subject to U.S. federal income tax as well as income tax of state jurisdictions.
They remain subject toexamination by U.S.
federal and state tax jurisdictions only for years after 2001.

In addition, PE has state refund
claims for tax years back to 1993. The pre-2002 tax years are closed to new
issues; therefore, no additional tax may be assessed by the taxing authorities
for these years.



136







NOTE
9. EMPLOYEE BENEFIT PLANS

We account for our employee
benefit plans in accordance with:

§

FASB
Statement No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements 87, 88, 106, and
132(R)

§

FASB
Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and
106

§

FASB
Statement No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions

§

FASB
Statement No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits

§

FASB
Statement No. 87, Employers' Accounting for Pensions

These pronouncementsrequire an employer to do the following:

§

recognize
an asset for a plan's overfunded status or a liability for a plan's underfunded
status in the statement of financial position;

§

measure
a plan's assets and its obligations that determine its funded status as of the
end of the fiscal year (with limited exceptions); and

§

recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. Generally, those changes are reported in
comprehensive income and as a separate component of shareholders' equity.

The information presented below
covers the employee benefit plans of Sempra Energy and its principal
subsidiaries.

Sempra Energy has funded and
unfunded noncontributory defined benefit plans, including separate plans for
SDG&E and SoCalGas, which together cover substantially all employees and
Sempra Energys board of directors. The plans provide defined benefits based on
years of service and either final average or career salary.

Sempra Energy also has other
postretirement benefit plans, including separate plans for SDG&E and
SoCalGas, which together cover substantially all employees and Sempra Energys
board of directors. The life insurance plans are both contributory and
noncontributory and the health-care plans are contributory. Participants'
contributions are adjusted annually. Other postretirement benefits include
medical benefits for retirees' spouses.

Pension and other postretirement
benefits costs and obligations are dependent on assumptions used in calculating
such amounts. These assumptions include:

§

discount
rates

§

expected
return on plan assets

§

health-care
cost trend rates

§

mortality
rates

§

compensation
increase rates

§

payout
elections (lump sum or annuity)

These assumptions are reviewed on
an annual basis prior to the beginning of each year and updated when
appropriate. We consider current market conditions, including interest rates, in
making these assumptions. We use a December 31 measurement date for all of our
plans.

In support of its Supplemental
Executive Retirement and Deferred Compensation Plans, Sempra Energy maintains
dedicated assets, including investments in life insurance contracts, which
totaled $401 million and $440 million at December 31, 2008 and 2007,
respectively.



137





PENSION
AND OTHER POSTRETIREMENT BENEFIT PLANS

Benefit
Plan Amendments for 2007 and 2008

Effective January 1, 2009, one of
Sempra Energys pension plans, separate from the Sempra Utilities plans, was
amended to increase the cash balance benefit obligation for certain
participants. This amendment resulted in an increase of $3 million in the
benefit obligation and unrecognized prior service costs as of December 31,
2008.

Effective July 1, 2008,
SDG&Es other postretirement benefit plan was amended to increase the health
benefits for certain union participants. This amendment resulted in a $3 million
increase at both Sempra Energy and SDG&E in the benefit obligation and
unrecognized prior service costs as of December 31, 2007.

Effective January 1, 2008, the
pension plans were amended to increase the death benefit for beneficiaries of
vested non-union participants. This amendment resulted in a $2 million increase
in the benefit obligation and unrecognized prior service costs as of December
31, 2007 at Sempra Energy, including a $1 million increase each at SoCalGas and
SDG&E.

Effective January 1, 2008,
SoCalGas and one of Sempra Energys other postretirement benefit plans were
amended to provide a health benefit for the surviving spouses (over the age of
65) of both union and non-union participants.  This amendment resulted in
an $18 million increase at both Sempra Energy and SoCalGas in the benefit
obligation and unrecognized prior service costs as of December 31, 2007.

Benefit
Obligations and Assets

The following three tables
provide a reconciliation of the changes in the plans' projected benefit
obligations and the fair value of assets during 2008 and 2007, and a statement
of the funded status at December 31, 2008 and 2007:



|                                                                     |   |                  |   |   |                             |   |   |      |   |   |      |  
|-------------------------------------------------------------------- | - | ---------------- | - | - | --------------------------- | - | - | ---- | - | - | ---- | -
|PROJECTED
BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
|(Dollars
in millions)                                               
|                                                                     |   | Pension Benefits |   |   | OtherPostretirementBenefits
|Sempra
Energy Consolidated                                           |   | 2008             |   |   | 2007                        |   |   | 2008 |   |   | 2007 |  
|CHANGE
IN PROJECTED BENEFIT OBLIGATION:                              |   |                  |   |   |                             |   |   |      |   |   |      |  
|Net
obligation at January 1                                          | $ | 2,791            |   | $ | 2,885                       |   | $ | 871  |   | $ | 952  |  
|Acquisition
of EnergySouth                                           |   | 27               |   |   | --                          |   |   | 2    |   |   | --   |  
|Service
cost                                                         |   | 71               |   |   | 76                          |   |   | 24   |   |   | 26   |  
|Interest
cost                                                        |   | 166              |   |   | 164                         |   |   | 53   |   |   | 54   |  
|Plan
amendments                                                      |   | 3                |   |   | 2                           |   |   | --   |   |   | 21   |  
|Actuarial
loss (gain)                                                |   | 6                |   |   | (90                         | ) |   | 34   |   |   | (139 | )
|Curtailments                                                         |   | --               |   |   | 1                           |   |   | (5   | ) |   | --   |  
|Settlements                                                          |   | (22              | ) |   | --                          |   |   | --   |   |   | --   |  
|Special
termination benefits                                         |   | --               |   |   | 2                           |   |   | --   |   |   | --   |  
|Benefit
payments                                                     |   | (184             | ) |   | (249                        | ) |   | (48  | ) |   | (46  | )
|Federal
subsidy (Medicare Part D)                                    |   | --               |   |   | --                          |   |   | 2    |   |   | 3    |  
|Other                                                                |   | 7                |   |   | --                          |   |   | 1    |   |   | --   |  
|Net
obligation at December 31                                        |   | 2,865            |   |   | 2,791                       |   |   | 934  |   |   | 871  |  
|                                                                     |   |                  |   |   |                             |   |   |      |   |   |      |  
|CHANGE
IN PLAN ASSETS:                                               |   |                  |   |   |                             |   |   |      |   |   |      |  
|Fair
value of plan assets at January 1                               |   | 2,528            |   |   | 2,535                       |   |   | 743  |   |   | 694  |  
|Acquisition
of EnergySouth                                           |   | 36               |   |   | --                          |   |   | 4    |   |   | --   |  
|Actual
return on plan assets                                         |   | (682             | ) |   | 207                         |   |   | (194 | ) |   | 47   |  
|Employer
contributions                                               |   | 66               |   |   | 35                          |   |   | 40   |   |   | 45   |  
|Settlements                                                          |   | (22              | ) |   | --                          |   |   | --   |   |   | --   |  
|Benefit
payments                                                     |   | (184             | ) |   | (249                        | ) |   | (48  | ) |   | (46  | )
|Other                                                                |   | --               |   |   | --                          |   |   | --   |   |   | 3    |  
|Fair
value of plan assets at December 31                             |   | 1,742            |   |   | 2,528                       |   |   | 545  |   |   | 743  |  
|                                                                     |   |                  |   |   |                             |   |   |      |   |   |      |  
|Funded
status at December 31                                         | $ | (1,123           | ) | $ | (263                        | ) | $ | (389 | ) | $ | (128 | )
|Net
recorded liability at December 31                                | $ | (1,123           | ) | $ | (263                        | ) | $ | (389 | ) | $ | (128 | )



138







| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 



|                                                                     |                  |      |                             |   |      |   |   |      |   |   |      |  
|-------------------------------------------------------------------- | ---------------- | ---- | --------------------------- | - | ---- | - | - | ---- | - | - | ---- | -
|PROJECTED
BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
|(Dollars
in millions)                                                |                  |      |                             |  
|                                                                     | Pension Benefits |      | OtherPostretirementBenefits |  
|SDG&E                                                                |                  | 2008 |                             |   | 2007 |   |   | 2008 |   |   | 2007 |  
|CHANGE
IN PROJECTED BENEFIT OBLIGATION:                              |                  |      |                             |   |      |   |   |      |   |   |      |  
|Net
obligation at January 1                                          | $                | 803  |                             | $ | 842  |   | $ | 139  |   | $ | 139  |  
|Service
cost                                                         |                  | 22   |                             |   | 22   |   |   | 5    |   |   | 5    |  
|Interest
cost                                                        |                  | 47   |                             |   | 47   |   |   | 9    |   |   | 8    |  
|Plan
amendments                                                      |                  | --   |                             |   | 1    |   |   | --   |   |   | 3    |  
|Actuarial
loss (gain)                                                |                  | (7   | )                           |   | (29  | ) |   | 1    |   |   | (10  | )
|Transfer
of liability to Sempra Energy                               |                  | (2   | )                           |   | (5   | ) |   | --   |   |   | --   |  
|Settlements                                                          |                  | (1   | )                           |   | --   |   |   | --   |   |   | --   |  
|Benefit
payments                                                     |                  | (48  | )                           |   | (75  | ) |   | (6   | ) |   | (6   | )
|Net
obligation at December 31                                        |                  | 814  |                             |   | 803  |   |   | 148  |   |   | 139  |  
|                                                                     |                  |      |                             |   |      |   |   |      |   |   |      |  
|CHANGE
IN PLAN ASSETS:                                               |                  |      |                             |   |      |   |   |      |   |   |      |  
|Fair
value of plan assets at January 1                               |                  | 684  |                             |   | 679  |   |   | 67   |   |   | 52   |  
|Actual
return on plan assets                                         |                  | (191 | )                           |   | 56   |   |   | (16  | ) |   | 3    |  
|Employer
contributions                                               |                  | 38   |                             |   | 27   |   |   | 16   |   |   | 15   |  
|Settlements                                                          |                  | (1   | )                           |   | --   |   |   | --   |   |   | --   |  
|Transfer
of assets to Sempra Energy                                  |                  | (2   | )                           |   | (3   | ) |   | --   |   |   | --   |  
|Other
transfers                                                      |                  | --   |                             |   | --   |   |   | --   |   |   | 3    |  
|Benefit
payments                                                     |                  | (48  | )                           |   | (75  | ) |   | (6   | ) |   | (6   | )
|Fair
value of plan assets at December 31                             |                  | 480  |                             |   | 684  |   |   | 61   |   |   | 67   |  
|                                                                     |                  |      |                             |   |      |   |   |      |   |   |      |  
|Funded
status at December 31                                         | $                | (334 | )                           | $ | (119 | ) | $ | (87  | ) | $ | (72  | )
|Net
recorded liability at December 31                                | $                | (334 | )                           | $ | (119 | ) | $ | (87  | ) | $ | (72  | )



|                                                                     |                  |       |                             |   |       |   |   |      |   |   |      |  
|-------------------------------------------------------------------- | ---------------- | ----- | --------------------------- | - | ----- | - | - | ---- | - | - | ---- | -
|PROJECTED
BENEFIT OBLIGATION, FAIR VALUE OF ASSETS AND FUNDED STATUS
|(Dollars
in millions)                                                |                  |       |                             |  
|                                                                     | Pension Benefits |       | OtherPostretirementBenefits |  
|SoCalGas                                                             |                  | 2008  |                             |   | 2007  |   |   | 2008 |   |   | 2007 |  
|CHANGE
IN PROJECTED BENEFIT OBLIGATION:                              |                  |       |                             |   |       |   |   |      |   |   |      |  
|Net
obligation at January 1                                          | $                | 1,624 |                             | $ | 1,692 |   | $ | 694  |   | $ | 776  |  
|Service
cost                                                         |                  | 40    |                             |   | 41    |   |   | 17   |   |   | 19   |  
|Interest
cost                                                        |                  | 97    |                             |   | 95    |   |   | 42   |   |   | 44   |  
|Plan
amendments                                                      |                  | --    |                             |   | 1     |   |   | --   |   |   | 18   |  
|Actuarial
loss (gain)                                                |                  | 7     |                             |   | (51   | ) |   | 33   |   |   | (127 | )
|Benefit
payments                                                     |                  | (115  | )                           |   | (154  | ) |   | (40  | ) |   | (38  | )
|Federal
subsidy (Medicare Part D)                                    |                  | --    |                             |   | --    |   |   | 2    |   |   | 2    |  
|Net
obligation at December 31                                        |                  | 1,653 |                             |   | 1,624 |   |   | 748  |   |   | 694  |  
|                                                                     |                  |       |                             |   |       |   |   |      |   |   |      |  
|CHANGE
IN PLAN ASSETS:                                               |                  |       |                             |   |       |   |   |      |   |   |      |  
|Fair
value of plan assets at January 1                               |                  | 1,657 |                             |   | 1,672 |   |   | 663  |   |   | 630  |  
|Actual
return on plan assets                                         |                  | (438  | )                           |   | 137   |   |   | (174 | ) |   | 43   |  
|Employer
contributions                                               |                  | 1     |                             |   | 1     |   |   | 22   |   |   | 28   |  
|Transfer
of assets to Sempra Energy                                  |                  | --    |                             |   | 1     |   |   | --   |   |   | --   |  
|Benefit
payments                                                     |                  | (115  | )                           |   | (154  | ) |   | (40  | ) |   | (38  | )
|Fair
value of plan assets at December 31                             |                  | 1,105 |                             |   | 1,657 |   |   | 471  |   |   | 663  |  
|                                                                     |                  |       |                             |   |       |   |   |      |   |   |      |  
|Funded
status at December 31                                         | $                | (548  | )                           | $ | 33    |   | $ | (277 | ) | $ | (31  | )
|Net
recorded asset (liability) at December 31                        | $                | (548  | )                           | $ | 33    |   | $ | (277 | ) | $ | (31  | )



139





Net
Assets and Liabilities

The assets and liabilities of the
pension and other postretirement benefit plans are affected by changing market
conditions as well as when actual plan experience is different than assumed.
Such events result in gains and losses. Investment gains and losses are deferred
and recognized in pension and postretirement benefit costs over a period of
years. Sempra Energy uses the asset smoothing method for all the
assets held for its pension and other postretirement plans, except for the 20
percent in the SDG&E plans. This method develops an asset value that
recognizes realized and unrealized investment gains and losses over a three-year
period. This adjusted asset value, known as the market-related value of assets,
is used to determine the expected return-on-assets component of net periodic
cost. SoCalGas also uses the asset smoothing method.

The 10-percent corridor
accounting method is used at Sempra Energy, SDG&E and SoCalGas. Under the
corridor-accounting method, if, as of the beginning of a year, unrecognized net
gain or loss exceeds 10 percent of the greater of the projected benefit
obligation or the market-related value of plan assets, the excess is amortized
over the average remaining service period of active participants. The asset
smoothing and 10-percent corridor accounting methods help mitigate volatility of
net periodic costs from year to year.

The net asset (liability) is
included in the following captions on the Consolidated Balance Sheets at
December 31:

|                               |                  |        |                         |   |      |   |       |      |   |   |      |  
|------------------------------ | ---------------- | ------ | ----------------------- | - | ---- | - | ----- | ---- | - | - | ---- | -
|                               |                  |        |                         |   |      |   | Other |     
|                               | Pension Benefits |        | Postretirement Benefits |  
|(Dollars
in millions)          |                  | 2008   |                         |   | 2007 |   |       | 2008 |   |   | 2007 |  
|Sempra
Energy Consolidated     |                  |        |                         |   |      |   |       |      |   |   |      |  
|Noncurrent
assets              | $                | --     |                         | $ | 75   |   | $     | --   |   | $ | --   |  
|Current
liabilities            |                  | (25    | )                       |   | (32  | ) |       | --   |   |   | --   |  
|Noncurrent
liabilities         |                  | (1,098 | )                       |   | (306 | ) |       | (389 | ) |   | (128 | )
|Net
recorded liability         | $                | (1,123 | )                       | $ | (263 | ) | $     | (389 | ) | $ | (128 | )
|SDG&E                          |                  |        |                         |   |      |   |       |      |   |   |      |  
|Current
liabilities            | $                | (2     | )                       | $ | (1   | ) | $     | --   |   | $ | --   |  
|Noncurrent
liabilities         |                  | (332   | )                       |   | (118 | ) |       | (87  | ) |   | (72  | )
|Net
recorded liability         | $                | (334   | )                       | $ | (119 | ) | $     | (87  | ) | $ | (72  | )
|SoCalGas                       |                  |        |                         |   |      |   |       |      |   |   |      |  
|Noncurrent
assets              | $                | --     |                         | $ | 62   |   | $     | --   |   | $ | --   |  
|Current
liabilities            |                  | (2     | )                       |   | (2   | ) |       | --   |   |   | --   |  
|Noncurrent
liabilities         |                  | (546   | )                       |   | (27  | ) |       | (277 | ) |   | (31  | )
|Net
recorded asset (liability) | $                | (548   | )                       | $ | 33   |   | $     | (277 | ) | $ | (31  | )



Amounts recorded in Accumulated
Other Comprehensive Income (Loss) as of December 31, 2008 and 2007, net of tax
effects and amounts recorded as regulatory assets, are as follows:



|                                                         |                  |      |                         |   |      |   |       |      |   |   |      |  
|-------------------------------------------------------- | ---------------- | ---- | ----------------------- | - | ---- | - | ----- | ---- | - | - | ---- | -
|AMOUNTS
IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|(Dollars
in millions)                                   
|                                                         |                  |      |                         |   |      |   | Other |     
|                                                         | Pension Benefits |      | Postretirement Benefits |  
|                                                         |                  | 2008 |                         |   | 2007 |   |       | 2008 |   |   | 2007 |  
|Sempra
Energy Consolidated                               |                  |      |                         |   |      |   |       |      |   |   |      |  
|Net
actuarial loss                                       | $                | (97  | )                       | $ | (70  | ) | $     | (2   | ) | $ | (2   | )
|Prior
service credit                                     |                  | 1    |                         |   | 3    |   |       | 1    |   |   | 2    |  
|Total                                                    | $                | (96  | )                       | $ | (67  | ) | $     | (1   | ) | $ | --   |  
|SDG&E                                                    |                  |      |                         |   |      |   |       |      |   |   |      |  
|Net
actuarial loss                                       | $                | (13  | )                       | $ | (16  | ) |       |      |   |   |      |  
|Prior
service credit                                     |                  | 1    |                         |   | 1    |   |       |      |   |   |      |  
|Total                                                    | $                | (12  | )                       | $ | (15  | ) |       |      |   |   |      |  
|SoCalGas                                                 |                  |      |                         |   |      |   |       |      |   |   |      |  
|Net
actuarial loss                                       | $                | (5   | )                       | $ | (6   | ) |       |      |   |   |      |  
|Prior
service credit                                     |                  | 1    |                         |   | 1    |   |       |      |   |   |      |  
|Total                                                    | $                | (4   | )                       | $ | (5   | ) |       |      |   |   |      |  





140





The
accumulated benefit obligations for defined benefit pension plans at December
31, 2008 and 2007 were as follows:



|                               |                            |       |       |   |          |  |      |     |      |   |      |  |   |       |  |   |       | 
|------------------------------ | -------------------------- | ----- | ----- | - | -------- |  | ---- | --- | ---- | - | ---- |  | - | ----- |  | - | ----- | 
|                               | Sempra Energy Consolidated |       | SDG&E |   | SoCalGas
|(Dollars
in millions)          | 2008                       |       | 2007  |   | 2008     |  | 2007 |     | 2008 |   | 2007 | 
|Accumulated
benefit obligation | $                          | 2,668 |       | $ | 2,606    |  | $    | 803 |      | $ | 795  |  | $ | 1,493 |  | $ | 1,467 | 



Sempra Energy has unfunded and
funded pension plans. SDG&E and SoCalGas each have an unfunded and a funded
pension plan. The following table also shows the obligations of funded pension
plans with benefit obligations in excess of plan assets as of December 31:



|                               |   |       |  |   |      | 
|------------------------------ | - | ----- |  | - | ---- | 
|(Dollars
in millions)          |   | 2008  |  |   | 2007 | 
|Sempra
Energy Consolidated     |   |       |  |   |      | 
|Projected
benefit obligation   | $ | 2,621 |  | $ | 774  | 
|Accumulated
benefit obligation |   | 2,449 |  |   | 771  | 
|Fair
value of plan assets      |   | 1,742 |  |   | 684  | 
|SDG&E                          |   |       |  |   |      | 
|Projected
benefit obligation   | $ | 787   |  | $ | 774  | 
|Accumulated
benefit obligation |   | 780   |  |   | 771  | 
|Fair
value of plan assets      |   | 480   |  |   | 684  | 
|SoCalGas                       |   |       |  |   |      | 
|Projected
benefit obligation   | $ | 1,623 |  | $ | --   | 
|Accumulated
benefit obligation |   | 1,466 |  |   | --   | 
|Fair
value of plan assets      |   | 1,105 |  |   | --   | 



141





Net
Periodic Benefit Cost, 2006-2008

The following three tables
provide the components of net periodic benefit cost and amounts recognized in
other comprehensive income for the years ended December 31:



|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |   |  | 
|--------------------------------------------------------------------------------------------- | ---------------- | ---- | ----------------------- | ----- | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - |  | 
|NET
PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OTHER COMPREHENSIVE
INCOME               
|(Dollars
in millions)                                                                        
|                                                                                              |                  |      |                         | Other |     
|Sempra
Energy Consolidated                                                                    | Pension Benefits |      | Postretirement Benefits |      
|                                                                                              |                  | 2008 |                         |       | 2007 |   |   | 2006 |   |   | 2008 |   |   | 2007 |   |   | 2006 |  
|Net
Periodic Benefit Cost                                                                     |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Service
cost                                                                                  | $                | 71   |                         | $     | 76   |   | $ | 73   |   | $ | 24   |   | $ | 26   |   | $ | 24   |  
|Interest
cost                                                                                 |                  | 166  |                         |       | 164  |   |   | 158  |   |   | 53   |   |   | 54   |   |   | 45   |  
|Expected
return on assets                                                                     |                  | (161 | )                       |       | (158 | ) |   | (149 | ) |   | (48  | ) |   | (44  | ) |   | (40  | )
|Amortization
of:                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Prior
service cost (credit)                                                                   |                  | 4    |                         |       | 5    |   |   | 10   |   |   | (1   | ) |   | (3   | ) |   | (3   | )
|Actuarial
loss                                                                                |                  | 8    |                         |       | 8    |   |   | 18   |   |   | --   |   |   | 6    |   |   | 3    |  
|Regulatory
adjustment                                                                         |                  | (22  | )                       |       | (34  | ) |   | (38  | ) |   | 7    |   |   | 7    |   |   | 4    |  
|Special
termination benefit charge                                                            |                  | --   |                         |       | 1    |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Curtailment
charge                                                                            |                  | --   |                         |       | 6    |   |   | --   |   |   | (3   | ) |   | --   |   |   | --   |  
|Settlement
charge                                                                             |                  | 8    |                         |       | --   |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
net periodic benefit cost                                                               |                  | 74   |                         |       | 68   |   |   | 72   |   |   | 32   |   |   | 46   |   |   | 33   |  
|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Net
loss (gain)                                                                               |                  | 54   |                         |       | (12  | ) |   | --   |   |   | 1    |   |   | (2   | ) |   | --   |  
|Prior
service cost (credit)                                                                   |                  | 3    |                         |       | (4   | ) |   |      |   |   | --   |   |   | --   |   |   | --   |  
|Amortization
of prior service credit                                                          |                  | --   |                         |       | --   |   |   | --   |   |   | 1    |   |   | 1    |   |   | --   |  
|Amortization
of actuarial loss                                                                |                  | (8   | )                       |       | (8   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
recognized in other comprehensive income                                                |                  | 49   |                         |       | (24  | ) |   | --   |   |   | 2    |   |   | (1   | ) |   | --   |  
|Total
recognized in net periodic benefit cost and other comprehensive
income                  | $                | 123  |                         | $     | 44   |   | $ | 72   |   | $ | 34   |   | $ | 45   |   | $ | 33   |  





142







|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |   | 
|--------------------------------------------------------------------------------------------- | ---------------- | ---- | ----------------------- | ----- | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | 
|NET
PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OTHER COMPREHENSIVE
INCOME               
|(Dollars
in millions)                                                                        
|                                                                                              |                  |      |                         | Other |     
|SDG&E                                                                                         | Pension Benefits |      | Postretirement Benefits |      
|                                                                                              |                  | 2008 |                         |       | 2007 |   |   | 2006 |   |   | 2008 |   |   | 2007 |   |   | 2006 |  
|Net
Periodic Benefit Cost                                                                     |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Service
cost                                                                                  | $                | 22   |                         | $     | 22   |   | $ | 12   |   | $ | 5    |   | $ | 5    |   | $ | 5    |  
|Interest
cost                                                                                 |                  | 47   |                         |       | 47   |   |   | 45   |   |   | 9    |   |   | 8    |   |   | 7    |  
|Expected
return on assets                                                                     |                  | (46  | )                       |       | (45  | ) |   | (41  | ) |   | (4   | ) |   | (3   | ) |   | (2   | )
|Amortization
of:                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Prior
service cost                                                                            |                  | 1    |                         |       | 2    |   |   | 2    |   |   | 3    |   |   | 3    |   |   | 3    |  
|Actuarial
loss                                                                                |                  | 2    |                         |       | 2    |   |   | 6    |   |   | --   |   |   | --   |   |   | --   |  
|Regulatory
adjustment                                                                         |                  | 14   |                         |       | 2    |   |   | 8    |   |   | 2    |   |   | 2    |   |   | (1   | )
|Settlement
charge                                                                             |                  | 2    |                         |       | --   |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
net periodic benefit cost                                                               |                  | 42   |                         |       | 30   |   |   | 32   |   |   | 15   |   |   | 15   |   |   | 12   |  
|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Net
gain                                                                                      |                  | (4   | )                       |       | (6   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Amortization
of actuarial loss                                                                |                  | (2   | )                       |       | (2   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
recognized in other comprehensive income                                                |                  | (6   | )                       |       | (8   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
recognized in net periodic benefit cost and other comprehensive
income                  | $                | 36   |                         | $     | 22   |   | $ | 32   |   | $ | 15   |   | $ | 15   |   | $ | 12   |  



|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |   | 
|--------------------------------------------------------------------------------------------- | ---------------- | ---- | ----------------------- | ----- | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | - | ---- | - | 
|NET
PERIODIC BENEFIT COST AND AMOUNTS RECOGNIZED IN OTHER COMPREHENSIVE
INCOME               
|(Dollars
in millions)                                                                        
|                                                                                              |                  |      |                         | Other |     
|SoCalGas                                                                                      | Pension Benefits |      | Postretirement Benefits |      
|                                                                                              |                  | 2008 |                         |       | 2007 |   |   | 2006 |   |   | 2008 |   |   | 2007 |   |   | 2006 |  
|Net
Periodic Benefit Cost                                                                     |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Service
cost                                                                                  | $                | 40   |                         | $     | 41   |   | $ | 40   |   | $ | 17   |   | $ | 19   |   | $ | 17   |  
|Interest
cost                                                                                 |                  | 97   |                         |       | 96   |   |   | 95   |   |   | 42   |   |   | 44   |   |   | 36   |  
|Expected
return on assets                                                                     |                  | (103 | )                       |       | (102 | ) |   | (98  | ) |   | (43  | ) |   | (40  | ) |   | (37  | )
|Amortization
of:                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Prior
service cost (credit)                                                                   |                  | 2    |                         |       | 2    |   |   | 7    |   |   | (4   | ) |   | (6   | ) |   | (6   | )
|Actuarial
loss                                                                                |                  | 1    |                         |       | 1    |   |   | 5    |   |   | --   |   |   | 6    |   |   | 3    |  
|Regulatory
adjustment                                                                         |                  | (36  | )                       |       | (36  | ) |   | (46  | ) |   | 5    |   |   | 5    |   |   | 5    |  
|Total
net periodic benefit cost                                                               |                  | 1    |                         |       | 2    |   |   | 3    |   |   | 17   |   |   | 28   |   |   | 18   |  
|                                                                                              |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income |                  |      |                         |       |      |   |   |      |   |   |      |   |   |      |   |   |      |  
|Net
gain                                                                                      |                  | (1   | )                       |       | --   |   |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Amortization
of actuarial loss                                                                |                  | (1   | )                       |       | (1   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
recognized in other comprehensive income                                                |                  | (2   | )                       |       | (1   | ) |   | --   |   |   | --   |   |   | --   |   |   | --   |  
|Total
recognized in net periodic benefit cost and other comprehensive
income                  | $                | (1   | )                       | $     | 1    |   | $ | 3    |   | $ | 17   |   | $ | 28   |   | $ | 18   |  





143





The
estimated net loss and prior service credit for the pension plans that will be
amortized from Accumulated Other Comprehensive Income (Loss) into net periodic
benefit cost in 2009 are as follows:



|                      |                            |    |       |  |          |    |  |  |   |    | 
|--------------------- | -------------------------- | -- | ----- |  | -------- | -- |  |  | - | -- | 
|(Dollars
in millions) | Sempra Energy Consolidated |    | SDG&E |  | SoCalGas
|Net
loss              | $                          | 8  |       |  | $        | 2  |  |  | $ | 1  | 
|Prior
service credit  |                            | -- |       |  |          | -- |  |  |   | -- | 



The estimated prior service
credit for the other postretirement benefit plans that will be amortized from
Accumulated Other Comprehensive Income (Loss) into net periodic benefit cost in
2009 is $1 million at Sempra Energy.

Medicare
Prescription Drug, Improvement and Modernization Act of 2003

The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 establishes a prescription drug
benefit under Medicare (Medicare Part D) and a tax-exempt federal subsidy to
sponsors of retiree health-care benefit plans that provide a benefit that
actuarially is at least equivalent to Medicare Part D. We determined that
benefits provided to certain participants actuarially will be at least
equivalent to Medicare Part D. Thus, we are entitled to a tax-exempt subsidy
that reduced our accumulated postretirement benefit obligation under our plans
at January 1, 2008 and reduced the net periodic cost for 2008 by the following
amounts:



|                                                        |   |                            |  |   |       |  |   |         
|------------------------------------------------------- | - | -------------------------- |  | - | ----- |  | - | --------
|(Dollars
in millions)                                   |   | Sempra Energy Consolidated |  |   | SDG&E |  |   | SoCalGas
|Accumulated
postretirement benefit obligation reduction | $ | 92                         |  | $ | 20    |  | $ | 67      
|Net
periodic benefit cost reduction                     |   | 8                          |  |   | 2     |  |   | 5       

Assumptions
for Pension and Other Postretirement Benefit Plans

Benefit
Obligation and Net Periodic Benefit Cost

We develop the discount rate
assumptions based on the results of a third party modeling tool that matches
each plan's expected future benefit payments to a bond yield curve to determine
their present value. We then calculate a single equivalent discount rate that
produces the same present value. The modeling tool uses an actual portfolio of
500 to 600 non-callable bonds with a Moodys Aa rating with an outstanding value
of at least $50 million to develop the bond yield curve. This reflects over $300
billion in outstanding bonds with approximately 50 issues having maturities in
excess of 20 years.

The expected long-term rate of
return on plan assets is derived from historical returns for broad asset classes
consistent with expectations from a variety of sources.



144





The
significant assumptions affecting benefit obligation and net periodic benefit
cost are as follows:



|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       |  |  |  | 
|------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- |  | ----------------------- | ----- |  | ----- | ----- |  |  | ----- |  |  |  | 
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  | Other |      
|                                                                                                       |                                                                                                                                                                                                            | Pension Benefits |  | Postretirement Benefits |      
|                                                                                                       |                                                                                                                                                                                                            | 2008             |  |                         | 2007  |  |       | 2008  |  |  | 2007  | 
|WEIGHTED-AVERAGE
ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATION AS OF DECEMBER
31:                  
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       |  | 
|Discount
rate                                                                                          |                                                                                                                                                                                                            | 6.00%            |  |                         | 6.10% |  |       | 6.10% |  |  | 6.20% | 
|Rate
of compensation increase                                                                          |                                                                                                                                                                                                            | 4.50%            |  |                         | 4.50% |  |       | 4.00% |  |  | 4.00% | 
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|WEIGHTED-AVERAGE
ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COSTS FOR
YEARS ENDED DECEMBER 31:
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|Sempra
Energy Consolidated                                                                             |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|Discount
rate                                                                                          |                                                                                                                                                                                                            | 6.10%            |  |                         | 5.75% |  |       | 6.20% |  |  | 5.85% | 
|Expected
return on plan assets                                                                         |                                                                                                                                                                                                            | 7.00%            |  |                         | 7.00% |  |       | 6.88% |  |  | 6.86% | 
|Rate
of compensation increase                                                                          |                                                                                                                                                                                                            | (1)              |  |                         | (1)   |  |       | (2)   |  |  | (2)   | 
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|SDG&E                                                                                                  |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|Discount
rate                                                                                          |                                                                                                                                                                                                            | 6.10%            |  |                         | 5.75% |  |       | 6.20% |  |  | 5.85% | 
|Expected
return on plan assets                                                                         |                                                                                                                                                                                                            | 7.00%            |  |                         | 7.00% |  |       | 5.89% |  |  | 5.50% | 
|Rate
of compensation increase                                                                          |                                                                                                                                                                                                            | (3)              |  |                         | (3)   |  |       | N/A   |  |  | N/A   | 
|                                                                                                       |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|SoCalGas                                                                                               |                                                                                                                                                                                                            |                  |  |                         |       |  |       |       |  |  |       | 
|Discount
rate                                                                                          |                                                                                                                                                                                                            | 6.10%            |  |                         | 5.75% |  |       | 6.20% |  |  | 5.85% | 
|Expected
return on plan assets                                                                         |                                                                                                                                                                                                            | 7.00%            |  |                         | 7.00% |  |       | 7.00% |  |  | 7.00% | 
|Rate
of compensation increase                                                                          |                                                                                                                                                                                                            | (4)              |  |                         | (4)   |  |       | (5)   |  |  | (5)   | 
|(1)                                                                                                    | 4.50%
for the non-qualified pension plans and 4.00% for the qualified pension
plan for SoCalGas union participants. An age-based formula is used for
all the other qualified pension plans' participants.
|(2)                                                                                                    | 4.00%
for the life insurance benefits for SoCalGas unions. There are no
compensation-based benefits for all the other postretirement benefit
plans.                                                      
|(3)                                                                                                    | 4.50%
for the non-qualified pension plan. An age-based formula is used for the
qualified pension plan.                                                                                                    
|(4)                                                                                                    | 4.50%
for the non-qualified pension plan at SoCalGas and 4.00% for the qualified
pension plan union participants. An age-based formula is used for the
other qualified pension plan's participants.       
|(5)                                                                                                    | 4.00%
for the life insurance benefits for SoCalGas unions. There are no
compensation-based benefits for all other postretirement benefit
plans.                                                          

Health-Care
Cost Trend Rates

Assumed health-care cost trend
rates have a significant effect on the amounts that we report for the
health-care plan costs. Following are the health-care cost trend rates
applicable to our postretirement benefit plans:



|                                                |                                                                                                                                                   |                 |   |  |      |      |   |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | - |  | ---- | ---- | - |  | 
|                                                |                                                                                                                                                   | 2008            |   |  | 2007 |     
|ASSUMED
HEALTH-CARE COST                        |                                                                                                                                                   |                 |   |  |      |     
|TREND
RATES AT DECEMBER 31:                     |                                                                                                                                                   |                 |   |  |      |     
|Health-care
cost trend rate*                    |                                                                                                                                                   | 9.44            | % |  |      | 9.48 | % | 
|Rate
to which the cost trend rate is assumed to |                                                                                                                                                   |                 |   |  |      |      |   | 
|decline
(the ultimate trend)                    |                                                                                                                                                   | 5.50            | % |  |      | 5.50 | % | 
|Year
that the rate reaches the ultimate trend   | 2014 and 2016**                                                                                                                                   | 2014 and 2016**
|*                                               | This
is the weighted average of the increases for all of our health plans. The
rate for these plans ranged from 8.50% to 10.00% in 2008 and
2007.
|**                                              | The
ultimate trend rate is reached in 2014 for HMOs and 2016 for Anthem Blue
Cross Plans.                                                        





145





A
one-percent change in assumed health-care cost trend rates would have the
following effects:



|                                                                                                                |                            |    |             |   |             |   |             |    |             |   |             |   |   |    |  |   |     |  
|--------------------------------------------------------------------------------------------------------------- | -------------------------- | -- | ----------- | - | ----------- | - | ----------- | -- | ----------- | - | ----------- | - | - | -- |  | - | --- | -
|                                                                                                                | Sempra Energy Consolidated |    | SDG&E       |   | SoCalGas   
|(Dollars
in millions)                                                                                           | 1% Increase                |    | 1% Decrease |   | 1% Increase |   | 1% Decrease |    | 1% Increase |   | 1% Decrease |  
|Effect
on total of service and interest cost components of net periodic
postretirement health-care benefit cost | $                          | 9  |             | $ | (7          | ) | $           | -- |             | $ | --          |   | $ | 9  |  | $ | (7  | )
|                                                                                                                |                            |    |             |   |             |   |             |    |             |   |             |   |   |    |  |   |     |  
|Effect
on the health-care component of the accumulated other postretirement
benefit obligation                  | $                          | 95 |             | $ | (77         | ) | $           | 5  |             | $ | (4          | ) | $ | 89 |  | $ | (71 | )

Pension
Trust Investment Strategies

Investment
Strategy for Sempra Energys Pension Trust

Sempra Energy's pension trust
includes the pension and other postretirement benefit plans of the Sempra
Utilities, except for those other postretirement plans separately described
below. The asset allocation for Sempra Energys pension trust at December 31,
2008 and 2007 and the target allocation for 2009 by asset categories are as
follows:



|               |            |   |                        |     |      |  |     |  
|-------------- | ---------- | - | ---------------------- | --- | ---- |  | --- | -
|               | Target     |   | Percentage of Plan    
|               | Allocation |   | Assets at December 31,
|Asset
Category | 2009       |   | 2008                   |     | 2007
|U.S.
Equity    | 45         | % |                        | 42  | %    |  | 45  | %
|Foreign
Equity | 25         |   |                        | 22  |      |  | 25  |  
|Fixed
Income   | 30         |   |                        | 36  |      |  | 30  |  
|Total          | 100        | % |                        | 100 | %    |  | 100 | %



Sempra Energy's investment
strategy is to stay fully invested to its strategic asset allocation. The equity
portfolio is balanced to maintain risk characteristics similar to the Morgan
Stanley Capital International (MSCI) 2500 index with respect to industry, sector
and market capitalization exposures. The foreign equity portfolios are managed
to track the MSCI Europe, Pacific Rim and Emerging Markets indices. Bond
portfolios are managed with respect to the Lehman Aggregate Bond Index and
Lehman Long Government Credit Bond Index. Other than index weight, the trust
does not invest in securities of Sempra Energy.

Investment
Strategy for SoCalGas' Other Postretirement Benefit Plans

The asset allocation for
SoCalGas' other postretirement benefit plans at December 31, 2008 and 2007 and
the target allocation for 2009 by asset categories are as follows:



|               |            |     |                        |    |      |   |    |     |  
|-------------- | ---------- | --- | ---------------------- | -- | ---- | - | -- | --- | -
|               | Target     |     | Percentage of Plan    
|               | Allocation |     | Assets at December 31,
|Asset
Category | 2009       |     | 2008                   |    | 2007
|U.S.
Equity    | 70         | %   |                        | 61 | %    |   | 75 | %  
|Fixed
Income   | 30         |     |                        | 39 |      |   | 25 |    
|               | Total      | 100 | %                      |    | 100  | % |    | 100 | %



SoCalGas' other postretirement
benefit plans are funded by cash contributions from SoCalGas and the retirees.
The asset allocation is designed to match the long-term growth of the plans'
liabilities. These plans are managed using index funds.



146





Investment
Strategy for SDG&E's Postretirement Health Plans

SDG&E's postretirement health
plans that are not included in the pension trust (shown above) pay premiums to
health maintenance organization and point-of-service plans from company and
participant contributions. SDG&E's investment strategy is to maintain a
diversified portfolio of equities and tax-exempt California municipal bonds.

The asset allocation for
SDG&E's postretirement health plans at December 31, 2008 and 2007 and the
target allocation for 2009 by asset categories are as follows:



|               |            |     |                        |    |      |   |    |     |  
|-------------- | ---------- | --- | ---------------------- | -- | ---- | - | -- | --- | -
|               | Target     |     | Percentage of Plan    
|               | Allocation |     | Assets at December 31,
|Asset
Category | 2009       |     | 2008                   |    | 2007
|U.S.
Equity    | 25         | %   |                        | 28 | %    |   | 25 | %  
|Foreign
Equity | 5          |     |                        | 4  |      |   | 5  |    
|Fixed
Income   | 70         |     |                        | 68 |      |   | 70 |    
|               | Total      | 100 | %                      |    | 100  | % |    | 100 | %

Future
Payments

We expect to contribute the
following amounts to our pension and other postretirement benefit plans in
2009:



|                                   |   |                            |  |   |       |  |   |         
|---------------------------------- | - | -------------------------- |  | - | ----- |  | - | --------
|(Dollars
in millions)              |   | Sempra Energy Consolidated |  |   | SDG&E |  |   | SoCalGas
|Pension
plans                      | $ | 165                        |  | $ | 60    |  | $ | 74      
|Other
postretirement benefit plans |   | 46                         |  |   | 17    |  |   | 27      



The following two tables show the
total benefits we expect to pay for the next 10 years to current employees and
retirees from the plans or from company assets.



|                      |                            |       |                               |   |                  |  |                               |   |                  |  |                               |    |  |  |   |     |  |   |     | 
|--------------------- | -------------------------- | ----- | ----------------------------- | - | ---------------- |  | ----------------------------- | - | ---------------- |  | ----------------------------- | -- |  |  | - | --- |  | - | --- | 
|                      | Sempra Energy Consolidated |       | SDG&E                         |   | SoCalGas        
|(Dollars
in millions) | Pension Benefits           |       | Other Postretirement Benefits |   | Pension Benefits |  | Other Postretirement Benefits |   | Pension Benefits |  | Other Postretirement Benefits
|2009                  | $                          | 227   |                               | $ | 47               |  |                               | $ | 63               |  | $                             | 7  |  |  | $ | 125 |  | $ | 38  | 
|2010                  |                            | 264   |                               |   | 51               |  |                               |   | 77               |  |                               | 8  |  |  |   | 154 |  |   | 40  | 
|2011                  |                            | 302   |                               |   | 55               |  |                               |   | 86               |  |                               | 9  |  |  |   | 171 |  |   | 43  | 
|2012                  |                            | 294   |                               |   | 59               |  |                               |   | 81               |  |                               | 10 |  |  |   | 167 |  |   | 45  | 
|2013                  |                            | 291   |                               |   | 63               |  |                               |   | 82               |  |                               | 12 |  |  |   | 175 |  |   | 48  | 
|2014-2018             |                            | 1,430 |                               |   | 377              |  |                               |   | 397              |  |                               | 72 |  |  |   | 853 |  |   | 287 | 



The expected future Medicare Part
D subsidy payments are as follows:



|                      |  |                            |       |          |   |    |  |   |    | 
|--------------------- |  | -------------------------- | ----- | -------- | - | -- |  | - | -- | 
|(Dollars
in millions) |  | Sempra Energy Consolidated | SDG&E | SoCalGas
|2009                  |  | $                          | 3     |          | $ | -- |  | $ | 2  | 
|2010                  |  |                            | 3     |          |   | -- |  |   | 2  | 
|2011                  |  |                            | 3     |          |   | -- |  |   | 3  | 
|2012                  |  |                            | 4     |          |   | 1  |  |   | 3  | 
|2013                  |  |                            | 4     |          |   | 1  |  |   | 3  | 
|2014-2018             |  |                            | 25    |          |   | 5  |  |   | 19 | 





147





SAVINGS
PLANS

Sempra Energy offers trusteed
savings plans to all employees. Participation in the plans is immediate for
salary deferrals for all employees except for the union employees at SoCalGas,
who are eligible upon completion of one year of service. Subject to plan
provisions, employees may contribute from one percent to 25 percent of their
regular earnings when they begin employment. After one year of each employee's
completed service, Sempra Energy makes matching contributions. Employer
contribution amounts and methodology vary by plan, but generally the
contributions are equal to 50 percent of the first 6 percent of eligible base
salary contributed by employees and, if certain company goals are met, an
additional amount related to incentive compensation payments.

Employer contributions are
initially invested in Sempra Energy common stock but the employee may transfer
the contribution to other investments. Employee contributions are invested inSempra Energy stock, mutual funds or institutional trusts (the same
investments to which employees may direct the employer contributions), which the
employee selects. In Sempra Energy plans, employee contributions may also be
invested in guaranteed investment contracts. Employer contributions for the
Sempra Energy and SoCalGas plans are partially funded by the ESOP referred to
below.

Contributions to the savings
plans were as follows:



|                           |      |      |      |   |    |  |   |    | 
|-------------------------- | ---- | ---- | ---- | - | -- |  | - | -- | 
|(Dollars
in millions)      | 2008 | 2007 | 2006
|Sempra
Energy Consolidated | $    | 32   |      | $ | 31 |  | $ | 31 | 
|SDG&E                      |      | 13   |      |   | 12 |  |   | 11 | 
|SoCalGas                   |      | 12   |      |   | 12 |  |   | 11 | 



The market value of Sempra Energy
common stock held by the savings plans was $700 million and $997 million at
December 31, 2008 and 2007, respectively. Sempra Commodities also operated
defined contribution plans outside of the United States. The contributions made
by Sempra Energy to such plans were $1 million in 2008 (before the formation of
RBS Sempra Commodities) and $4 million in each of 2007 and 2006.

EMPLOYEE
STOCK OWNERSHIP PLAN

All contributions to the ESOP
Trust (described in Note 6) are made by Sempra Energy; there are no
contributions made by the participants. As Sempra Energy makes contributions,
the ESOP debt service is paid and shares are released in proportion to the total
expected debt service. We charge compensation expense and credit equity for the
market value of the released shares. Dividends on unallocated shares are used to
pay debt service and are applied against the liability. The shares held by the
Trust are unallocated and consist of 1.2 million shares of Sempra Energy common
stock with a fair value of $50 million at December 31, 2008, and 1.5 million
shares with a fair value of $92 million at December 31, 2007.





148







NOTE
10. SHARE-BASED COMPENSATION

SEMPRA
ENERGY EQUITY COMPENSATION PLANS

Sempra Energy has share-based
compensation plans intended to align employee and shareholder objectives related
to the long-term growth of Sempra Energy. The plans permit a wide variety of
share-based awards, including:

|                              |                            
|----------------------------- | ---------------------------
|§
non-qualified
stock options | §
stock
appreciation rights
|§
incentive
stock options     | §
performance
awards       
|§
restricted
stock            | §
stock
payments           
|§
restricted
stock units      | §
dividend
equivalents     

Eligible Sempra Utilities
employees participate in Sempra Energy's share-based compensation plans as a
component of their compensation package.

At December 31, 2008, Sempra
Energy had the following types of equity awards outstanding:

§

Non-Qualified
Stock Options:Options have an exercise price equal to the market price of
the common stock at the date of grant, are service-based, become exercisable
over a four-year period, and expire 10 years from the date of grant. Vesting
and/or the ability to exercise may be accelerated upon a change in control, in
accordance with severance pay agreements or upon eligibility for retirement.
Options are subject to forfeiture or earlier expiration when an employee
terminates employment.

§

Restricted
Stock:Substantially all restricted stock vests at the end of a four-year
period based on Sempra Energys total return to shareholders relative to that of
market indices. Vesting is subject to earlier forfeiture upon termination of
employment and accelerated vesting upon a change in control, in accordance with
severance pay agreements or upon eligibility for retirement. Holders of
restricted stock have full voting rights. They also have full dividend rights;
however, dividends paid on restricted stock held by officers are reinvested to
purchase additional shares that become subject to the same vesting conditions as
the restricted stock to which the dividends relate.

§

Restricted
Stock Units:Restricted stock units vest at the end of a four-year period
based on Sempra Energys total return to shareholders relative to that of market
indices. If Sempra Energys total return to shareholders exceeds the target
levels designated in the 2008 Long Term Incentive Plan, up to an additional 50
percent of the number of granted restricted stock units may be issued. If Sempra
Energy's total return to shareholders is below the target levels, shares are
subject to partial vesting on a pro rata basis. Vesting is subject to earlier
forfeiture upon termination of employment and accelerated vesting upon a change
in control, in accordance with severance pay agreements or upon eligibility for
retirement. Dividend equivalents on restricted stock units are reinvested to
purchase additional shares that become subject to the same vesting conditions as
the restricted stock units to which the dividends relate.

The Sempra Energy 2008 Long Term
Incentive Plan for EnergySouth, Inc. Employees and Other Eligible Individuals
(the Plan) authorizes the issuance of up to 302,478 shares of Sempra Energy
common stock. In connection with the acquisition of EnergySouth in October 2008,
we adopted the Plan to utilize the shares remaining available for future awards
under the 2008 Incentive Plan of EnergySouth, Inc. (the Prior Plan). All awards
outstanding under the Prior Plan at the time of the acquisition were cancelled,
and the holders were paid the merger consideration in accordance with the terms
of the merger agreement. The Plan provides for the grant of substantially the
same types of share-based awards (other than incentive stock options) that are
available under the Sempra Energy 2008 Long Term Incentive Plan.



149





SHARE-BASED
AWARDS AND COMPENSATION EXPENSE

Sempra Energy accounts for
share-based awards in accordance with SFAS 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). SFAS 123 requires that we measure and recognize
compensation expense for all share-based payment awards made to our employees
and directors based on estimated fair values. We adopted the provisions of SFAS
123(R) on January 1, 2006, using the modified prospective transition method. In
accordance with this transition method, Sempra Energys consolidated financial
statements for prior periods were not restated to reflect the impact of SFAS
123(R). Under the modified prospective transition method, share-based
compensation expense for 2006 includes compensation expense for all share-based
compensation awards granted prior to, but for which the requisite service had
not yet been performed as of January 1, 2006, based on the fair value estimated
in accordance with the original provisions of SFAS 123, Accounting for
Stock-Based Compensation (SFAS 123).

Share-based compensation expense
for all share-based compensation awards granted after January 1, 2006 is based
on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R). We recognize compensation costs net of an estimated forfeiture
rate (based on historical experience) and recognize the compensation costs for
non-qualified stock options and restricted shares on a straight-line basis over
the requisite service period of the award, which is generally four years.
However, in the year that an employee becomes eligible for retirement, the
remaining expense related to the employee's awards is recognized immediately. We account for these awards as equity awards in accordance
with SFAS 123(R).

As of December 31, 2008,
7,296,239shares were authorized and available for future grants of
share-based awards. Company practice is to satisfy share-based awards by issuing
new shares rather than by open-market purchases.

Total share-based compensation
expense for all of Sempra Energys share-based awards was comprised as
follows:



|                                                              |                          |      |   |  |   |      |   |  |   |      |  
|------------------------------------------------------------- | ------------------------ | ---- | - |  | - | ---- | - |  | - | ---- | -
|SHARE-BASED
COMPENSATION EXPENSE  SEMPRA ENERGY CONSOLIDATED
|(Dollars
in millions, except per share amounts)              
|                                                              | Years ended December 31,
|                                                              |                          | 2008 |   |  |   | 2007 |   |  |   | 2006 |  
|Share-based
compensation expense, before income taxes         | $                        | 44   |   |  | $ | 45   |   |  | $ | 42   |  
|Income
tax benefits                                           |                          | (17  | ) |  |   | (17  | ) |  |   | (16  | )
|Share-based
compensation expense, net of income taxes         | $                        | 27   |   |  | $ | 28   |   |  | $ | 26   |  
|                                                              |                          |      |   |  |   |      |   |  |   |      |  
|Net
share-based compensation expense, per common share       
|Basic                                                         | $                        | 0.11 |   |  | $ | 0.11 |   |  | $ | 0.10 |  
|Diluted                                                       | $                        | 0.11 |   |  | $ | 0.11 |   |  | $ | 0.10 |  



Sempra Energys capitalized
compensation cost was $5 million in 2008 and $3 million in each of 2007 and
2006.

The tax benefits resulting from
tax deductions in excess of the tax benefit related to compensation cost
recognized for stock option exercises are classified as financing cash flows.

Sempra Energy subsidiaries
record an expense for the plans to the extent that subsidiary employees
participate in the plans and/or the subsidiaries are allocated a portion of the
Sempra Energy plans corporate staff costs. Expenses and capitalized
compensation cost recorded by SDG&E and SoCalGas were as follows:

|                                              |                          |   |      |  |      |   |  |  |   |    | 
|--------------------------------------------- | ------------------------ | - | ---- |  | ---- | - |  |  | - | -- | 
|SHARE-BASED
COMPENSATION  SDG&E AND SOCALGAS
|(Dollars
in millions)                        
|                                              | Years ended December 31,
|                                              | 2008                     |   | 2007 |  | 2006
|SDG&E                                         |                          |   |      |  |      |   |  |  |   |    | 
|Compensation
expense                          | $                        | 8 |      |  | $    | 6 |  |  | $ | 7  | 
|Capitalized
compensation cost                 |                          | 3 |      |  |      | 2 |  |  |   | 2  | 
|SoCalGas                                      |                          |   |      |  |      |   |  |  |   |    | 
|Compensation
expense                          | $                        | 9 |      |  | $    | 8 |  |  | $ | 10 | 
|Capitalized
compensation cost                 |                          | 2 |      |  |      | 1 |  |  |   | 1  | 



150







| |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  | 

SEMPRA
ENERGY NON-QUALIFIED STOCK OPTIONS

We use a Black-Scholes
option-pricing model (Black-Scholes model) to estimate the fair value of each
non-qualified stock option grant. The use of a valuation model requires us to
make certain assumptions about selected model inputs. Expected volatility is
calculated based on the historical volatility of Sempra Energys stock price. We
based the average expected life for options issued in 2008 on the contractual
term of the option and expected employee exercise and post-termination behavior.
We developed the average expected life for options issued in prior years using
the simplified approach in accordance with Securities and Exchange Commission
Staff Accounting Bulletin 107 (SAB 107).

The risk-free interest rate is
based on U.S. Treasury zero-coupon issues with a remaining term equal to the
expected life assumed at the date of the grant. The weighted-average per-share
fair values for options granted were $12.53 in 2008, $13.82 in 2007 and $10.75
in 2006. To calculate these fair values, we use the Black-Scholes model with the
following weighted-average assumptions:

|                         |  |           |  |           |  |          
|------------------------ |  | --------- |  | --------- |  | ---------
|                         |  | 2008      |  | 2007      |  | 2006     
|Stock
price volatility   |  | 19%       |  | 21%       |  | 23%      
|Risk-free
rate of return |  | 3.6%      |  | 4.7%      |  | 4.3%     
|Annual
dividend yield    |  | 2.0%      |  | 2.1%      |  | 2.5%     
|Expected
life            |  | 6.4 Years |  | 6.2 Years |  | 6.2 Years



The following table shows a
summary of the non-qualified stock options as of December 31, 2008 and activity
for the year then ended:



|                                 |  |                     |   |                                 |       |                                                         |     |                                         |   |    | 
|-------------------------------- |  | ------------------- | - | ------------------------------- | ----- | ------------------------------------------------------- | --- | --------------------------------------- | - | -- | 
|NON-QUALIFIED
STOCK OPTIONS     
|                                
|                                 |  | Shares under Option |   | Weighted-Average Exercise Price |       | Weighted- Average Remaining Contractual Term (in
years) |     | Aggregate Intrinsic Value (in millions) |  
|Outstanding
at December 31, 2007 |  | 6,788,214           |   | $                               | 32.61 |                                                         |     |                                         |   |   
|Granted                          |  | 783,500             |   | $                               | 61.10 |                                                         |     |                                         |   |   
|Exercised                        |  | (683,858            | ) | $                               | 25.97 |                                                         |     |                                         | $ | 21 | 
|Forfeited/canceled               |  | (35,600             | ) | $                               | 54.54 |                                                         |     |                                         |   |   
|Outstanding
at December 31, 2008 |  | 6,852,256           |   | $                               | 36.42 |                                                         | 5.2 |                                         | $ | 70 | 
|                                 |  |                     |   |                                 |       |                                                         |     |                                         |   |   
|Vested
or expected to vest,      |  |                     |   |                                 |       |                                                         |     |                                         |   |   
|at
December 31, 2008             |  | 6,805,507           |   | $                               | 36.29 |                                                         | 5.2 |                                         | $ | 70 | 
|Exercisable
at December 31, 2008 |  | 5,042,381           |   | $                               | 29.92 |                                                         | 4.2 |                                         | $ | 69 | 



The aggregate intrinsic value at
December 31, 2008 is the total of the difference between Sempra Energys closing
stock price and the exercise price for all in-the-money options. The total fair
value of shares vested in the last three years was

§

$8
million in 2008

§

$7
million in 2007

§

$12
million in 2006

The $7 million of total
compensation cost related to nonvested stock options not yet recognized as of
December 31, 2008 is expected to be recognized over a weighted-average period of
2.3 years.

We received cash from option
exercises during 2008 totaling $18million. The realized tax
benefits for the share-based payment award deductions, in addition to the $17
million benefit shown above, totaled $10 million for 2008.



151





SEMPRA
ENERGY RESTRICTED STOCK AWARDS AND UNITS

We use a Monte-Carlo simulation
model to estimate the fair value of the restricted stock awards and units. Our
determination of fair value is affected by the volatility of the stock price and
the dividend yields for Sempra Energy and its peer group companies. The
valuation also is affected by the risk-free rates of return, and a number of
other variables. Below are key assumptions for Sempra Energy:

|                         |  |      |   |      |     |      |  |     |  
|------------------------ |  | ---- | - | ---- | --- | ---- |  | --- | -
|                         |  | 2008 |   | 2007 |     | 2006
|Risk-free
rate of return |  | 3.1  | % |      | 4.6 | %    |  | 4.3 | %
|Annual
dividend yield    |  | 2.3  |   |      | 2.2 |      |  | 2.6 |  
|Stock
price volatility   |  | 18   |   |      | 19  |      |  | 24  |  

Restricted
Stock Awards

A summary of Sempra Energys
restricted stock awards as of December 31, 2008 and the activity during the year
is presented below.

|                               |  |            |   |   |                                        | 
|------------------------------ |  | ---------- | - | - | -------------------------------------- | 
|RESTRICTED
STOCK AWARDS       
|                              
|                               |  | Shares     |   |   | Weighted-Average Grant-Date Fair Value | 
|Nonvested
at December 31, 2007 |  | 2,758,797  |   | $ | 35.79                                  | 
|Granted                        |  | 4,002      |   | $ | 43.17                                  | 
|Vested                         |  | (1,005,311 | ) | $ | 38.77                                  | 
|Forfeited                      |  | (46,500    | ) | $ | 34.81                                  | 
|Nonvested
at December 31, 2008 |  | 1,710,988  |   | $ | 34.06                                  | 



The $11 million of total
compensation cost related to nonvested restricted stock awards not yet
recognized as of December 31, 2008 is expected to be recognized over a
weighted-average period of 1.7 years. The total fair value of shares vested
in the last three years was

§

$39
million in 2008

§

$37
million in 2007

§

$68
million in 2006

Restricted
Stock Units

A summary of Sempra Energys
restricted stock units as of December 31, 2008 and the activity during the year
is presented below.



|                                |                                                                                                                                                      |         |   |   |                                       |  | 
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | - | - | ------------------------------------- |  | 
|RESTRICTED
STOCK UNITS         
|                               
|                                |                                                                                                                                                      | Shares  |   |   | Weighted-AverageGrant-Date Fair Value | 
|Nonvested
at December 31, 2007  |                                                                                                                                                      | 5,400   |   | $ | 62.26                                 | 
|Granted                         |                                                                                                                                                      | 643,250 |   | $ | 52.80                                 | 
|Vested                          |                                                                                                                                                      | --      |   |   | --                                    | 
|Forfeited                       |                                                                                                                                                      | (22,300 | ) | $ | 52.87                                 | 
|Nonvested
at December 31, 2008* |                                                                                                                                                      | 626,350 |   | $ | 52.70                                 | 
|*                               | Additional
units may be granted if Sempra Energy exceeds the target shareholder
return requirements designated in the 2008 Long Term Incentive
Plan.



The $13 million of total
compensation cost related to nonvested restricted stock units not yet recognized
as of December 31, 2008 is expected to be recognized over a weighted-average
period of 3.0 years.



152





NOTE
11. FINANCIAL INSTRUMENTS

We periodically use interest-rate
swap agreements and commodity derivative instruments to moderate our exposure to
commodity price changes and interest-rate changes and to lower our overall cost
of borrowing.

FAIR
VALUE HEDGES

Fair value interest-rate swap hedges at December 31, 2008
and 2007 were:



|                           |   |                   |  |   |                   |  |            |  |   |               |  |   |       |  |           
|-------------------------- | - | ----------------- |  | - | ----------------- |  | ---------- |  | - | ------------- |  | - | ----- |  | ----------
|                           |   | December 31, 2008 |  |   | December 31, 2007
|(Dollars
in millions)      |   | Notional Debt     |  |   | Asset             |  | Maturities |  |   | Notional Debt |  |   | Asset |  | Maturities
|Sempra
Energy Consolidated | $ | 450               |  | $ | 24                |  | 2010-2011  |  | $ | 450           |  | $ | 11    |  | 2010-2011 
|SoCalGas                   |   | 150               |  |   | 9                 |  | 2011       |  |   | 150           |  |   | 2     |  | 2011      



There has been no hedge
ineffectiveness on these swaps. We recorded the market value adjustments since
inception of the interest-rate swap hedges as an increase in Fixed-Price
Contracts and Other Derivatives (in noncurrent assets as Sundry or in noncurrent
liabilities) and a corresponding increase or decrease in Long-Term Debt without
affecting net income or other comprehensive income.

Prior to the sale of the
commodities-marketing businesses into RBS Sempra Commodities in April 2008,
commodity fair value hedges were associated with Sempra Commodities and were
recorded as trading instruments.

CASH
FLOW HEDGES

Cash flow interest-rate swap
hedges at December 31, 2008 and 2007 were:



|                            |                                                                                         |   |                   |  |            |                   |   |               |  |  |            | 
|--------------------------- | --------------------------------------------------------------------------------------- | - | ----------------- |  | ---------- | ----------------- | - | ------------- |  |  | ---------- | 
|                            |                                                                                         |   | December 31, 2008 |  |            | December 31, 2007
|(Dollars
in millions)       |                                                                                         |   | Notional Debt     |  | Maturities |                   |   | Notional Debt |  |  | Maturities
|Sempra
Energy Consolidated* |                                                                                         | $ | 176               |  | 2009       |                   | $ | 434           |  |  | 2009-2038 
|SDG&E*                      |                                                                                         |   | 176               |  | 2009       |                   |   | 251           |  |  | 2009      
|SoCalGas                    |                                                                                         |   | --                |  | --         |                   |   | 183           |  |  | 2038      
|Otay
Mesa VIE               |                                                                                         |   | --                |  | --         |                   |   | 73 - 377      |  |  | 2019      
|*                           | Excludes
Otay Mesa VIE, which de-designated all cash flow interest-rate hedges in
2008.



Prior to the sale of the
commodities-marketing businesses, commodity cash flow hedges were primarily
associated with Sempra Commodities and were generally recorded as trading
instruments.

In the third quarter of 2005,
Sempra Energy entered into derivative transactions to hedge future interest
payments associated with forecasted borrowings of $450 million for facilities
related to Sempra LNG's Energía Costa Azul project. The swaps expire in 2027.During the second quarter of 2007, we revised our borrowing plans in
anticipation of receiving net cash proceeds in connection with the sale of the
commodities-marketing businesses. Accordingly, as of June 30, 2007, we
reclassified the cash flow hedge gain of $30 million pretax from Accumulated
Other Comprehensive Income (Loss) to Other Income (Expense), Net in the
Statements of Consolidated Income. In August 2007, we entered into interest-rate
swaps with a collective notional value of $450 million to economically offset
the original swap instruments.



153





The
following table provides the balances in Accumulated Other Comprehensive Income
(Loss), net of income tax, related to all cash flow hedges:



|                           |                                                                                                                                                             |   |              |    |   |      |   | 
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | -- | - | ---- | - | 
|                           |                                                                                                                                                             |   | December 31, |   
|(Dollars
in millions)      |                                                                                                                                                             |   | 2008         |    |   | 2007 |  
|Sempra
Energy Consolidated |                                                                                                                                                             | $ | (40          | )* | $ | (24  | )
|SDG&E                      |                                                                                                                                                             |   | (1           | )  |   | (1   | )
|SoCalGas                   |                                                                                                                                                             |   | (24          | )  |   | 1    |  
|*                          | Sempra
Energy Consolidated includes accumulated other comprehensive losses of $6
million as part of its equity method investment in RBS Sempra
Commodities.



Sempra Energy expects that losses
of $7 million, which are net of income tax benefit, that are currently recorded
in Accumulated Other Comprehensive Income (Loss) related to these cash flow
hedges will be reclassified into earnings during the next twelve months as the
hedged items affect earnings. This excludes amounts related to RBS Sempra
Commodities. In connection with the sale of the commodities-marketing
businesses, we recognized losses of $35 million, net of income tax, of Sempra
Commodities' cash flow hedge balance during 2008.

SDG&E and SoCalGas expect
that losses of $1 million and $3 million, respectively, which are net of income
tax benefit, that are currently recorded in Accumulated Other Comprehensive
Income (Loss) related to these cash flow hedges will be reclassified into
earnings during the next twelve months as the hedged items affect earnings.

HEDGE
INEFFECTIVENESS

Following is a summary of the
hedge ineffectiveness gains (losses) for Sempra Energy. Information related to
the Sempra Utilities is noted separately within the table:



|                        |                                                                                                                                                                    |      |     |   |  |      |     |   |  |      |     |  
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | --- | - |  | ---- | --- | - |  | ---- | --- | -
|                        | Years ended December 31,                                                                                                                                          
|(Dollars
in millions)   |                                                                                                                                                                    | 2008 |     |   |  | 2007 |     |   |  | 2006 |    
|Commodity
hedges*:      |                                                                                                                                                                    |      |     |   |  |      |     |   |  |      |    
|                        | Cash
flow hedges                                                                                                                                                   | $    | (3  | ) |  | $    | 3   |   |  | $    | 24  |  
|                        | Fair
value hedges                                                                                                                                                  |      | (9  | ) |  |      | 29  |   |  |      | 86  |  
|                        | Time
value exclusions from hedge assessment                                                                                                                        |      | --  |   |  |      | 192 |   |  |      | 179 |  
|                        | Total
unrealized gains (losses)                                                                                                                                    |      | (12 | ) |  |      | 224 |   |  |      | 289 |  
|                        |                                                                                                                                                                    |      |     |   |  |      |     |   |  |      |     |  
|Interest-rate
hedges**: |                                                                                                                                                                    |      |     |   |  |      |     |   |  |      |    
|                        | Cash
flow hedges held by SDG&E***                                                                                                                                  |      | (1  | ) |  |      | (3  | ) |  |      | (1  | )
|                        | Total
unrealized losses                                                                                                                                            |      | (1  | ) |  |      | (3  | ) |  |      | (1  | )
|                        |                                                                                                                                                                    |      |     |   |  |      |     |   |  |      |     |  
|                        | Total
ineffectiveness gains (losses)                                                                                                                               | $    | (13 | ) |  | $    | 221 |   |  | $    | 288 |  
|*                       | For
commodity derivative instruments, we record ineffectiveness gains (losses)
in Revenues from Sempra Global and Parent on the Statements of
Consolidated Income.
|**                      | For
interest-rate swap instruments, all companies record ineffectiveness gains
(losses) in Other Income (Expense), Net on the Statements of Consolidated
Income.  
|***                     | The
2008 and 2007 losses include $(1) million and a negligible amount,
respectively, associated with Otay Mesa VIE.                                               



For commodity derivative
instruments designated as fair value hedges,

§

the
ineffectiveness gains relate to hedges of commodity inventory and include gains
that represent the time value of money, which is excluded for hedge assessment
purposes.

For commodity derivative
instruments designated as cash flow hedges,

§

the
ineffectiveness amounts relate to hedges of natural gas purchases and sales
related to transportation and storage capacity arrangements.



154





These
commodity derivative instruments were held by our commodities-marketing
businesses. For 2006, the ineffectiveness in commodity derivative instruments
also relates to the phase-out of synthetic fuels income tax credits.

In 2007 and 2006, we also
reclassified $2 million and $39 million, respectively, of losses from
Accumulated Other Comprehensive Income (Loss) due to the expectation that these
losses would not be recovered. The gains and losses are included in Revenues
from Sempra Global and Parent for Sempra Energy on the Statements of
Consolidated Income. These commodity derivative instruments were held by our
commodities-marketing businesses.

SEMPRA
UTILITIES

At the Sempra Utilities, company
policy and regulatory requirements impose limits on the use of derivative
instruments. These instruments enable the companies to estimate with greater
certainty the effective prices to be received by the companies and the prices to
be charged to their customers. SDG&E records realized gains or losses on
derivative instruments associated with transactions for electric energy
contracts in Cost of Electric Fuel and Purchased Power on the Statements of
Consolidated Income. SDG&E and SoCalGas record realized gains and losses on
derivative instruments associated with transactions for natural gas contracts in
Cost of Natural Gas on the Statements of Consolidated Income. On the
Consolidated Balance Sheets, the Sempra Utilities record regulatory assets and
liabilities related to unrealized gains and losses from these derivative
instruments to the extent derivative gains and losses associated with these
derivative instruments will be payable or recoverable in future rates.

SEMPRA
COMMODITIES

Prior to the formation of RBS
Sempra Commodities in 2008, the carrying values of trading assets and trading
liabilities, primarily at Sempra Commodities, were as follows:



|                                                        |                                                                                         |   |       |       |       | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------- | - | ----- | ----- | ----- | 
|(Dollars
in millions)                                   | December 31, 2007*                                                                     
|TRADING
ASSETS                                          |                                                                                         |   |      
|Trading-related
receivables and deposits, net:          |                                                                                         |   |      
|                                                        | Due
from trading counterparties                                                         |   | $     | 2,489
|                                                        | Due
from commodity clearing organizations and clearing brokers                          |   |       | 230  
|                                                        |                                                                                         |   |       |       | 2,719
|Derivative
trading instruments:                         |                                                                                         |   |      
|                                                        | Unrealized
gains on swaps and forwards                                                  |   |       | 1,067
|                                                        | OTC
commodity options purchased                                                         |   |       | 1,103
|                                                        |                                                                                         |   |       |       | 2,170
|Commodities
owned                                       |                                                                                         |   | 2,231
|Total
trading assets                                    |                                                                                         | $ | 7,120
|                                                        |                                                                                         |   |       |       |      
|TRADING
LIABILITIES                                     |                                                                                         |   |      
|Trading-related
payables                                |                                                                                         | $ | 2,265
|Derivative
trading instruments sold, not yet purchased: |                                                                                         |   |      
|                                                        | Unrealized
losses on swaps and forwards                                                 |   |       | 950  
|                                                        | OTC
commodity options written                                                           |   |       | 722  
|                                                        |                                                                                         |   |       |       | 1,672
|Commodities
sold with agreement to repurchase           |                                                                                         |   | 500  
|Total
trading liabilities                               |                                                                                         | $ | 4,437
|*                                                       | Amounts
have been reclassified to reflect the adoption of FASB Staff Position FIN
39-1.





155





The
following table summarizes the counterparty credit quality and exposure for
Sempra Commodities, expressed in terms of net replacement value. These exposures
are net of collateral in the form of customer margin and/or letters of credit of
$1.6 billion at December 31, 2007:

|                             |                                                                                                              |       |   |     |      
|---------------------------- | ------------------------------------------------------------------------------------------------------------ | ----- | - | --- | -----
|COUNTERPARTY
CREDIT QUALITY*
|(Dollars
in millions)        |                                                                                                             
|                             | December 31, 2007                                                                                           
|                             | Commodity
exchanges                                                                                          |       | $ | 230
|                             | AAA                                                                                                          |       |   |     | 13   
|                             | AA                                                                                                           |       |   |     | 478  
|                             | A                                                                                                            |       |   |     | 419  
|                             | BBB                                                                                                          |       |   |     | 504  
|                             | Below
investment grade or not rated                                                                          |       |   | 959
|                             |                                                                                                              | Total |   | $   | 2,603
|*                            | As
determined by rating agencies or by internal models intended to
approximate rating agency determinations.



We provide additional disclosure
of credit risk and counterparty credit quality with RBS Sempra Commodities in
Notes 1 and 6.

FAIR
VALUE OF FINANCIAL INSTRUMENTS

The fair values of certain of our
financial instruments (cash, temporary investments, accounts and notes
receivable, dividends and accounts payable, short-term debt and customer
deposits) approximate their carrying amounts. The following table provides the
carrying amounts and fair values of the remaining financial instruments at
December 31:

|                                                |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       |  | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | -------- |  | - | ----- |  | - | -------- |  | - | ----- |  | 
|                                                |                                                                                                                                        | 2008     |  |   | 2007  | 
|                                                |                                                                                                                                        | Carrying |  |   | Fair  |  |   | Carrying |  |   | Fair  | 
|(Dollars
in millions)                           |                                                                                                                                        | Amount   |  |   | Value |  |   | Amount   |  |   | Value | 
|Sempra
Energy Consolidated                      |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       | 
|Investments
in affordable housing partnerships1 | $                                                                                                                                      | 43       |  | $ | 63    |  | $ | 61       |  | $ | 84    | 
|Total
long-term debt2                           |                                                                                                                                        | 6,962    |  |   | 7,013 |  |   | 4,566    |  |   | 4,620 | 
|Due
to unconsolidated affiliates                |                                                                                                                                        | 102      |  |   | 101   |  |   | 162      |  |   | 170   | 
|Preferred
stock of subsidiaries3                |                                                                                                                                        | 179      |  |   | 149   |  |   | 193      |  |   | 173   | 
|SDG&E                                           |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       | 
|Total
long-term debt4                           | $                                                                                                                                      | 2,146    |  | $ | 2,073 |  | $ | 1,960    |  | $ | 1,975 | 
|Preferred
stock                                 |                                                                                                                                        | 79       |  |   | 71    |  |   | 93       |  |   | 90    | 
|PE/SoCalGas                                     |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       | 
|Total
long-term debt4                           | $                                                                                                                                      | 1,372    |  | $ | 1,333 |  | $ | 1,115    |  | $ | 1,100 | 
|PE:                                             |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       | 
|Preferred
stock                                 | $                                                                                                                                      | 80       |  | $ | 59    |  | $ | 80       |  | $ | 66    | 
|Preferred
stock of subsidiary                   |                                                                                                                                        | 20       |  |   | 19    |  |   | 20       |  |   | 17    | 
|                                                | $                                                                                                                                      | 100      |  | $ | 78    |  | $ | 100      |  | $ | 83    | 
|SoCalGas:                                       |                                                                                                                                        |          |  |   |       |  |   |          |  |   |       | 
|Preferred
stock                                 | $                                                                                                                                      | 22       |  | $ | 20    |  | $ | 22       |  | $ | 19    | 
|1                                               | See
Note 4.                                                                                                                           
|2                                               | Before
reductions for unamortized discount of $8 million and $6 million at
December 31, 2008 and 2007, respectively.                  
|3                                               | At
December 31, 2007, $14 million of mandatorily redeemable preferred stock
of subsidiaries was included in Other Current Liabilities.
|4                                               | Before
reductions for unamortized discount of $2 million at both December 31,
2008 and 2007.                                          





156





Sempra
Energy

§

based
the fair values of investments in affordable housing partnerships on the present
value of estimated future cash flows, discounted at rates available for similar
investments; and

§

estimated
the fair values of debt incurred to acquire affordable housing partnerships
based on the present value of the future cash flows, discounted at rates
available for similar notes with comparable maturities.

All entities based the fair
values of the long-term debt and preferred stock on their quoted market prices
or quoted market prices for similar securities.

Adoption of FSP FIN 39-1

We adopted FSP FIN 39-1 effective
January 1, 2008, which required retroactive application. Each Consolidated
Balance Sheet reflects the offsetting of net derivative positions with fair
value amounts for cash collateral with the same counterparty when management
believes a legal right of setoff exists. As of December 31, 2008, Sempra Energy
offset fair value cash collateral receivables and payables against net
derivative positions of $63 million and $38 million, respectively. As of
December 31, 2007, Sempra Energy offset fair value cash collateral receivables
and payables against net derivative positions of $177 million and $1.1 billion,
respectively. The fair value of cash collateral that was not offset in the
Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007 was
$28 million and $27 million, respectively.



The following table provides the
amount of fair value of cash collateral receivables that were offset against net
derivative positions in the Consolidated Balance Sheets as of December 31, 2008
and December 31, 2007 at the Sempra Utilities:



|                      |   |              |  |   |     
|--------------------- | - | ------------ |  | - | ----
|                      |   | December 31,
|(Dollars
in millions) |   | 2008         |  |   | 2007
|SDG&E                 | $ | 52           |  | $ | 9   
|SoCalGas              |   | 11           |  |   | --  



The following table provides the
amount of fair value of cash collateral that was not offset in the Consolidated
Balance Sheets as of December 31, 2008 and December 31, 2007 at the Sempra
Utilities:



|                      |   |              |  |   |     
|--------------------- | - | ------------ |  | - | ----
|                      |   | December 31,
|(Dollars
in millions) |   | 2008         |  |   | 2007
|SDG&E                 | $ | 21           |  | $ | 6   
|SoCalGas              |   | 7            |  |   | 7   



Fair
Value Hierarchy

We discuss the valuation
techniques we use to measure fair value and the definition of the three levels
of the fair value hierarchy, as defined in SFAS 157, in Note 1 under "Fair Value
Measurements" and in Note 2 under "FSP FAS 157-3."

The three tables below, by level
within the fair value hierarchy, set forth our financial assets and liabilities
that were accounted for at fair value on a recurring basis as of December 31,
2008 and 2007. As required by SFAS 157, we classify financial assets and
liabilities in their entirety based on the lowest level of input that is
significant to the fair value measurement.  Our assessment of the
significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value assets and liabilities, and
their placement within the fair value hierarchy levels.

The fair value of commodity
derivative assets and liabilities is determined in accordance with our netting
policy, as discussed above under "Adoption of FSP FIN 39-1."



157





Determining
the fair values, shown in the tables below, incorporates various factors
required under SFAS 157. These factors include not only the credit standing of
the counterparties involved and the impact of credit enhancements (such as cash
deposits, letters of credit and priority interests), but also the impact of the
risk of our nonperformance on our liabilities.

Our financial assets and
liabilities that were accounted for at fair value on a recurring basis as of
December 31, 2008 and 2007 in the tables below include the following:

§

Nuclear
decommissioning trusts reflect the assets of SDG&E's nuclear decommissioning
trusts, excluding cash balances, as we discuss in Note 7. The trust assets are
valued by a third party trustee. The trustee obtains prices from pricing
services that are derived from observable data. The trustee monitors the prices
supplied by pricing services by validating pricing with other sources of
data.

§

Investments
include marketable securities and are primarily priced based on observable
interest rates for similar instruments actively trading in the marketplace.

§

Commodity
and other derivative positions, which include other interest-rate management
instruments, are entered into primarily as a means to manage price exposures. We
use market participant assumptions to price these derivatives. Market
participant assumptions include those about risk, and the risk inherent in the
inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable.

In the third quarter of 2007, the
California Independent System Operator (ISO) began the process of allocating
congestion revenue rights (CRRs) to load serving entities, including SDG&E.
These instruments are included with commodity derivatives and are recorded at
fair value based on annual auction prices published by the California ISO. Prior
to the ISO auction conducted in November 2008, the CRRs were priced based on
discounted cash flows. They are classified as Level 3 and reflected in the
Sempra Energy and SDG&E tables below. Changes in the fair value of CRRs are
deferred and recorded in regulatory accounts to the extent they are recoverable
through rates.



158







|                                                           |                                                                                            |                                 |   |         |   |         |   |                        |   |   |       | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------- | - | ------- | - | ------- | - | ---------------------- | - | - | ----- | 
|RECURRING
FAIR VALUE MEASURES  SEMPRA ENERGY CONSOLIDATED
|(Dollars
in millions)                                      |                                                                                            |                                
|                                                           |                                                                                            | At fair value as of December 31
|                                                           |                                                                                            | Level 1                         |   | Level 2 |   | Level 3 |   | Netting and Collateral |   |   | Total
|2008*:                                                     |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                                                    |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Nuclear
decommissioning trusts**                           | $                                                                                          | 421                             | $ | 148     | $ | --      | $ | --                     |   | $ | 569  
|Investments                                                |                                                                                            | 1                               |   | 176     |   | --      |   | --                     |   |   | 177  
|Commodity
derivatives                                      |                                                                                            | 55                              |   | 76      |   | 27      |   | (38                    | ) |   | 120  
|Other
derivatives                                          |                                                                                            | --                              |   | 76      |   | --      |   | --                     |   |   | 76   
|Total                                                      | $                                                                                          | 477                             | $ | 476     | $ | 27      | $ | (38                    | ) | $ | 942  
|                                                           |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Liabilities:                                               |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                                      | $                                                                                          | 63                              | $ | 110     | $ | --      | $ | (63                    | ) | $ | 110  
|Other
derivatives                                          |                                                                                            | --                              |   | 130     |   | --      |   | --                     |   |   | 130  
|Total                                                      | $                                                                                          | 63                              | $ | 240     | $ | --      | $ | (63                    | ) | $ | 240  
|2007***:                                                   |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                                                    |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Trading
derivatives                                        | $                                                                                          | 201                             | $ | 2,943   | $ | 446     | $ | (1,197                 | ) | $ | 2,393
|Commodity
trading inventories                              |                                                                                            | --                              |   | 2,177   |   | --      |   | --                     |   |   | 2,177
|Nuclear
decommissioning trusts**                           |                                                                                            | 551                             |   | 175     |   | --      |   | --                     |   |   | 726  
|Investments                                                |                                                                                            | 86                              |   | 6       |   | 7       |   | --                     |   |   | 99   
|Commodity
derivatives                                      |                                                                                            | 16                              |   | 5       |   | 7       |   | --                     |   |   | 28   
|Other
derivatives                                          |                                                                                            | --                              |   | 40      |   | --      |   | --                     |   |   | 40   
|Total                                                      | $                                                                                          | 854                             | $ | 5,346   | $ | 460     | $ | (1,197                 | ) | $ | 5,463
|                                                           |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Liabilities:                                               |                                                                                            |                                 |   |         |   |         |   |                        |   |   |      
|Trading
derivatives                                        | $                                                                                          | 200                             | $ | 2,116   | $ | 59      | $ | (302                   | ) | $ | 2,073
|Commodity
derivatives                                      |                                                                                            | --                              |   | 9       |   | --      |   | --                     |   |   | 9    
|Other
derivatives                                          |                                                                                            | --                              |   | 23      |   | --      |   | --                     |   |   | 23   
|Total                                                      | $                                                                                          | 200                             | $ | 2,148   | $ | 59      | $ | (302                   | ) | $ | 2,105
|*                                                          | On
April 1, 2008, the commodities-marketing businesses were sold, as we
discuss in Note 3.
|**                                                         | Excludes
cash balances.                                                                   
|***                                                        | Amounts
have been reclassified to reflect the retrospective application of FSP FIN
39-1.  





159







|                                      |                                                                                          |                                 |   |         |   |         |   |                        |   |   |       | 
|------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------- | - | ------- | - | ------- | - | ---------------------- | - | - | ----- | 
|RECURRING
FAIR VALUE MEASURES  SDG&E
|(Dollars
in millions)                 |                                                                                          |                                
|                                      |                                                                                          | At fair value as of December 31
|                                      |                                                                                          | Level 1                         |   | Level 2 |   | Level 3 |   | Netting and Collateral |   |   | Total
|2008:                                 |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                               |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                 | $                                                                                        | 21                              | $ | --      | $ | 27      | $ | --                     |   | $ | 48   
|Nuclear
decommissioning trusts*       |                                                                                          | 421                             |   | 148     |   | --      |   | --                     |   |   | 569  
|Short-term
investments                |                                                                                          | --                              |   | 24      |   | --      |   | --                     |   |   | 24   
|Total                                 | $                                                                                        | 442                             | $ | 172     | $ | 27      | $ | --                     |   | $ | 641  
|                                      |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Liabilities:                          |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                 | $                                                                                        | 52                              | $ | 24      | $ | --      | $ | (52                    | ) | $ | 24   
|Other
derivatives                     |                                                                                          | --                              |   | 88      |   | --      |   | --                     |   |   | 88   
|Total                                 | $                                                                                        | 52                              | $ | 112     | $ | --      | $ | (52                    | ) | $ | 112  
|2007**:                               |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                               |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                 | $                                                                                        | 9                               | $ | 3       | $ | 7       | $ | --                     |   | $ | 19   
|Nuclear
decommissioning trusts*       |                                                                                          | 551                             |   | 175     |   | --      |   | --                     |   |   | 726  
|Total                                 | $                                                                                        | 560                             | $ | 178     | $ | 7       | $ | --                     |   | $ | 745  
|                                      |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Liabilities:                          |                                                                                          |                                 |   |         |   |         |   |                        |   |   |      
|Trading
derivatives                   | $                                                                                        | 9                               | $ | 8       | $ | --      | $ | (9                     | ) | $ | 8    
|Other
derivatives                     |                                                                                          | --                              |   | 20      |   | --      |   | --                     |   |   | 20   
|Total                                 | $                                                                                        | 9                               | $ | 28      | $ | --      | $ | (9                     | ) | $ | 28   
|*                                     | Excludes
cash balances.                                                                 
|**                                    | Amounts
have been reclassified to reflect the retrospective application of FSP FIN
39-1.



|                                         |   |                                 |   |         |   |         |   |                        |   |   |      
|---------------------------------------- | - | ------------------------------- | - | ------- | - | ------- | - | ---------------------- | - | - | -----
|RECURRING
FAIR VALUE MEASURES  SOCALGAS
|(Dollars
in millions)                    |   |                                
|                                         |   | At fair value as of December 31
|                                         |   | Level 1                         |   | Level 2 |   | Level 3 |   | Netting and Collateral |   |   | Total
|2008:                                    |   |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                                  |   |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                    | $ | 8                               | $ | 3       | $ | --      | $ | --                     |   | $ | 11   
|Other
derivatives                        |   | --                              |   | 10      |   | --      |   | --                     |   |   | 10   
|Total                                    | $ | 8                               | $ | 13      | $ | --      | $ | --                     |   | $ | 21   
|                                         |   |                                 |   |         |   |         |   |                        |   |   |      
|Liabilities:                             |   |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                    | $ | 11                              | $ | --      | $ | --      | $ | (11                    | ) | $ | --   
|2007:                                    |   |                                 |   |         |   |         |   |                        |   |   |      
|Assets:                                  |   |                                 |   |         |   |         |   |                        |   |   |      
|Commodity
derivatives                    | $ | 7                               | $ | 1       | $ | --      | $ | --                     |   | $ | 8    
|Other
derivatives                        |   | --                              |   | 5       |   | --      |   | --                     |   |   | 5    
|Total                                    | $ | 7                               | $ | 6       | $ | --      | $ | --                     |   | $ | 13   



Trading derivatives in the
Recurring Fair Value Measures  Sempra Energy Consolidated table above include
OTC unrealized values related to swaps, forwards and options, as well as open,
listed exchange transactions. However, exchange transactions, which are cash
settled during the life of the transaction, are classified as part of
Trading-Related Receivables and Deposits, Net on the Consolidated Balance
Sheets. The following table provides a reconciliation of these balances as of
December 31, 2007:



160







|                                           |                         |        |  |  |             |       | 
|------------------------------------------ | ----------------------- | ------ |  |  | ----------- | ----- | 
|                                           | As of December 31, 2007
|(Dollars
in millions)                      |                         | Assets |  |  | Liabilities
|Derivative
trading instruments:            |                         |        |  |  |             |       | 
|Per
Consolidated Balance Sheet             | $                       | 2,170  |  |  | $           | 1,672 | 
|Unrealized
revenues for exchange contracts |                         | 223    |  |  |             | 401   | 
|Per
Recurring Fair Value Measures Table    | $                       | 2,393  |  |  | $           | 2,073 | 



The Recurring Fair Value Measures
table above does not include certain commodity trading inventories that are
carried on a lower-of-cost-or-market basis as of December 31, 2007. The table
does include a portion of commodity trading inventories for which fair value
hedge accounting is applied. The following table shows a reconciliation of the
commodities trading inventories balance as of December 31, 2007:



|                                                             |  |                   |       |  
|------------------------------------------------------------ |  | ----------------- | ----- | -
|(Dollars
in millions)                                        |  | December 31, 2007
|Commodities
owned:                                           |  |                   |       |  
|Per
Consolidated Balance Sheet                               |  | $                 | 2,231 |  
|Less:
Commodities owned, recorded at lower-of-cost-or-market |  |                   | (54   | )
|Per
Recurring Fair Value Measures Table                      |  | $                 | 2,177 |  

Trading
Derivatives and Commodity Trading Inventories

Trading derivatives and commodity
trading inventories reflect positions held by Sempra Commodities, prior to the
formation of RBS Sempra Commodities in 2008, as we discuss in Note 3. Trading
derivatives include exchange-traded derivative contracts and OTC derivative
contracts. Exchange-traded derivative contracts, which include futures and
exchange-traded options, are generally based on unadjusted quoted prices in
active markets and are classified within Level 1.

In addition, certain OTC-cleared
options and swap contracts are included in Level 1, as the fair values of these
items are based on unadjusted quoted prices in active markets. Some
exchange-traded derivatives are valued using broker or dealer quotations, or
market transactions in either the listed or OTC markets. In such cases, these
exchange-traded derivatives are classified within Level 2.

OTC derivative trading
instruments include swaps, forwards, options and complex structures that are
valued at fair value and may be offset with similar positions in exchange-traded
markets. In certain instances, we may use models to measure the fair value of
these instruments. Generally, we use a similar model to value similar
instruments. Valuation models use various inputs that include quoted prices for:

§

similar
assets or liabilities in active markets;

§

identical
or similar assets or liabilities in markets that are not active;

§

other
observable inputs for the asset or liability; and

§

market-corroborated
inputs, i.e., inputs derived principally from or corroborated by observable
market data by correlation or other means. Where observable inputs are available
for substantially the full term of the asset or liability, the instrument is
categorized in Level 2.

Certain OTC derivatives trade in
less active markets with a lower availability of pricing information. In
addition, complex or structured transactions can introduce the need for
internally-developed model inputs that might not be observable in or
corroborated by the market. When such inputs have a significant impact on the
measurement of fair value, the instrument is categorized in Level 3.



161





Level
3 Information

The following table set forth
reconciliations of changes in the fair value of net trading and other
derivatives classified as Level 3 in the fair value hierarchy:



|                                                                                |                            |              |   |   |      |   |   |      |  |   |      | 
|------------------------------------------------------------------------------- | -------------------------- | ------------ | - | - | ---- | - | - | ---- |  | - | ---- | 
|                                                                                | Sempra Energy Consolidated | SDG&E       
|                                                                                | December 31,               | December 31,
|(Dollars
in millions)                                                           |                            | 2008         |   |   | 2007 |   |   | 2008 |  |   | 2007 | 
|Balance
as of January 1                                                         | $                          | 401          |   | $ | 519  |   | $ | 7    |  | $ | --   | 
|Realized
and unrealized gains (losses)                                          |                            | (79          | ) |   | (272 | ) |   | 3    |  |   | --   | 
|Allocated
transmission instruments                                              |                            | 17           |   |   | --   |   |   | 17   |  |   | 7    | 
|Purchases
and issuances                                                         |                            | 24           |   |   | 154  |   |   | --   |  |   | --   | 
|Sale
of the commodities-marketing businesses                                    |                            | (336         | ) |   | --   |   |   | --   |  |   | --   | 
|Balance
as of December 31                                                       | $                          | 27           |   | $ | 401  |   | $ | 27   |  | $ | 7    | 
|                                                                                |                            |              |   |   |      |   |   |      |  |   |      | 
|Change
in unrealized gains relating to instruments still held as of December
31 | $                          | 27           |   | $ | 75   |   | $ | 27   |  | $ | 7    | 



Transfers in and/or out of Level
3 represent existing assets or liabilities that were either:

§

previously
categorized as a higher level for which the inputs to the model became
unobservable; or

§

assets
and liabilities that were previously classified as Level 3 for which the lowest
significant input became observable during the period.

There were no transfers in or out
of Level 3 during the periods presented.

Gains and losses (realized and
unrealized) for Level 3 recurring items are primarily related to the
commodities-marketing businesses and are included in Revenues for Sempra Global
and Parent on the Statements of Consolidated Income for the three months ended
March 31, 2008 and for the year ended December 31, 2007. With the sale of these
businesses on April 1, 2008, Level 3 recurring activity was substantially
reduced.



162







NOTE
12. PREFERRED STOCK

The table below shows the details
of preferred stock for SDG&E, PE and SoCalGas.



|                                                                                                                              |   |        |               |              |   |     |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------- | - | ------ | ------------- | ------------ | - | --- |  |  |  |  | 
|                                                                                                                              |   | Call/  |               |              |   |    
|                                                                                                                              |   |        | Redemption    | December 31,
|                                                                                                                              |   | Price  | 2008          | 2007        
|                                                                                                                              |   |        | (in millions)
|                                                                                                                              |   |        |               |              |   |    
|Subject
to mandatory redemption:                                                                                              |   |        |               |              |   |    
|SDG&E:                                                                                                                        |   |        |               |              |   |    
|Without
par value: $1.7625 Series, 550,000 shares outstanding at December 31,
2007*                                           | $ | 25.00  | $             | --           | $ | 14 
|Sempra
Energy - total preferred stock of subsidiary subject to mandatory
redemption                                           |   |        | $             | --           | $ | 14 
|                                                                                                                              |   |        |               |              |   |    
|Not
subject to mandatory redemption:                                                                                          |   |        |               |              |   |    
|SDG&E:                                                                                                                        |   |        |               |              |   |    
|$20
par value, authorized 1,375,000 shares:                                                                                   |   |        |               |              |   |    
|5%
Series, 375,000 shares outstanding                                                                                         | $ | 24.00  | $             | 8            | $ | 8  
|4.5%
Series, 300,000 shares outstanding                                                                                       | $ | 21.20  |               | 6            |   | 6  
|4.4%
Series, 325,000 shares outstanding                                                                                       | $ | 21.00  |               | 7            |   | 7  
|4.6%
Series, 373,770 shares outstanding                                                                                       | $ | 20.25  |               | 7            |   | 7  
|Without
par value:                                                                                                            |   |        |               |              |   |    
|$1.70
Series, 1,400,000 shares outstanding                                                                                    | $ | 25.595 |               | 35           |   | 35 
|$1.82
Series, 640,000 shares outstanding                                                                                      | $ | 26.00  |               | 16           |   | 16 
|Total
preferred stock of SDG&E, not subject to mandatory
redemption                                                           |   |        |               | 79           |   | 79 
|                                                                                                                              |   |        |               |              |   |    
|Pacific
Enterprises:                                                                                                          |   |        |               |              |   |    
|Without
par value, authorized 15,000,000 shares:                                                                              |   |        |               |              |   |    
|$4.75
Dividend, 200,000 shares outstanding                                                                                    | $ | 100.00 |               | 20           |   | 20 
|$4.50
Dividend, 300,000 shares outstanding                                                                                    | $ | 100.00 |               | 30           |   | 30 
|$4.40
Dividend, 100,000 shares outstanding                                                                                    | $ | 101.50 |               | 10           |   | 10 
|$4.36
Dividend, 200,000 shares outstanding                                                                                    | $ | 101.00 |               | 20           |   | 20 
|$4.75
Dividend, 253 shares outstanding                                                                                        | $ | 101.00 |               | --           |   | -- 
|Total
preferred stock of Pacific Enterprises                                                                                  |   |        |               | 80           |   | 80 
|                                                                                                                              |   |        |               |              |   |    
|SoCalGas:                                                                                                                     |   |        |               |              |   |    
|$25
par value, authorized 1,000,000 shares:                                                                                   |   |        |               |              |   |    
|6%
Series, 79,011 shares outstanding                                                                                          |   |        |               | 3            |   | 3  
|6%
Series A, 783,032 shares outstanding                                                                                       |   |        |               | 19           |   | 19 
|Total
preferred stock of SoCalGas                                                                                             |   |        |               | 22           |   | 22 
|Less:
50,970 shares of the 6% Series outstanding owned by Pacific
Enterprises                                                 |   |        |               | (2           | ) | (2)
|Pacific
Enterprises  total preferred stock of subsidiary                                                                     |   |        |               | 20           |   | 20 
|                                                                                                                              |   |        |               |              |   |    
|Sempra
Energy  total preferred stock of subsidiaries not subject to mandatory
redemption                                     |   |        | $             | 179          | $ | 179
|*  At
December 31, 2007, $14 million was included in Other Current Liabilities.
This series was redeemed on January 15, 2008.



163







The following are the attributes
of each companys preferred stock:

SDG&E

§

All
outstanding series are callable.

§

The
$1.7625 Series had a sinking fund requirement to redeem 50,000 shares at $25 per
share in 2007 and all remaining shares in 2008. On January 15, 2007, SDG&E
redeemed 100,000 shares, and on January 15, 2008, SDG&E redeemed the
remaining 550,000 shares.

§

The
$20 par value preferred stock has two votes per share on matters being voted
upon by shareholders of SDG&E and a liquidation value at par.

§

All
outstanding series of SDG&E's preferred stock have cumulative preferences as
to dividends.

§

The
no-par-value preferred stock is nonvoting and has a liquidation value of $25 per
share plus any unpaid dividends.

§

SDG&E
is authorized to issue 10,000,000 shares of no-par-value preferred stock (both
subject to and not subject to mandatory redemption).

SDG&E is currently authorized
to issue up to 25 million shares of an additional class of preference
shares designated as "Series Preference Stock." The Series Preference Stock is
in addition to the Cumulative Preferred Stock, Preference Stock (Cumulative) and
Common Stock that SDG&Ewas otherwise authorized to issue, and when
issued would rank junior to the Cumulative Preferred Stock and Preference Stock
(Cumulative). The stocks rights, preferences and privileges would be
established by the board at the time of issuance.

PACIFIC
ENTERPRISES

§

Outstanding
PE preferred stock is subject to redemption at PE's option at any time with at
least 30 days' notice at the applicable redemption price for each series plus
any unpaid dividends.

§

All
outstanding series have one vote per share, cumulative preferences as to
dividends, and a liquidation value of $100 per share plus any unpaid dividends.

SOCALGAS

§

None
of SoCalGas' outstanding preferred stock is callable.

§

All
outstanding series have one vote per share, cumulative preferences as to
dividends and liquidation values of $25 per share plus any unpaid dividends.

SoCalGas currently is authorized
to issue 5 million shares of series preferred stock and 5 million shares of
preference stock, both without par value and with cumulative preferences as to
dividends and with liquidation value. The preference stock would rank junior to
all series of preferred stock. Other rights and privileges of the stock would be
established by the board of directors at the time of issuance.



164







NOTE
13. SEMPRA ENERGY - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE

The following table provides the
per share computations for income from continuing operations for the years ended
December 31. Basic earnings per common share (EPS) is calculated by dividing
earnings applicable to common stock by the weighted-average number of common
shares outstanding for the year. Diluted EPS includes the potential dilution of
common stock equivalent shares that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock.



|                                                             |                          |   |         |  |   |         |  |   |        
|------------------------------------------------------------ | ------------------------ | - | ------- |  | - | ------- |  | - | -------
|EARNINGS
PER SHARE COMPUTATIONS                             
|                                                            
|                                                             | Years ended December 31,
|                                                             |                          |   | 2008    |  |   | 2007    |  |   | 2006   
|Numerator
(in millions):                                     |                         
|Income
from continuing operations                            |                          | $ | 1,113   |  | $ | 1,125   |  | $ | 1,091  
|Denominator
(in thousands):                                  |                         
|Weighted
average common shares outstanding for basic EPS     |                          |   | 247,387 |  |   | 259,269 |  |   | 256,477
|Dilutive
effect of stock options and restricted stock awards |                          |   | 3,772   |  |   | 4,735   |  |   | 4,891  
|Weighted
average common shares outstanding for diluted EPS   |                          |   | 251,159 |  |   | 264,004 |  |   | 261,368
|Earnings
per share:                                          |                         
|Basic                                                        |                          | $ | 4.50    |  | $ | 4.34    |  | $ | 4.25   
|Diluted                                                      |                          | $ | 4.43    |  | $ | 4.26    |  | $ | 4.17   



The dilution from common stock
options is based on the treasury stock method. Under this method, proceeds based
on the exercise price plus unearned compensation and windfall tax benefits or
tax shortfalls, as defined by SFAS 123(R), are assumed to be used to repurchase
shares on the open market at the average market price for the year. The windfall
tax benefits are tax deductions we would receive upon the assumed exercise of
stock options in excess of the deferred income taxes we recorded related to the
compensation expense on the stock options. Tax shortfalls occur when the assumed
tax deductions are less than recorded deferred income taxes. The calculation
excludes options for which the exercise price on common stock was greater than
the average market price during the year. We had 1,496,500 and 55,800 such stock
options outstanding during 2008 and 2007, respectively. We had no options
outstanding for which the exercise price on common stock was greater than the
average market price during 2006.

During 2007 and 2006, we had
699,600 and 787,600 stock options outstanding, respectively, that were
antidilutive because of the unearned compensation and windfall tax benefits
included in the assumed proceeds under the treasury stock method. There were no
such antidilutive stock options outstanding during 2008.

The dilution from unvested
restricted stock awards and units is also based on the treasury stock method.
Assumed proceeds equal to the unearned compensation and windfall tax benefits or
tax shortfalls related to the awards, as defined by SFAS 123(R), are assumed to
be used to repurchase shares on the open market at the average market price for
the year. The windfall tax benefits or tax shortfalls are the difference between
tax deductions we would receive upon the assumed vesting of restricted stock
awards and units and the deferred income taxes we recorded related to the
compensation expense on the restricted stock awards and units. We had 1,009 and
850 restricted stock awards and units outstanding that were antidilutive during
2008 and 2006, respectively. There were no such restricted stock awards in
2007.

We are authorized to issue
750,000,000 shares of no-par-value common stock. In addition, we are authorized
to issue 50,000,000 shares of preferred stock having rights, preferences and
privileges that would be established by the Sempra Energy board of directors at
the time of issuance.

Shares of common stock held by
the ESOP were 1,177,196, 1,488,046 and 1,683,766 at December 31, 2008, 2007 and
2006, respectively. These shares are unallocated and therefore excluded from the
computation of EPS.



165





Excluding
shares held by the ESOP, common stock activity consisted of the following:



|                                                                                                         |                               |             |             |             |            |             |           |  
|-------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------- | ----------- | ----------- | ---------- | ----------- | --------- | -
|COMMON
STOCK ACTIVITY                                                                                   
|                                                                                                        
|                                                                                                         |                               |             | 2008        |             | 2007       |             | 2006      |  
|Common
shares outstanding, January 1                                                                     |                               | 261,214,009 |             | 262,005,690 |            | 257,187,943 |          
|                                                                                                         | Savings
plan issuance         |             | --          |             | 268,178    |             | 807,258   |  
|                                                                                                         | Shares
released from ESOP     |             | 310,850     |             | 195,720    |             | 232,650   |  
|                                                                                                         | Stock
options exercised       |             | 683,858     |             | 1,245,696  |             | 3,306,937 |  
|                                                                                                         | Restricted
stock issuances    |             | 4,002       |             | 803,706    |             | 920,900   |  
|                                                                                                         | Common
stock investment plan* |             | 1,508       |             | 95,499     |             | 352,736   |  
|                                                                                                         | Shares
repurchased            |             | (18,841,287 | )           | (3,349,771 | )           | (706,554  | )
|                                                                                                         | Shares
forfeited and other    |             | (48,659     | )           | (50,709    | )           | (96,180   | )
|Common
shares outstanding, December 31                                                                   |                               | 243,324,281 |             | 261,214,009 |            | 262,005,690 |          
|*
Participants in the Direct Stock Purchase Plan may reinvest dividends to
purchase newly issued shares.



Our board of directors has the
discretion to determine the payment and amount of future dividends.

COMMON
STOCK REPURCHASE PROGRAM

On September 11, 2007, our board
of directors authorized the repurchase of additional shares of our common stock
provided that the amounts expended for such purposes did not exceed the greater
of $2 billion or amounts expended to purchase no more than 40 million shares.
Purchases may include open-market and negotiated transactions, structured
purchase arrangements, and tender offers.

In April 2008, we entered into a
Collared Accelerated Share Acquisition Program under which we prepaid $1 billion
to repurchase shares of our common stock to be delivered later in 2008 in a
share forward transaction. Our outstanding shares used to calculate earnings per
share were reduced by the number of shares repurchased when they were delivered
to us, and the $1 billion purchase price was recorded as a reduction in
shareholders equity upon its prepayment. We received 18,416,241 shares under
the program (15,407,961 shares in the second quarter and 3,008,280 shares in the
fourth quarter) based on a final weighted average price of $54.30 per share.

This share repurchase program is
unrelated to share-based compensation as described in Note 10.

NOTE
14. ELECTRIC INDUSTRY REGULATION

BACKGROUND

California's legislative response
to the 2000 - 2001 energy crisis resulted in the California Department of Water
Resources (DWR) purchasing a substantial portion of power for California's
electricity users. In 2001, the DWR entered into long-term contracts with
suppliers, including Sempra Generation, to provide power for the utility
procurement customers of each of the California investor-owned utilities (IOUs),
including SDG&E. The California Public Utilities Commission (CPUC) allocates
the power and its administrative responsibility, including collection of power
contract costs from utility customers, among the IOUs. Effective in 2003, the
IOUs resumed responsibility for electric commodity procurement above their
allocated share of the DWR's long-term contracts.

POWER
PROCUREMENT AND RESOURCE PLANNING

Effective in 2003, the CPUC:

§

directed
the IOUs, including SDG&E, to resume electric commodity procurement to cover
their net short energy requirements, which are the total customer energy
requirements minus supply from resources owned, operated or contracted;



166





§

implemented
legislation regarding procurement and renewable energy portfolio standards;
and

§

established
a process for review and approval of the utilities' long-term resource and
procurement plans.

This process is intended to
identify anticipated needs for generation and transmission resources in order to
support transmission grid reliability and to better serve customers.

Sunrise
Powerlink Electric Transmission Line

In December 2008, the CPUC issued
a final decision authorizing SDG&E to construct a 500-kilovolt (kV) electric
transmission line between the Imperial Valley and the San Diego region (Sunrise
Powerlink). This line is designed to provide 1,000 MW of increased import
capability into the San Diego area. The decision allows SDG&E to construct
the Sunrise Powerlink along a route that would generally run south of the
Anza-Borrego Desert State Park. The decision also approves the environmental
impact review jointly conducted by the CPUC and the Bureau of Land Management
(BLM) and establishes a total project cost cap of $1.883 billion, including
approximately $190 million for environmental mitigation costs. In January 2009,
the BLM issued its decision approving the project, route and environmental
review.

Sunrise Powerlink costs will be
recovered in SDG&E's Electric Transmission Formula Rate (described below),
where SDG&E must demonstrate to the FERC that such costs were prudently
incurred.

The CPUC decision requires
SDG&E to adhere to certain commitments it made during the application
process, as follows:

§

not
to contract, for any length of term, with conventional coal generators to
deliver power via the Sunrise Powerlink;

§

if
any currently approved renewable energy contract that is deliverable via the
Sunrise Powerlink fails, to replace it with a viable contract with a renewable
generator located in the Imperial Valley; and

§

voluntarily
raise SDG&E's Renewables Portfolio Standard (RPS) goal to 33 percent by
2020.

The decision is subject to
rehearing before the CPUC and appeal to the California courts of appeal, or to
the California Supreme Court. Rehearing requests were required to be filed with
the CPUC on or before January 23, 2009, and parties wishing to appeal must first
seek rehearing with the CPUC. The Utility Consumers Action Network and the
Center for Biological Diversity/Sierra Club (CBD) timely applied for rehearing.
In addition, on January 21, 2009, CBD filed a petition for writ of review of the
CPUC decision with the California Supreme Court. The Supreme Court denied that
petition on February 18, 2009.

The Sunrise Powerlink route
crosses federal land and requires discretionary approvals from the BLM and the
United States Forest Service (USFS). The BLM issued a decision approving its
segment of the route on January 20, 2009. SDG&E expects the USFS to issue a
decision approving its segment of the route in the second quarter of 2009. Both
the BLM and the USFS approvals may be the subject of administrative and judicial
appeals.

Before construction can begin,
additional discretionary agency permits must be obtained, and those permits may
be subject to independent legal review. SDG&E expects the Sunrise Powerlink
to be in commercial operation in 2012.

Renewable
Energy

Pursuant to Senate Bill 107,
enacted in September 2006, the California Public Utilities Code requires certain
California electric retail sellers, including SDG&E, to deliver 20 percent
of their 2010 retail demand from renewable energy sources. The rules governing
this requirement, administered by both the CPUC and the California Energy
Commission, are generally known as the Renewables Portfolio Standard (RPS)
Program.

In February 2008, the CPUC issued
a decision defining flexible compliance mechanisms that can be used to meet the
RPS Program goals in 2010 and beyond, including clarifying rules within which
insufficient transmission is a permissible reason for failing to satisfy the RPS
Program goals. While SDG&E believes it will be able to comply with the RPS
Program requirements based on its contracting activity and application of the
flexible compliance



167





mechanisms,
it is possible that SDG&E could be penalized, though we cannot know the
amount that would be imposed.

SDG&E continues to
aggressively secure renewable energy supplies to achieve the RPS Program goals.
A substantial number of these supply contracts, however, are contingent upon
many factors, including:

§

access
to electric transmission infrastructure (including SDG&E's Sunrise Powerlink
transmission line);

§

timely
regulatory approval of contracted renewable energy projects;

§

the
renewable energy project developers' ability to obtain project financing and
permitting; and

§

successful
development and implementation of the renewable energy technologies.

While CPUC approval was received
for the Sunrise Powerlink project in December 2008, due to the extended
regulatory review period, SDG&E does not expect the Sunrise Powerlink
transmission line to be in operation until 2012, too late to provide
transmission capability to meet the RPS Program requirements for 2010 and 2011.
Consequently, it is unlikely that SDG&E will be able to meet the RPS Program
delivered-energy goal for those years. Without the application of the flexible
compliance mechanisms, SDG&E's failure to attain the 20-percent goal in
2010, or any subsequent years' goals, could subject it to CPUC-imposed penalties
of 5 cents per kilowatt hour of renewable energy under-delivery up to a maximum
penalty of $25 million per year.

Miramar
II Peaking Plant

In January 2009, the CPUC issued
a final decision approving SDG&E's application to construct a natural
gas-fired peaking plant in San Diego (Miramar II), next to an existing SDG&E
peaking plant. Miramar II is currently estimated to cost $57 million and will
have a capacity of 46.5 MW. SDG&E will own and operate the plant.
SDG&E expects the plant to be in operation by mid-2009.

Solar
Photovoltaic Program

In July 2008, SDG&E filed an
application with the CPUC proposing to install solar photovoltaic panels in the
San Diego area. These panels could potentially generate approximately 50 MW of
direct current power (approximately equivalent to 35 MW of power to the electric
grid). We estimate the cost of the program to be $250 million. A CPUC decision
is expected in the third quarter of 2009. If approved, we expect the program to
be completed in 2013.

Long-Term
Procurement Plan

In December 2007, SDG&E
exercised its option to acquire the El Dorado power plant in 2011 at Sempra
Generation's net book value. We estimate that the net book value at the date of
acquisition will be approximately $189 million.

San
Onofre Nuclear Generating Station (SONGS)

SONGS is jointly owned by
Southern California Edison (Edison) (78.21%), SDG&E (20%) and the city of
Riverside (1.79%). In September 2008, as part of Edison's 2009 General Rate
Case, SDG&E requested a $116.2 million base revenue requirement for 2009 (a
$10.2 million increase) to recover costs for its 20-percent ownership in SONGS.
SDG&E also requested $13.2 million for its share of SONGS refueling outage
expenses (per refueling outage) in 2009, a decrease of $2.7 million. The CPUC
issued draft and alternate decisions in November 2008, and SDG&E expects the
final CPUC decision in the first quarter of 2009. Until a final decision is
approved, SDG&E has received approval from the CPUC to track the change in
SONGS-related revenue requirement from January 1, 2009 through the effective
date of the final decision.

Edison is in the process of
replacing the steam generators at SONGS. Project completion is expected in 2010
and 2011 for Units 2 and 3, respectively. Total estimated capital expenditure
for the project, in 2004 dollars, is $671 million, excluding AFUDC. SDG&E's
current expected share is $169 million, of which $51 million has been incurred
through December 31, 2008, and there are $60 million of firm commitments at
December 31, 2008. In 2006, the CPUC approved SDG&E's participation in the
replacement project as well as providing SDG&E with full recovery of current
operating and maintenance costs via balancing account treatment effective
January 1, 2007.



168





Spent
Nuclear Fuel

SONGS owners are responsible for
interim storage of spent nuclear fuel generated at SONGS until the DOE accepts
it for final disposal. Spent nuclear fuel has been stored in the SONGS Units 1,
2 and 3 spent fuel pools and in the independent spent fuel storage installation
(ISFSI). Movement of all Unit 1 spent fuel to the ISFSI was completed in 2005.

§

Spent
fuel for Unit 2 is being stored in both the Unit 2 spent fuel pool and the
ISFSI.

§

Spent
fuel for Unit 3 is being stored in both the Unit 3 spent fuel pool and the
ISFSI.

Construction of a second ISFSI
pad to be completed in 2009 will provide sufficient storage capacity to allow
for the continued operation of SONGS through 2022.

Electric
Transmission Formula Rate

Effective July 1, 2007, SDG&E
recovers its annual transmission capital investment at a return on equity (ROE)
of 11.35 percent, an increase from the previous authorized ROE of 11.25 percent.
In May 2007, the FERC approved a formula rate mechanism that allows SDG&E to
recover the cost of owning and operating its transmission system through annual
informational filings with revised rates effective September 1 of each year. In
August 2008, SDG&E made such a filing with the FERC, increasing SDG&E's
transmission revenue requirement by $85 million, or 40%, effective September 1,
2008, for a twelve-month period. SDG&Es formula rate mechanism remains in
effect through August 2013.

NOTE
15. OTHER REGULATORY MATTERS

GENERAL
RATE CASE (GRC)

The CPUC uses a general rate case
proceeding to determine the Sempra Utilities' reasonable level of costs and to
set rates sufficient to allow the Sempra Utilities to recover their costs and
realize an acceptable rate of return on their investment.

In July 2008, the CPUC issued its
final decision in both SoCalGas' and SDG&E's 2008 General Rate Case (2008
GRC). The decision adopted the test-year 2008 revenue requirements, effective
retroactive to January 1, 2008. It also adopted the post-test year revenue
requirements that were included in settlement agreements filed with the CPUC.
These settlement agreements were with various groups representing the interests
of ratepayers and other constituents.

The CPUC decision:

§

increased
the 2008 annual revenue requirement as compared to 2007 by $59 million for
SoCalGas and $138 million for SDG&E;

§

provides
average annual increases of approximately $52 million (3%) for SoCalGas and $43
million (3%) for SDG&E, in each of the post-test years' (2009 through 2011)
revenue requirements;

§

established
a GRC period of four years (2008-2011); and

§

excludes
any earnings cap or earnings sharing during the GRC period.

SDG&E and SoCalGas will file
their next GRC applications in December 2010 for test year 2012.

UTILITY
INCENTIVE MECHANISMS

The CPUC applies
performance-based measures and incentive mechanisms to all California utilities.
Under such measures or mechanisms, the Sempra Utilities have income potential
above authorized base margins if they achieve or exceed specific performance and
operating goals, rather than relying solely on expanding utility plant to
increase earnings. Generally, for performance-based awards, if performance is
above or below specific benchmarks, the



169





utility
is eligible for financial awards or subject to financial penalties. There are
four general areas that operate under an incentive structure:

§

employee
safety

§

energy
efficiency programs

§

natural
gas procurement

§

natural
gas unbundled storage and system operator hub services

Incentive awards are included in
our earnings when we receive the CPUC's approval of the award, if applicable.
All award amounts discussed below are on a pretax basis.

Employee
Safety

The CPUC determines operational
incentives and the associated benchmarks as a component of a general rate case
or cost of service decision. The operational performance incentives in effect
for fiscal years 2008 through 2011 were established as part of the CPUC's final
decision in the 2008 GRC. This decision adopted modified performance measures
for customer satisfaction and employee safety for both SDG&E and SoCalGas,
and electric reliability for SDG&E. The Sempra Utilities reviewed these
modified measures and filed their response in September 2008, accepting the
safety performance measure but rejecting the electric reliability and customer
satisfaction measures, as allowed by the GRC decision. As a result, effective in
2008, the Sempra Utilities are no longer eligible for awards or subject to
penalties for electric reliability and customer satisfaction.

During the second quarter of
2008, the Sempra Utilities received CPUC approval for their 2007 Operational
Performance incentive awards of $10 million for SDG&E and $2 million for
SoCalGas. The Sempra Utilities plans to submit their employee safety results and
incentive award claims in May 2009 for performance in 2008.

Energy
Efficiency

Energy efficiency awards are
determined under an incentive mechanism established by the CPUC that applies to
the Sempra Utilities' performance over a three-year (2006  2008) energy
efficiency program period. In December 2008, the CPUC approved energy efficiency
awards of $10.8 million for SDG&E and $5.2 million for SoCalGas for 2006 and
2007 energy efficiency results. The awards were based on initial reports of
energy efficiency results submitted by the Sempra Utilities and are net of a
holdback of 65%. None, some or all of the holdback may be awarded to the Sempra
Utilities after the CPUC staff completes its final verification of the energy
efficiency results.

In accordance with the mechanism,
the Sempra Utilities plan on filing in the first quarter of 2009 for their
energy efficiency awards for 2008 results.

Natural
Gas Procurement

Beginning April 1, 2008, the
SDG&E and SoCalGas core natural gas supply portfolios were combined, and
SoCalGas now procures natural gas for SDG&E's core natural gas customers'
requirements. All SDG&E assets associated with its core natural gas supply
portfolio were transferred or assigned to SoCalGas. Accordingly, SDG&Es
incentive mechanism for natural gas procurement awards or penalties ended as of
the effective date of the combination of the core natural gas supply portfolios,
and SoCalGas' gas cost incentive mechanism (GCIM) is applied on the combined
portfolio basis going forward.

In January 2008, the CPUC
approved a SoCalGas GCIM award of $9 million for its core natural gas
procurement activities for the 12-month period ended March 31, 2007. In November
2008, SDG&E received approval of a $2.2 million natural gas procurement
incentive award for the final eight-month period ended March 31, 2008.

In January 2009, the CPUC
approved a SoCalGas GCIM award of $6.5 million for core natural gas procurement
activities in the 12-month period ended March 31, 2008, which will be recorded
in the first quarter of 2009.

Unbundled
Gas Storage and System Operator Hub Services

The CPUC issued a final decision
in December 2008 adopting an uncontested settlement agreement in Phase I of the
Sempra Utilities' Biennial Cost Allocation Proceeding (BCAP). The settlement
agreement will be in effect for six years (2009 through 2014) and resolves a
number of storage-related issues. It also provides that the annual net



170





revenues
(revenues less allocated service costs) from the unbundled storage and system
operator hub services programs be split between ratepayers and shareholders on a
graduated basis. The prior mechanism provided a 50/50 split of the net revenues
(2007 and prior) between ratepayers and shareholders. The mechanism requires
that:

§

the
first $15 million of net revenue be shared 90 percent ratepayer/10 percent
shareholder;

§

the
next $15 million shared 75 percent ratepayer/25 percent shareholder; and

§

all
additional net revenues shared 50 percent ratepayer/50 percent shareholder.

There is a total annual
shareholder cap of $20 million (pretax).

COST
OF CAPITAL

The cost of capital proceeding
determines the Sempra Utilities' authorized capital structure and the authorized
rate of return that the Sempra Utilities may earn on their electric and natural
gas distribution and electric generation assets.

SDG&E

In May 2007, SDG&E filed an
application with the CPUC seeking to update its cost of capital, authorized ROE,
and debt/equity ratios. In December 2007, the CPUC issued a final decision
increasing SDG&Es authorized ROE from 10.7 percent to 11.1 percent
effective January 1, 2008, and maintaining SDG&E's current capital structure
of:

§

49.00
percent common equity

§

5.75
percent preferred equity

§

45.25
percent long-term debt

As a result, SDG&Es
authorized return on rate base (ROR) was 8.40 percent effective January 1, 2008.

In May 2008, the CPUC issued a
decision establishing a uniform, multi-year cost of capital mechanism for
SDG&E that will replace its existing cost of capital mechanism. The new
mechanism requires a full cost of capital application every third year, with the
first full application to be filed in April 2010 for test year 2011. If there
were significant changes in the bond market between test years, ROE would
automatically be adjusted. In any year where the difference between the current
12-month October-September average Moody's utility bond rates and the
established benchmark (currently 6.02%) exceeds a 100-basis point trigger, an
automatic adjustment to SDG&E's ROE would be made through an October 15
advice letter to become effective on January 1 of the following year. No change
in ROE has been triggered for calendar year 2009. There is no provision for
capital structure adjustment outside of the test year, but an adjustment may be
permitted if credit ratings change in mid-cycle. The decision also allows an
adjustment outside of the mechanism process if an extraordinary or catastrophic
event occurs that has a material impact.

SoCalGas

SoCalGas' authorized ROE is 10.82
percent and its ROR is 8.68 percent. These rates continue to be effective until
market interest-rate changes are large enough to trigger an automatic adjustment
or until the CPUC orders a periodic review. SoCalGas' current authorized capital
structure is

§

48.0
percent common equity

§

6.4
percent preferred equity

§

45.6
percent long-term debt

2008
BIENNIAL COST ALLOCATION PROCEEDING (BCAP)

The purpose of the BCAP is to
adopt a new forecast of natural gas demand to allocate costs and set rates to
enable the Sempra Utilities to recover their natural gas distribution costs.

In August 2006, SDG&E,
SoCalGas and Edison jointly filed an application with the CPUC seeking its
approval of a series of revisions to the natural gas operations and service
offerings of the Sempra Utilities. The CPUC issued a final decision in December
2007 approving some, but not all, of the proposals and deferring a number of
issues to



171





the
Sempra Utilities BCAP where they could be addressed more fully. As discussed
above, under "Unbundled Gas Storage and System Operator Hub Services," the
parties reached a settlement agreement on a majority of the storage-related
issues and the CPUC issued its final decision approving the uncontested
settlement in December 2008.

The settlement agreement will
allow SoCalGas to invest in certain underground natural gas storage replacement
and expansion projects. These projects ultimately could add an estimated 145
million cubic feet per day (MMcfd) of storage injection capacity and
approximately 7 billion cubic feet (Bcf) of inventory capacity. The cost of
these investments is estimated at $250 million. This investment would be
incremental to the capital authorized in the 2008 GRC and would be treated like
existing storage assets, providing an additional earnings opportunity through
the resulting increase in SoCalGas' rate base in combination with the unbundled
storage revenue described in "Unbundled Gas Storage and System Operator Hub
Services" above.

NATURAL
GAS MARKET OIR

The CPUC considered natural gas
market issues, including market design and infrastructure requirements, as part
of its Natural Gas Market Order Instituting Rulemaking (OIR). In September 2006,
a final decision in Phase II of this proceeding was issued. This decision
reaffirmed the adequacy of the capacity of the SoCalGas and SDG&E systems to
meet then-current and forecasted demand. Among other things, this decision
established revised natural gas quality standards that apply to all natural gas
supplies entering the SoCalGas and SDG&E systems, including new supplies of
regasified liquefied natural gas. The South Coast Air Quality Management
District and the City of San Diego (jointly with Ratepayers for Affordable Clean
Energy) filed petitions for review in the California Court of Appeal and the
California Supreme Court challenging the CPUC's September 2006 decision. In
November 2007, the Court of Appeal determined that the California Supreme Court
had exclusive jurisdiction over the petitions for review. In July 2008, the
California Supreme Court denied the petitions for review, thereby affirming the
CPUC's decision in all respects.

ADVANCED
METERING INFRASTRUCTURE

In April 2007, the CPUC approved
SDG&E's request to install advanced meters with integrated two-way
communications functionality, providing a home area network for all customers,
including remote disconnect for the majority of residential customers. SDG&E
estimates expenditures for this project of $572 million (including approximately
$500 million in capital investment). This project involves replacing 1.4 million
electric meters and 900,000 natural gas meters throughout SDG&Es service
territory. Based on the evaluation of an initial installation of 4,500 meters,
SDG&E plans to begin full-scale deployment in the second quarter of 2009,
with completion by the end of 2011.

In September 2008, SoCalGas filed
an application with the CPUC for approval to upgrade approximately six million
natural gas meters with an advanced metering infrastructure at an estimated cost
of $1.1 billion (including approximately $900 million in capital investment). A
final CPUC decision is expected late in 2009. If approved as scheduled,
installation of the meters is expected to begin in 2011 and continue through
2015.

GREENHOUSE
GAS REGULATION

Legislation was enacted in 2006,
including California Assembly Bill 32 (AB 32) and California Senate Bill 1368,
mandating reductions in greenhouse gas emissions. The California Air Resources
Board (CARB) is the lead agency in developing a plan to meet these requirements
and is in the process of developing rules and market mechanisms that will be
implemented on January 1, 2012. The CPUC and California Energy Commission are
also in the process of making recommendations to the CARB regarding the rules
that should apply for the electricity and natural gas sectors. The CARB's formal
AB 32 Scoping Plan was adopted in December 2008.

These legislative mandates could
affect costs and growth at the Sempra Utilities and at Sempra Generation's power
plants. Any cost impact at the Sempra Utilities is expected to be recoverable
through rates. As discussed in Note 16 under "Environmental Issues," compliance
with this and similar legislation could adversely affect Sempra



172





Generation.
However, such legislation may also present growth opportunities for Sempra
Generation because of an increasing preference for natural gas and renewables
for electric generation, as opposed to other sources.

NOTE
16. COMMITMENTS AND CONTINGENCIES

LEGAL
PROCEEDINGS

We record reserves for legal
proceedings in accordance with SFAS 5, Accounting for Contingencies. At
December 31, 2008, Sempra Energy's reserves for unresolved legal proceedings, on
a consolidated basis, were $53 million. At December 31, 2008, SDG&E and
SoCalGas had reserves for unresolved legal proceedings of $31 million and $12
million, respectively. RBS Sempra Commodities assumed litigation reserves
related to Sempra Commodities, however, we have indemnified RBS should the
liabilities from the final resolution of these matters be greater than the
reserves.

The uncertainties that exist in
legal proceedings make it difficult to estimate with reasonable certainty the
costs and effects of resolving these matters. Accordingly, actual costs incurred
may differ materially from insured or reserved amounts and could materially
adversely affect our business, cash flows, results of operations, and financial
condition.

SDG&E
2007 Wildfire Litigation

In October 2007, San Diego County
experienced catastrophic wildfires. In July 2008, the California Department of
Forestry and Fire Protection (Cal Fire) issued investigation reports stating
that two fires (the Witch and Rice fires) were SDG&E "power line caused" and
that a third fire (the Guejito fire) occurred when a wire securing a Cox
Communications' fiber optic cable came into contact with an SDG&E power line
"causing an arc and starting the fire." Cal Fire states that the Rice fire
burned approximately 9,500 acres and damaged 206 homes and two commercial
properties. The reports indicate that the Witch and Guejito fires merged and
eventually burned approximately 198,000 acres, resulted in two fatalities,
injured approximately 40 firefighters and destroyed approximately 1,141 homes.
Cal Fire is still investigating the perimeters of these two fires to determine
the damages associated with each fire. In September 2008, the Consumer
Protection and Safety Division of the California Public Utilities Commission
issued a staff investigative report reaching substantially the same conclusions
as the Cal Fire reports. However, the staff report also opines that the power
lines involved in the Witch and Rice fires and the lashing wire involved in the
Guejito fire were not properly designed, constructed and maintained as required
by commission rules. In November 2008, the Commission initiated an investigation
to determine whether SDG&E and Cox Communications violated any rules or
regulations in connection with the fires.

Approximately 100 lawsuits, some
of which seek class action certification, have been filed against SDG&E and
Sempra Energy in San Diego County Superior Court seeking to recover damages in
unspecified amounts, including punitive damages and other costs associated with
the three fires. Plaintiffs include owners and insurers of properties that were
damaged or destroyed and public entities seeking recovery of firefighting costs.
They assert various bases for recovery, including inverse condemnation based
upon a California Court of Appeal decision finding that another California
investor-owned utility was subject to strict liability, without regard to
foreseeability or negligence, for damages resulting from a wildfire ignited by
power lines. SDG&E has filed cross-complaints against Cox Communications
seeking indemnification for any liability that SDG&E may incur that relates
to the Guejito fire.

By January 2009, insurers
representing 92 percent of the total California homeowner insurance market have
paid out approximately $1.4 billion on more than 18,000 claims relating to the
three fires. These include claims for approximately 900 of the 1,300 houses,
mobile homes, and apartment units identified in public records as having been
destroyed by the three fires. The litigation includes additional claims for
uninsured and underinsured structures, firefighting costs, business
interruption, evacuation expenses, agricultural damage, and personal injuries.
The wildfire litigation, including any appeals, could take a number of years to
be resolved in light of the complexity of the matters and the large number of
parties and claims involved. If SDG&Es ultimate liability were to exceed
its $1.1 billion of liability insurance coverage, SDG&E would request
authorization from the FERC and CPUC to



173





recover
the excess amounts in utility rates. The company is unable to predict the degree
of success SDG&E may have in pursuing such requests or the timing of any
recovery.

DWR
Contract

In February 2002, the California
Energy Oversight Board (CEOB) and the CPUC filed challenges at the Federal
Energy Regulatory Commission (FERC) to the DWR's contracts with Sempra
Generation and other power suppliers. After the FERC upheld the contracts in
2003, the CEOB and CPUC appealed to the U.S. Court of Appeals for the Ninth
Circuit (Ninth Circuit Court of Appeals), challenging the FERC's application of
the Mobile-Sierra doctrine's "public interest" standard of review to the
contracts without having first determined that the contracts met a more rigorous
"just and reasonable" standard of review. In June 2008, the United States
Supreme Court (Supreme Court) ruled that the FERC was correct to apply the
Mobile-Sierra doctrine (which presumes that contract rates are just and
reasonable) absent a demonstration that one of the contracting parties' unlawful
manipulation of the market directly affected the rates. The Supreme Court ruled
that the FERC should clarify its findings on this issue and consider whether the
contract rates seriously harm the public interest.

At various times since the
contract's inception, Sempra Generation and the DWR have also had disputes
regarding the meaning of terms and performance of their agreement under which
Sempra Generation sells electricity to the DWR. In 2002, in a state civil
action, the DWR sought to void its contract with Sempra Generation, seeking
damages, injunctive and declaratory relief, and $100 million in punitive
damages. The DWR claims that Sempra Generation misrepresented its intention and
ability to construct a temporary phase of one power project and, alternatively,
breached its contract by failure to construct and deliver power from that phase.
In June 2005, the California Court of Appeal reversed a previous summary
judgment in favor of Sempra Generation. The Court concluded that the contract
language was ambiguous and presented triable issues of material fact that must
be addressed by further evidence and proceedings. The case was sent back to the
trial court. In January 2007, the DWR added additional claims for fraud and
breach of contract. In June 2008, the California Court of Appeal upheld the
trial court's denial of Sempra Generation's motion to compel the DWR to
arbitrate its new claims. The case was returned to the San Diego Superior Court
for further proceedings. The case is scheduled for a jury trial in May 2009.

In February 2006, the DWR began
an additional arbitration against Sempra Generation related to the manner in
which Sempra Generation schedules its Mexicali plant. The DWR sought $100
million in damages and an order terminating the contract. Arbitration hearings
were held in November 2008 and on January 16, 2009, the arbitration panel issued
a decision denying all of the DWR's claims.

In September 2008, the DWR
initiated another arbitration proceeding against Sempra Generation, alleging
that Sempra Generation had breached the parties agreement in various
operational respects, and violated the order issued by the first arbitration
panel relating to the amount refunded to the DWR and the manner in which Sempra
Generation operates. The DWR seeks $60 million in damages and an order
terminating the contract.

FERC
Refund Proceedings

The FERC is investigating prices
charged by various electric suppliers to buyers in the California Power Exchange
(PX) and Independent System Operator (ISO) markets. In December 2002, a FERC
Administrative Law Judge (ALJ) issued preliminary findings indicating that the
PX and ISO owe power suppliers $1.2 billion for the October 2, 2000 through June
20, 2001 period. This amount is the $3.0 billion that the California PX and ISO
still owe energy companies less $1.8 billion that the energy companies charged
California customers in excess of the preliminarily determined competitive
market clearing prices. In March 2003, the FERC adopted its ALJ's findings, but
changed the calculation of the refund by basing it on a different benchmark of
natural gas prices. This change would increase the refund obligations from $1.8
billion to more than $3 billion for the same time period.

Various parties, including Sempra
Commodities, appealed the FERC's order to the Ninth Circuit Court of Appeals. In
August 2006, the Court of Appeals held that the FERC had properly established
October 2, 2000 through June 20, 2001 as the refund period and had properly
excluded certain short-term bilateral transactions between sellers and the DWR
from the refund proceedings. However, the court also held that the FERC erred in
excluding certain multi-day transactions from the refund proceedings. Finally,
while the court upheld the FERC's decision not to extend the refund proceedings
to the summer period (prior to October 2, 2000), it found that the FERC should
have considered other remedies for tariff violations that are alleged to have
occurred prior to October 2, 2000. The Ninth Circuit



174





Court
of Appeals returned the matter to the FERC for further proceedings. In November
2007, Sempra Commodities and other entities filed requests for rehearing of the
Ninth Circuit Court of Appeals August 2006 decision.

In August 2007, the Ninth Circuit
Court of Appeals issued a decision reversing and remanding FERC orders declining
to provide refunds in a related proceeding regarding short-term bilateral sales
up to one month in the Pacific Northwest. The court found that some of the
short-term sales between the DWR and various sellers (including Sempra
Commodities) that had previously been excluded from the refund proceeding
involving sales in the ISO and PX markets in California, were within the scope
of the Pacific Northwest refund proceeding. In December 2007, Sempra Commodities
and other sellers filed requests for rehearing of the Ninth Circuit Court of
Appeals August 2007 decision. On remand, the FERC could order refunds for
short-term sales to the DWR in the Pacific Northwest refund proceeding.

In a separate complaint filed
with the FERC in 2002, the California Attorney General challenged the FERC's
authority to establish a market-based rate system and also contended that even
if such a system were valid, electricity sellers had failed to comply with the
FERC's quarterly reporting requirements. The Attorney General requested that the
FERC order refunds from suppliers. The FERC dismissed the complaint and instead
ordered sellers to restate their reports. After an appeal by the California
Attorney General, the Ninth Circuit Court of Appeals upheld the FERC's authority
to establish a market-based rate system, but stated that failure to file
transaction-specific quarterly reports gave the FERC authority to order refunds
with respect to jurisdictional sellers. The Supreme Court has declined further
review of the Ninth Circuit Court of Appeals' order. On remand, the FERC could
order refunds or disgorgement of profits for periods in addition to those
covered by its prior refund orders.

RBS Sempra Commodities has
reserves for the estimated refund liability that reflect its estimate of the
effect of the FERC's revision of the benchmark prices it will use to calculate
refunds and other refund-related developments. Pursuant to the agreements
related to the formation of RBS Sempra Commodities, we have indemnified RBS
related to these proceedings should the liability from the final resolution be
greater than the reserves.

FERC
Manipulation Investigation

The FERC has separately
investigated whether there was manipulation of short-term energy markets in the
western United States that would constitute violations of applicable tariffs and
warrant disgorgement of associated profits. In this proceeding, the FERC's
authority is not limited to the periods relevant to the refund proceeding. In
May 2002, the FERC ordered all energy companies engaged in electric energy
trading activities to state whether they had engaged in various specific trading
activities in violation of the PX and ISO tariffs.

In June 2003, the FERC ordered a
number of entities, including Sempra Commodities, to show why they should not
disgorge profits from certain transactions between January 1, 2000 and June 20,
2001 that are asserted to have constituted gaming and/or anomalous market
behavior under the California ISO and/or PX tariffs. In October 2003, Sempra
Commodities agreed to pay $7.2 million in full resolution of these
investigations. That liability was recorded as of December 31, 2003. The Sempra
Commodities settlement was approved by the FERC in August 2004. Certain
California parties sought rehearing of this order, which the FERC largely denied
in November 2008. The California parties have appealed the FERC's orders to the
Ninth Circuit Court of Appeals.

Other
Litigation

Sempra Energy and several
subsidiaries, along with three oil and natural gas companies, the City of
Beverly Hills, and the Beverly Hills Unified School District, are defendants in
a toxic tort lawsuit filed in Los Angeles County Superior Court by approximately
1,000 plaintiffs. This lawsuit claims that various emissions resulted in cancer
or fear of cancer. We have submitted the case to our insurers, who have reserved
their rights with respect to coverage. In November 2006, the court granted the
defendants' summary judgment motions based on lack of medical causation for the
12 initial plaintiffs scheduled to go to trial first. The court also granted
summary judgment excluding punitive damages. The court has stayed the case as to
the remaining plaintiffs pending the appeal of the rulings.

In 1998, we converted our
traditional pension plans (other than the SoCalGas union employee plan) to cash
balance plans. In July 2005, a lawsuit was filed against SoCalGas in the U.S.
District Court for the Central District of California alleging that the
conversion unlawfully discriminated against older employees and failed to
provide required disclosure of a reduction in benefits. In October 2005, the
court dismissed three of the four causes of action and, in March 2006, dismissed
the remaining cause of action. Plaintiffs appealed to the Ninth Circuit Court of



175





Appeals
and, in August 2008, the court affirmed the dismissal of three of the four
causes of action and reversed the District Courts dismissal of the remaining
cause of action. In November 2008, the Ninth Circuit Court of Appeals
denied plaintiffs' request for rehearing.

We are also defendants in
ordinary routine litigation incidental to our businesses, including personal
injury, product liability, property damage and other claims. California juries
have demonstrated an increasing willingness to grant large awards, including
punitive damages, in these cases.

Resolved
Matters

We have accrued liabilities for
resolved matters of:

§

$380
million at Sempra Energy Consolidated

§

$32
million at SDG&E

§

$64
million at SoCalGas

These amounts are for settlements
related to certain litigation arising out of the 2000  2001 California energy
crisis.

The following is a description of
specific litigation settlements.

Continental
Forge Settlement

The Continental Forge
class-action and individual antitrust and unfair competition lawsuits in
California and Nevada alleged that Sempra Energy and the Sempra Utilities
unlawfully sought to control natural gas and electricity markets. The detailed
terms of these settlements were reported previously, and are summarized as
follows:

§

In
January 2006, in order to settle the California and Nevada litigation, we agreed
to make cash payments in installments totaling $377 million. Of this amount,
$347 million relates to the California Continental Forge and California class
action price reporting litigation, and $30 million relates to the Nevada
Continental Forge litigation. In March 2007, Sempra Energy and the Sempra
Utilities entered into a separate settlement agreement with the City of Los
Angeles resolving all of its claims in the Continental Forge litigation in
return for payment of $8.5 million.

§

Additional
consideration for the January 2006 California settlement includes an agreement
that Sempra LNG would sell to the Sempra Utilities, subject to annual CPUC
approval, regasified liquefied natural gas (LNG) for a period of 18 years
beginning in 2011 at the California border index price minus $0.02 per million
British thermal units (MMBtu). Also, Sempra Generation voluntarily would reduce
the price that it charges for power and limit the locations at which it would
deliver power under its DWR contract. Based on the expected contractual power
deliveries, this discount would have a potential value of $300 million over the
remaining term of the contract.

§

Under
the terms of the January 2006 settlements, $83 million was paid in August 2006,
$83 million was paid in August 2007, and $25.8 million was paid in August 2008.
Installments of $24.8 million will be paid on each successive anniversary of the
closing date (August 2008) through the seventh anniversary of the closing date.
Under the terms of the City of Los Angeles settlement, $8.5 million was paid in
April 2007. A portion of the reserves was discounted at 7 percent, the rate
specified for prepayments in the settlement agreement. For payments not
addressed in the agreement, 6 percent was used to approximate our average cost
of financing.

§

In
September 2006, the Clark County District Court approved the Nevada settlement.
In July 2008, the California Attorney General and the DWR dismissed their appeal
of the July 2006 San Diego County Superior Court order approving the California
settlement, and all of the settlements became final in August 2008. The reserves
recorded for the settlements in 2005 fully provide for the present value of both
the cash amounts to be paid in the settlements and the price discount to be
provided on electricity to be delivered under the DWR contract by Sempra
Generation.



176





Natural
Gas Cases

In April 2003, Sierra Pacific
Resources and its utility subsidiary Nevada Power filed a lawsuit in the U.S.
District Court in Nevada against major natural gas suppliers, including Sempra
Energy, the Sempra Utilities and Sempra Commodities. The lawsuit claimed that
the defendants conspired to manipulate and inflate the prices that Nevada Power
had to pay for its natural gas by 1) preventing the construction of natural gas
pipelines to serve Nevada and other Western states, and 2) reporting
artificially inflated prices to trade publications. In December 2008, we paid
$700,000 to settle the case, which has now been dismissed.

Five cases against Sempra Energy,
Sempra Commodities, the Sempra Utilities and various other companies are pending
in the U.S. District Court in Nevada. Plaintiffs claim that energy prices were
unlawfully manipulated 1) by reporting artificially inflated natural gas prices
to trade publications and 2) by entering into deceptive transactions such as
wash trades and churning transactions. In January 2009, we entered into a
settlement agreement in which we agreed to pay $2 million to resolve these
cases.

Electricity
Case

In November 2006, the U.S.
District Court in San Diego dismissed a lawsuit filed by the California Attorney
General in November 2005 against Sempra Commodities alleging illegal
market-gaming activities during the California energy crisis and claiming
unspecified civil penalties and damages. The Ninth Circuit Court of Appeals
affirmed the dismissal in September 2008.

NATURAL
GAS CONTRACTS

SoCalGas has the responsibility
for procuring natural gas for both SDG&Es and SoCalGas core customers in a
combined portfolio. SoCalGas buys natural gas under short-term and long-term
contracts for this portfolio. Purchases are from various southwestern U.S., U.S.
Rockies,andCanadiansuppliers and are primarily based on
monthly spot-market prices.

SoCalGas transports natural gas
primarily under long-term firm interstate pipeline capacity agreements that
provide for annual reservation charges, which are recovered in rates. SoCalGas
has commitments with interstate pipeline companies for firm pipeline capacity
under contracts that expire at various dates through 2025. Note 15 discusses the
CPUC's Natural Gas Market OIR.

At December 31, 2008, the future
minimum payments under existing natural gas contracts and natural gas storage
and transportation contracts were:



|                           |                                                                                                 |  |                            |     |  |             |   |       |       |   |       |  | 
|-------------------------- | ----------------------------------------------------------------------------------------------- |  | -------------------------- | --- |  | ----------- | - | ----- | ----- | - | ----- |  | 
|Sempra
Energy Consolidated
|(Dollars
in millions)      |                                                                                                 |  | Storage and Transportation |     |  | Natural Gas | * |       | Total | *
|2009                       |                                                                                                 |  | $                          | 142 |  |             | $ | 1,123 |       | $ | 1,265 | 
|2010                       |                                                                                                 |  |                            | 111 |  |             |   | 424   |       |   | 535   | 
|2011                       |                                                                                                 |  |                            | 74  |  |             |   | 267   |       |   | 341   | 
|2012                       |                                                                                                 |  |                            | 45  |  |             |   | 3     |       |   | 48    | 
|2013                       |                                                                                                 |  |                            | 44  |  |             |   | 3     |       |   | 47    | 
|Thereafter                 |                                                                                                 |  |                            | 211 |  |             |   | --    |       |   | 211   | 
|Total
minimum payments     |                                                                                                 |  | $                          | 627 |  |             | $ | 1,820 |       | $ | 2,447 | 
|*                          | Excludes
amounts related to Sempra LNGs contract with Tangguh PSC Contractors
discussed below.



|                       |  |  |                |     |  |             |   |       |       |   |       | 
|---------------------- |  |  | -------------- | --- |  | ----------- | - | ----- | ----- | - | ----- | 
|SoCalGas               |  |  |                |     |  |             |   |       |       |  
|(Dollars
in millions)  |  |  | Transportation |     |  | Natural Gas |   |       | Total |  
|2009                   |  |  | $              | 136 |  |             | $ | 855   |       | $ | 991   | 
|2010                   |  |  |                | 111 |  |             |   | 423   |       |   | 534   | 
|2011                   |  |  |                | 74  |  |             |   | 266   |       |   | 340   | 
|2012                   |  |  |                | 45  |  |             |   | 3     |       |   | 48    | 
|2013                   |  |  |                | 44  |  |             |   | 3     |       |   | 47    | 
|Thereafter             |  |  |                | 211 |  |             |   | --    |       |   | 211   | 
|Total
minimum payments |  |  | $              | 621 |  |             | $ | 1,550 |       | $ | 2,171 | 



177







| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 



Total payments under natural gas
contracts were:

|                           |                          |       |      |       |   |      
|-------------------------- | ------------------------ | ----- | ---- | ----- | - | -----
|                           | Years ended December 31,
|(Dollars
in millions)      | 2008                     | 2007  | 2006
|Sempra
Energy Consolidated | $                        | 3,469 | $    | 2,976 | $ | 2,926
|SDG&E                      |                          | 12    |      | 390   |   | 380  
|SoCalGas                   |                          | 3,145 |      | 2,413 |   | 2,387



Sempra LNG has a purchase
agreement with Tangguh PSC Contractors for the supply of 500 million cubic feet
of natural gas per day from Indonesias Tangguh liquefaction facility to Sempra
LNGs Energía Costa Azul regasification terminal. The contracted volume
deliveries under the 20-year agreement will begin in 2009 and supply half of the
capacity of Energía Costa Azul. The price of natural gas that Sempra LNG
purchases is based on the Southern California border index.

As of December 31, 2008, minimum
payments under this contract are expected to be:

§

$366
million in 2009

§

$1.1
billion in 2010

§

$1.1
billion in 2011

§

$1.1
billion in 2012

§

$1.1
billion in 2013

§

$17.9
billion for the remainder of the contract term

Minimum payments are based on
forward prices of the Southern California border index price, plus an estimated
1 percent escalation per year beyond 2013. Sempra LNG has a contract to sell a
portion of the volumes purchased from Tangguh PSC to Mexicos national electric
company, Comisión Federal de Electricidad (CFE) at prices that are based on the
Southern California border index price. Sempra LNG also has an agreement with
RBS Sempra Commodities for RBS Sempra Commodities to market any volumes
purchased from Tangguh PSC that are not sold to the CFE.

PURCHASED-POWER
CONTRACTS

For 2009, SDG&E expects to
receive 27 percent of its customer power requirements from DWR allocations. The
remaining requirements are expected to be met as follows

§

SONGS:
18 percent

§

Long-term
contracts: 18 percent (of which 9 percent is provided by renewable energy
contracts expiring on various dates through 2025)

§

Other
SDG&E-owned generation (including Palomar) and tolling contracts (including
OMEC): 22 percent

§

Spot
market purchases: 15 percent.

The long-term contracts expire on
various dates through 2035.

At December 31, 2008, the
estimated future minimum payments under SDG&Es long-term purchased-power
contracts (not including the DWR allocations) were:

|                        |                                                                  |   |       |  | 
|----------------------- | ---------------------------------------------------------------- | - | ----- |  | 
|(Dollars
in millions)   |                                                                  |   |       | 
|2009                    |                                                                  | $ | 342   | 
|2010                    |                                                                  |   | 249   | 
|2011                    |                                                                  |   | 252   | 
|2012                    |                                                                  |   | 250   | 
|2013                    |                                                                  |   | 245   | 
|Thereafter              |                                                                  |   | 1,676 | 
|Total
minimum payments* |                                                                  | $ | 3,014 | 
|*                       | Excludes
amounts related to OMEC as it is consolidated at
SDG&E.



178







| |  |  |  |  | 
| |  |  |  |  | 



The payments represent capacity
charges and minimum energy purchases. SDG&E is required to pay additional
amounts for actual purchases of energy that exceed the minimum energy
commitments. Excluding DWR-allocated contracts, total payments under the
contracts were:

§

$393
million in 2008

§

$351
million in 2007

§

$344
million in 2006

LEASES

Sempra Energy, SDG&E, PE and
SoCalGas have operating leases on real and personal property expiring at various
dates from 2009 to 2045. Certain leases on office facilities contain escalation
clauses requiring annual increases in rent ranging from 2 percent to 6 percent
at Sempra Energy, 4 percent to 6 percent at SDG&E, and 2 percent to 5
percent at both PE and SoCalGas. The rentals payable under these leases may
increase by a fixed amount each year or by a percentage of a base year, and most
leases contain extension options that we could exercise.

The Sempra Utilities had a master
lease agreement with GE Capital, which was terminated in November 2008 and
contained a repayment provision for any outstanding amounts to be repaid within
twelve months. At December 31, 2008, these amounts were $38 million and $46
million for SDG&E and SoCalGas, respectively. A new master lease agreement
was entered into with RBS Asset Finance, Inc., with an aggregate maximum limit
of $100 million combined for the Sempra Utilities.

Rent expense totaled:



|                           |                          |      |      |     |   |    
|-------------------------- | ------------------------ | ---- | ---- | --- | - | ---
|                           | Years ended December 31,
|(Dollars
in millions)      | 2008                     | 2007 | 2006
|Sempra
Energy Consolidated | $                        | 100  | $    | 141 | $ | 131
|SDG&E                      |                          | 25   |      | 24  |   | 23 
|PE                         |                          | 65   |      | 68  |   | 62 
|SoCalGas                   |                          | 52   |      | 54  |   | 49 



At December 31, 2008, the minimum
rental commitments payable in future years under all noncancelable leases were
as follows:



|                                |                            |       |    |          |     |  |   |     |  |   |     | 
|------------------------------- | -------------------------- | ----- | -- | -------- | --- |  | - | --- |  | - | --- | 
|(Dollars
in millions)           | Sempra Energy Consolidated | SDG&E | PE | SoCalGas
|2009                            | $                          | 99    |    | $        | 24  |  | $ | 60  |  | $ | 47  | 
|2010                            |                            | 98    |    |          | 22  |  |   | 52  |  |   | 46  | 
|2011                            |                            | 83    |    |          | 21  |  |   | 39  |  |   | 39  | 
|2012                            |                            | 51    |    |          | 19  |  |   | 9   |  |   | 9   | 
|2013                            |                            | 42    |    |          | 16  |  |   | 5   |  |   | 4   | 
|Thereafter                      |                            | 346   |    |          | 59  |  |   | 14  |  |   | 14  | 
|Total
future rental commitments | $                          | 719   |    | $        | 161 |  | $ | 179 |  | $ | 159 | 

CONSTRUCTION
AND DEVELOPMENT PROJECTS

Sempra Energy has developed or is
in the process of constructing various capital projects in the United States and
in Mexico. The following is a summary of contractual commitments and
contingencies related to the construction projects.

SDG&E

At December 31, 2008, SDG&E
has commitments to make payments in 2009 of:

§

$48
million for implementation of the Smart Metering Program



179





§

$28
million for replacement of the SONGS steam generators

Sempra
Pipelines & Storage

Sempra Pipelines & Storage
entered into agreements for the construction of the natural gas storage
facilities at Bay Gas and Mississippi Hub. At December 31, 2008, Sempra
Pipelines & Storage expects to make payments of $35 million in 2009 under
each of these contracts.

Liberty Gas Storageas
currently permitted, is a 17 Bcf salt-cavern natural gas storage facility
located in Calcasieu Parish, Louisiana. The facility has been under construction
by Sempra Pipelines & Storage and its 25-percent partner Proliance
Transportation and Storage, LLC. When completed, Liberty will be connected with
several interstate pipelines, including the Cameron Interstate Pipeline operated
by Sempra Pipelines & Storage, and will connect area LNG regasification
terminals to an interstate natural gas transmission system and storage
facilities. We estimate the total project cost to be approximately $250 million,
and we have expended $204 million through December 31, 2008. Completion of the
project has been delayed by subsurface and well-completion problems. If ongoing
corrective measures prove to be unsuccessful, the salt-cavern facility may not
go into service, or may have reduced capacity when placed in service. In the
event that the cavern is abandoned, we may be required to take an impairment
charge of up to $65 million after tax.

Sempra
LNG

In August 2005, Sempra LNG
entered into an agreement with a group of companies for the construction of the
Cameron LNG receipt facility. As of December 31, 2008, Sempra LNG expects to
make payments under the contracts of $27 million in 2009. Force majeure and cost
overrun claims have been made by some of these companies for additional costs,
primarily related to hurricanes. Sempra LNG is currently in negotiations with
the companies, and cannot estimate at this time the additional amounts that may
be paid.

Sempra LNG has contracted for the
construction of the Energía Costa Azul LNG receipt facility, the
nitrogen-injection facility and the project's breakwater. As of December 31,
2008, Sempra LNG expects to make payments under the contracts of $39 million in
2009.

GUARANTEES

Sempra Energys guarantees
related to RBS Sempra Commodities and Rockies Express are discussed in Note 6.

Sempra Energy has guaranteed $25
million related to debt issued by Chilquinta Energía Finance Co., LLC, an
unconsolidated affiliate.  The fair value of this guarantee is negligible
and the associated performance risk is not significant.

As of December 31, 2008,
SDG&E and SoCalGas did not have any outstanding guarantees.

SEMPRA
GENERATION'S CONTRACT WITH THE DWR

In May 2001, Sempra Generation
entered into a ten-year agreement with the DWR to supply up to 1,900 MW of power
to California. Sempra Generation delivers energy to the DWR, primarily from its
portfolio of natural gas-fired plants in the western United States and Baja
California, Mexico. Additional information concerning this contract is provided
under "Legal Proceedings - DWR Contract" above.

DEPARTMENT
OF ENERGY NUCLEAR FUEL DISPOSAL

The Nuclear Waste Policy Act of
1982 made the DOE responsible for the disposal of spent nuclear fuel. However,
it is uncertain when the DOE will begin accepting spent nuclear fuel from SONGS.
This delay will lead to increased costs for spent fuel storage.  This cost
will be recovered through SONGS revenue unless SDG&E is able to recover the
increased cost from the federal government.



180





ENVIRONMENTAL
ISSUES

Our operations are subject to
federal, state and local environmental laws. We also are subject to regulations
related to hazardous wastes, air and water quality, land use, solid waste
disposal and the protection of wildlife. These laws and regulations require that
we investigate and correct the effects of the release or disposal of materials
at sites associated with our past and our present operations. These sites
include those at which we have been identified as a Potentially Responsible
Party (PRP) under the federal Superfund laws and similar state laws.

In addition, we are required to
obtain numerous governmental permits, licenses and other approvals to construct
facilities and operate our businesses. The related costs of environmental
monitoring, pollution control equipment, cleanup costs, and emissions fees are
significant. Increasing national and international concerns regarding global
warming and mercury, carbon dioxide, nitrogen oxide and sulfur dioxide emissions
could result in requirements for additional pollution control equipment or
significant emissions fees or taxes that could adversely affect Sempra
Generation. The Sempra Utilities' costs to operate their facilities in
compliance with these laws and regulations generally have been recovered in
customer rates.

We generally capitalize the
significant costs we incur to mitigate or prevent future environmental
contamination or extend the life, increase the capacity, or improve the safety
or efficiency of property used in current operations. The following table shows
(in millions) our capital expenditures in order to comply with environmental
laws and regulations:



|                                                                    |   |                          |   |      |   |      | 
|------------------------------------------------------------------- | - | ------------------------ | - | ---- | - | ---- | 
|                                                                    |   | Years ended December 31,
|                                                                    |   | 2008                     |   | 2007 |   | 2006
|Sempra
Energy Consolidated*                                         | $ | 30                       | $ | 19   | $ | 26  
|SDG&E                                                               |   | 18                       |   | 11   |   | 14  
|SoCalGas                                                            |   | 9                        |   | 6    |   | 6   
|*
In cases of non-wholly owned affiliates, includes only our
share.



Increases from 2007 to 2008 are
primarily due to SDG&E's spending related to the Sunrise Powerlink and the
Miramar II peaking plant, and Sempra LNG's spending related to the Energía Costa
Azul LNG receipt terminal. We have not identified any significant environmental
issues outside the United States. Over the next five years, SDG&E expects to
incur costs of approximately $190 million for environmental mitigation measures
associated with the Sunrise Powerlink construction project.

At the Sempra Utilities, costs
that relate to current operations or an existing condition caused by past
operations are generally recorded as a regulatory asset due to the probability
that these costs will be recovered in rates.

The environmental issues
currently facing us or resolved during the last three years include 1)
investigation and remediation of the Sempra Utilities' manufactured-gas sites,
2) cleanup of third-party waste-disposal sites used by the Sempra Utilities at
sites which have been identified as PRPs and 3) mitigation of damage to the
marine environment caused by the cooling-water discharge from SONGS. The
requirements for enhanced fish protection and restoration of 150 acres of
coastal wetlands for the SONGS mitigation are in process and a 150-acre
artificial reef was completed in 2008. The table below shows the status at
December 31, 2008, of the Sempra Utilities' manufactured-gas sites and the
third-party waste-disposal sites identified as PRPs:



|                                 |  |                   |  |                   
|-------------------------------- |  | ----------------- |  | ------------------
|                                 |  | # Sites Completed |  | # Sites In Process
|SDG&E                            |  |                   |  |                   
|Manufactured-gas
sites           |  | 3                 |  | --                
|Third-party
waste-disposal sites |  | 1                 |  | 1                 
|SoCalGas                         |  |                   |  |                   
|Manufactured-gas
sites           |  | 34                |  | 8                 
|Third-party
waste-disposal sites |  | 1                 |  | 1                 



We record environmental
liabilities at undiscounted amounts when our liability is probable and the costs
can be reasonably estimated. In many cases, however, investigations are not yet
at a stage where we can determine whether we are liable or, if the liability is
probable, to reasonably estimate the amount or range of amounts of the costs.



181





Estimates
of our liability are further subject to uncertainties such as the nature and
extent of site contamination, evolving cleanup standards and imprecise
engineering evaluations. We review our accruals periodically and, as
investigations and cleanup proceed, we make adjustments as necessary. The
following table shows (in millions) our accrued liabilities for environmental
matters at December 31, 2008:



|                    |                                                                      |                         |  |                             |  |                                   |  |                             |  |             | 
|------------------- | -------------------------------------------------------------------- | ----------------------- |  | --------------------------- |  | --------------------------------- |  | --------------------------- |  | ----------- | 
|                    |                                                                      | Manufac-tured Gas Sites |  | Waste Disposal Sites (PRP*) |  | Former Fossil-Fueled Power Plants |  | Other Hazardous Waste Sites |  | Total      
|SDG&E**             |                                                                      | $       0.3             |  | $       0.2                 |  | $       6.3                       |  | $       1.0                 |  | $       7.8
|SoCalGas            |                                                                      | 37.4                    |  | 0.6                         |  | --                                |  | 1.8                         |  | 39.8       
|Other               |                                                                      | 0.2                     |  | 0.9                         |  | --                                |  | --                          |  | 1.1        
|Total
Sempra Energy |                                                                      | $     37.9              |  | $       1.7                 |  | $       6.3                       |  | $       2.8                 |  | $     48.7 
|*                   | For
which we have been identified as a Potentially Responsible
Party
|**                  | Does
not include SDG&E's liability for SONGS marine
mitigation.     



We expect to pay the majority of
these accruals over the next three years. In connection with the issuance of
operating permits, SDG&E and the other owners of SONGS previously reached an
agreement with the California Coastal Commission to mitigate the damage to the
marine environment caused by the cooling-water discharge from SONGS. At December
31, 2008, SDG&E's share of the estimated mitigation costs remaining to be
spent through 2050 is $19.7 million, which is recoverable in rates.

NUCLEAR
INSURANCE

SDG&E and the other owners of
SONGS have insurance to cover claims from nuclear liability incidents arising at
SONGS. This insurance provides $300 million in coverage limits, the maximum
amount available, including coverage for acts of terrorism. In addition, the
Price-Anderson Act provides for up to $12.2 billion of secondary financial
protection (SFP). If a nuclear liability loss occurring at any U.S.
licensed/commercial reactor exceeds the $300 million insurance limit, all
nuclear reactor owners could be required to contribute to the SFP. SDG&Es
contribution would be up to $47 million. This amount is subject to an annual
maximum of $7 million, unless a default occurs by any other SONGS owner. If SFP
is insufficient to cover the liability loss, SDG&E could be subject to an
additional assessment.

The SONGS owners, including
SDG&E, also have $2.75 billion of nuclear property, decontamination, and
debris removal insurance. In addition, the SONGS owners have up to $490 million
insurance coverage for outage expenses and replacement power costs due to
accidental property damage. This coverage is limited to $3.5 million per week
for the first 52 weeks, then $2.8 million per week for up to 110 additional
weeks. There is a 12-week waiting period deductible. These insurance coverages
are provided through a mutual insurance company. Insured members are subject to
retrospective premium assessments. SDG&E could be assessed up to
$8.5 million.

The nuclear property insurance
program includes an industry aggregate loss limit for non-certified acts of
terrorism (as defined by the Terrorism Risk Insurance Act). The industry
aggregate loss limit for property claims arising from non-certified acts of
terrorism is $3.24 billion. This is the maximum amount that will be paid to
insured members who suffer losses or damages from these non-certified terrorist
acts.

CONCENTRATION
OF CREDIT RISK

We maintain credit policies and
systems to manage our overall credit risk. These policies include an evaluation
of potential counterparties' financial condition and an assignment of credit
limits. These credit limits are established based on risk and return
considerations under terms customarily available in the industry. We grant
credit to utility customers and counterparties, substantially all of whom are
located in our service territory, which covers most of Southern California and a
portion of central California for SoCalGas, and all of San Diego County and an
adjacent portion of Orange County for SDG&E.



182





As
described above, Sempra Generation has a contract with the DWR to supply up to
1,900 MW of power to the state over 10 years, beginning in 2001. Sempra
Generation would be at risk for the amounts of outstanding billings and the
continued viability of the contract if the DWR were to default on its payments
under this contract. The average monthly billing related to this contract is $38
million and is normally collected by the end of the next month.

When they become operational,
projects at Sempra LNG and Sempra Pipelines & Storage place significant
reliance on the ability of their suppliers and customers to perform on long-term
agreements and on our ability to enforce contract terms in the event of
nonperformance. We consider many factors, including the negotiation of supplier
and customer agreements, when we evaluate and approve development projects.

As a transitional measure, we
continue to provide back-up guarantees for a portion of RBS Sempra Commodities'
trading obligations and for certain credit facilities with third party lenders
pending novation of the remaining trading obligations to RBS. In addition, in
conjunction with the other owners of the Rockies Express, we guarantee Rockies
Express' $600 million of floating rate notes maturing in September 2009 and
borrowings under its credit facility. We discuss these credit guarantees in Note
6.



183







NOTE
17. SEGMENT INFORMATION

We have five separately managed
reportable segments, as follows:

1.

SDG&E provides electric
service to San Diego and southern Orange counties and natural gas service to San
Diego County.



2.

SoCalGas is a natural gas
distribution utility, serving customers throughout most of Southern California
and part of central California.



3.

Sempra
Commodities holds our investment in RBS Sempra Commodities, a joint venture
with RBS. The partnership was formed on April 1, 2008 from our
commodities-marketing businesses previously reported in this segment. The
partnership's commodity trading businesses serve customers in natural gas,
electricity, petroleum and petroleum products, and base metals.

We provide
further discussion regarding the joint venture in Note 4. Sempra Commodities
also includes the operating results of Sempra Rockies Marketing, which holds
firm service capacity on the Rockies Express Pipeline.



4.

Sempra
Generation develops, owns and operates electric power plants in California,
Nevada, Arizona and Mexico to serve wholesale electricity markets in North
America.



5.

Sempra
Pipelines & Storage develops, owns and operates, or holds interests in,
natural gas pipelines and storage facilities in the United States and Mexico,
and in companies that provide natural gas or electricity services in Argentina,
Chile, Mexico and Peru. We are currently pursuing the sale of our interests in
the Argentine utilities, which we discuss further in Note 4. Sempra Pipelines
& Storage also operates a small natural gas distribution utility in
Southwest Alabama.



We evaluate each segment's
performance based on reported net income. The Sempra Utilities operate in
essentially separate service territories, under separate regulatory frameworks
and rate structures set by the CPUC. The Sempra Utilities' transactions are
based on rates set by the CPUC and the FERC. We describe the accounting policies
of our segments in Note 1.

Sales to the DWR, which is a
customer of the Sempra Generation segment and which is discussed in various
sections of this Annual Report, comprised 10 percent of our revenues in 2008 and
9 percent in each of 2007 and 2006.

The operations that were
discontinued in the first half of 2006, as described in Note 5, had been in the
Sempra Generation segment, with the exception of Bangor Gas and Frontier Energy,
which were in the Sempra Pipelines & Storage segment.

The following tables show
selected information by segment from our Statements of Consolidated Income and
Consolidated Balance Sheets. The tables exclude amounts from discontinued
operations, unless otherwise noted.

Amounts labeled as "all other" in
the following tables consist primarily of parent organizations and Sempra
LNG.



184







|                                       |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|-------------------------------------- | ------------------------ | ------ | ---- | --- | - | - | ------ | - | --- | - | - | ------ | - | --- | -
|SEGMENT
INFORMATION                    |                         
|(Dollars
in millions)                  |                         
|                                       | Years ended December 31,
|                                       | 2008                     | 2007   | 2006
|REVENUES                               |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E                                  | $                        | 3,251  |      | 30  | % | $ | 2,852  |   | 25  | % | $ | 2,785  |   | 24  | %
|SoCalGas                               |                          | 4,768  |      | 44  |   |   | 4,282  |   | 38  |   |   | 4,181  |   | 36  |  
|Sempra
Commodities                     |                          | 500    |      | 5   |   |   | 2,674  |   | 23  |   |   | 3,256  |   | 28  |  
|Sempra
Generation                      |                          | 1,784  |      | 17  |   |   | 1,476  |   | 13  |   |   | 1,454  |   | 12  |  
|Sempra
Pipelines & Storage             |                          | 457    |      | 4   |   |   | 314    |   | 3   |   |   | 295    |   | 2   |  
|All
other                              |                          | 74     |      | 1   |   |   | (22    | ) | --  |   |   | (21    | ) | --  |  
|Adjustments
and eliminations           |                          | (7     | )    | --  |   |   | (51    | ) | (1  | ) |   | (93    | ) | (1  | )
|Intersegment
revenues                  |                          | (69    | )    | (1  | ) |   | (87    | ) | (1  | ) |   | (96    | ) | (1  | )
|Total                                  | $                        | 10,758 |      | 100 | % | $ | 11,438 |   | 100 | % | $ | 11,761 |   | 100 | %
|INTEREST
EXPENSE                       |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E                                  | $                        | 96     |      |     |   | $ | 96     |   |     |   | $ | 97     |   |     |  
|SoCalGas                               |                          | 62     |      |     |   |   | 70     |   |     |   |   | 70     |   |     |  
|Sempra
Commodities                     |                          | 23     |      |     |   |   | 48     |   |     |   |   | 72     |   |     |  
|Sempra
Generation                      |                          | 15     |      |     |   |   | 15     |   |     |   |   | 19     |   |     |  
|Sempra
Pipelines & Storage             |                          | 18     |      |     |   |   | 16     |   |     |   |   | 14     |   |     |  
|All
other                              |                          | 156    |      |     |   |   | 206    |   |     |   |   | 262    |   |     |  
|Intercompany
eliminations              |                          | (117   | )    |     |   |   | (179   | ) |     |   |   | (183   | ) |     |  
|Total                                  | $                        | 253    |      |     |   | $ | 272    |   |     |   | $ | 351    |   |     |  
|INTEREST
INCOME                        |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E                                  | $                        | 6      |      |     |   | $ | 8      |   |     |   | $ | 6      |   |     |  
|SoCalGas                               |                          | 11     |      |     |   |   | 27     |   |     |   |   | 29     |   |     |  
|Sempra
Commodities                     |                          | 7      |      |     |   |   | 17     |   |     |   |   | 10     |   |     |  
|Sempra
Generation                      |                          | 9      |      |     |   |   | 28     |   |     |   |   | 32     |   |     |  
|Sempra
Pipelines & Storage             |                          | 18     |      |     |   |   | 14     |   |     |   |   | 18     |   |     |  
|All
other                              |                          | 111    |      |     |   |   | 157    |   |     |   |   | 197    |   |     |  
|Intercompany
eliminations              |                          | (117   | )    |     |   |   | (179   | ) |     |   |   | (183   | ) |     |  
|Total                                  | $                        | 45     |      |     |   | $ | 72     |   |     |   | $ | 109    |   |     |  
|DEPRECIATION
AND AMORTIZATION         
|SDG&E                                  | $                        | 298    |      | 43  | % | $ | 301    |   | 44  | % | $ | 291    |   | 44  | %
|SoCalGas                               |                          | 280    |      | 41  |   |   | 281    |   | 41  |   |   | 267    |   | 41  |  
|Sempra
Commodities                     |                          | 6      |      | 1   |   |   | 26     |   | 3   |   |   | 25     |   | 4   |  
|Sempra
Generation                      |                          | 56     |      | 8   |   |   | 56     |   | 8   |   |   | 46     |   | 7   |  
|Sempra
Pipelines & Storage             |                          | 20     |      | 3   |   |   | 11     |   | 2   |   |   | 12     |   | 2   |  
|All
other                              |                          | 27     |      | 4   |   |   | 11     |   | 2   |   |   | 16     |   | 2   |  
|Total                                  | $                        | 687    |      | 100 | % | $ | 686    |   | 100 | % | $ | 657    |   | 100 | %
|INCOME
TAX EXPENSE (BENEFIT)           |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E                                  | $                        | 161    |      |     |   | $ | 135    |   |     |   | $ | 152    |   |     |  
|SoCalGas                               |                          | 140    |      |     |   |   | 160    |   |     |   |   | 173    |   |     |  
|Sempra
Commodities                     |                          | 201    |      |     |   |   | 252    |   |     |   |   | 294    |   |     |  
|Sempra
Generation                      |                          | 100    |      |     |   |   | 111    |   |     |   |   | 243    |   |     |  
|Sempra
Pipelines & Storage             |                          | 23     |      |     |   |   | (2     | ) |     |   |   | 12     |   |     |  
|All
other                              |                          | (187   | )    |     |   |   | (132   | ) |     |   |   | (233   | ) |     |  
|Total                                  | $                        | 438    |      |     |   | $ | 524    |   |     |   | $ | 641    |   |     |  
|EQUITY
EARNINGS (LOSSES)               |                          |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|Earnings
(losses) recorded before tax:
|Sempra
Commodities                     | $                        | 383    |      |     |   | $ | --     |   |     |   | $ | --     |   |     |  
|Sempra
Generation                      |                          | 8      |      |     |   |   | 9      |   |     |   |   | 354    |   |     |  
|Sempra
Pipelines & Storage             |                          | 43     |      |     |   |   | (4     | ) |     |   |   | 1      |   |     |  
|All
other                              |                          | (14    | )    |     |   |   | (14    | ) |     |   |   | (17    | ) |     |  
|Total                                  | $                        | 420    |      |     |   | $ | (9     | ) |     |   | $ | 338    |   |     |  
|Earnings
(losses) recorded net of tax:
|Sempra
Pipelines & Storage             | $                        | 60     |      |     |   | $ | 59     |   |     |   | $ | (166   | ) |     |  
|Sempra
Commodities                     |                          | 3      |      |     |   |   | 40     |   |     |   |   | (16    | ) |     |  
|Total                                  | $                        | 63     |      |     |   | $ | 99     |   |     |   | $ | (182   | ) |     |  





185







|                                             |                                                                                     |        |      |     |   |   |        |   |     |   |   |        |   |     |   | 
|-------------------------------------------- | ----------------------------------------------------------------------------------- | ------ | ---- | --- | - | - | ------ | - | --- | - | - | ------ | - | --- | - | 
|SEGMENT
INFORMATION (CONT'D)                
|(Dollars
in millions)                       
|                                             | At December 31 or years ended December 31,                                         
|                                             | 2008                                                                                | 2007   | 2006
|NET
INCOME                                   |                                                                                     |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E*                                       | $                                                                                   | 339    |      | 31  | % | $ | 283    |   | 25  | % | $ | 237    |   | 17  | %
|SoCalGas*                                    |                                                                                     | 244    |      | 22  |   |   | 230    |   | 21  |   |   | 223    |   | 16  |  
|Sempra
Commodities                           |                                                                                     | 345    |      | 31  |   |   | 499    |   | 45  |   |   | 504    |   | 36  |  
|Sempra
Generation                            |                                                                                     | 222    |      | 20  |   |   | 162    |   | 15  |   |   | 375    |   | 27  |  
|Sempra
Pipelines & Storage                   |                                                                                     | 106    |      | 9   |   |   | 64     |   | 6   |   |   | (165   | ) | (12 | )
|Discontinued
operations                      |                                                                                     | --     |      | --  |   |   | (26    | ) | (2  | ) |   | 315    |   | 22  |  
|All
other                                    |                                                                                     | (143   | )    | (13 | ) |   | (113   | ) | (10 | ) |   | (83    | ) | (6  | )
|Total                                        | $                                                                                   | 1,113  |      | 100 | % | $ | 1,099  |   | 100 | % | $ | 1,406  |   | 100 | %
|ASSETS**                                     |                                                                                     |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|SDG&E                                        | $                                                                                   | 9,079  |      | 34  | % | $ | 8,499  |   | 30  | % | $ | 7,794  |   | 28  | %
|SoCalGas                                     |                                                                                     | 7,351  |      | 28  |   |   | 6,406  |   | 22  |   |   | 6,359  |   | 23  |  
|Sempra
Commodities                           |                                                                                     | 2,092  |      | 8   |   |   | 8,620  |   | 30  |   |   | 8,631  |   | 31  |  
|Sempra
Generation                            |                                                                                     | 1,860  |      | 7   |   |   | 1,759  |   | 6   |   |   | 2,416  |   | 9   |  
|Sempra
Pipelines & Storage                   |                                                                                     | 4,060  |      | 15  |   |   | 2,287  |   | 8   |   |   | 2,215  |   | 8   |  
|Discontinued
operations                      |                                                                                     | --     |      | --  |   |   | --     |   | --  |   |   | 62     |   | --  |  
|All
other                                    |                                                                                     | 2,843  |      | 11  |   |   | 2,182  |   | 8   |   |   | 1,923  |   | 7   |  
|Intersegment
receivables                     |                                                                                     | (885   | )    | (3  | ) |   | (1,036 | ) | (4  | ) |   | (1,701 | ) | (6  | )
|Total                                        | $                                                                                   | 26,400 |      | 100 | % | $ | 28,717 |   | 100 | % | $ | 27,699 |   | 100 | %
|EXPENDITURES
FOR PROPERTY, PLANT & EQUIPMENT |                                                                                    
|SDG&E                                        | $                                                                                   | 884    |      | 43  | % | $ | 714    |   | 35  | % | $ | 1,070  |   | 56  | %
|SoCalGas                                     |                                                                                     | 454    |      | 22  |   |   | 457    |   | 23  |   |   | 413    |   | 22  |  
|Sempra
Commodities                           |                                                                                     | 21     |      | 1   |   |   | 43     |   | 2   |   |   | 29     |   | 2   |  
|Sempra
Generation                            |                                                                                     | 59     |      | 3   |   |   | 13     |   | 1   |   |   | 40     |   | 2   |  
|Sempra
Pipelines & Storage                   |                                                                                     | 264    |      | 13  |   |   | 267    |   | 13  |   |   | 181    |   | 9   |  
|All
other                                    |                                                                                     | 379    |      | 18  |   |   | 517    |   | 26  |   |   | 644    |   | 34  |  
|Intercompany
eliminations                    |                                                                                     | --     |      | --  |   |   | --     |   | --  |   |   | (470   | ) | (25 | )
|Total                                        | $                                                                                   | 2,061  |      | 100 | % | $ | 2,011  |   | 100 | % | $ | 1,907  |   | 100 | %
|GEOGRAPHIC
INFORMATION                      
|Long-lived
assets                            |                                                                                     |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|United
States                                | $                                                                                   | 17,637 |      | 88  | % | $ | 13,752 |   | 85  | % | $ | 12,384 |   | 87  | %
|Latin
America                                |                                                                                     | 2,476  |      | 12  |   |   | 2,352  |   | 15  |   |   | 1,865  |   | 13  |  
|Europe                                       |                                                                                     | ---    |      | --  |   |   | 23     |   | --  |   |   | 12     |   | --  |  
|Total                                        | $                                                                                   | 20,113 |      | 100 | % | $ | 16,127 |   | 100 | % | $ | 14,261 |   | 100 | %
|Revenues                                     |                                                                                     |        |      |     |   |   |        |   |     |   |   |        |   |     |  
|United
States                                | $                                                                                   | 9,743  |      | 91  | % | $ | 10,165 |   | 89  | % | $ | 10,407 |   | 89  | %
|Latin
America                                |                                                                                     | 918    |      | 8   |   |   | 652    |   | 6   |   |   | 637    |   | 5   |  
|Europe                                       |                                                                                     | 93     |      | 1   |   |   | 525    |   | 5   |   |   | 638    |   | 6   |  
|Canada                                       |                                                                                     | (12    | )    | --  |   |   | 37     |   | --  |   |   | 43     |   | --  |  
|Asia                                         |                                                                                     | 16     |      | --  |   |   | 59     |   | --  |   |   | 36     |   | --  |  
|Total                                        | $                                                                                   | 10,758 |      | 100 | % | $ | 11,438 |   | 100 | % | $ | 11,761 |   | 100 | %
|*                                            | After
preferred dividends.                                                         
|**                                           | 2007
and 2006 are adjusted to reflect the adoption of FASB Staff Position FIN
39-1.





186





NOTE
18. QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |       |      | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------------ | ----------- | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | - | ----- | ---- | 
|SEMPRA
ENERGY                           |                                                                                                                                       |               
|(In
millions, except per share amounts) |                                                                                                                                       |               
|                                        |                                                                                                                                       | Quarters ended
|                                        |                                                                                                                                       | March 31       | June 30 | September 30 | December 31
|2008                                    |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Revenues                                |                                                                                                                                       |                |         |              |             | $ | 3,270 |       | $ | 2,503 |       | $ | 2,692 |       | $ | 2,293
|Expenses
and other income               |                                                                                                                                       |                |         |              |             | $ | 2,922 |       | $ | 2,075 |       | $ | 2,308 |       | $ | 1,965
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Income
from continuing operations       |                                                                                                                                       |                |         |              |             | $ | 242   |       | $ | 244   |       | $ | 308   |       | $ | 319  
|Net
income                              |                                                                                                                                       |                |         |              |             | $ | 242   |       | $ | 244   |       | $ | 308   |       | $ | 319  
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Basic
earnings per share*:              |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|                                        | Income
from continuing operations                                                                                                     |                |         | $            | 0.94        |   | $     | 0.99  |   | $     | 1.26  |   | $     | 1.32 
|                                        | Net
income                                                                                                                            |                |         |              |             |   | $     | 0.94  |   | $     | 0.99  |   | $     | 1.26  |   | $     | 1.32
|                                        | Average
common shares outstanding                                                                                                     |                |         |              | 258.6       |   |       | 245.6 |   |       | 243.8 |   |       | 241.7
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Diluted
earnings per share*:            |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|                                        | Income
from continuing operations                                                                                                     |                |         | $            | 0.92        |   | $     | 0.98  |   | $     | 1.24  |   | $     | 1.30 
|                                        | Net
income                                                                                                                            |                |         |              |             |   | $     | 0.92  |   | $     | 0.98  |   | $     | 1.24  |   | $     | 1.30
|                                        | Average
common shares outstanding                                                                                                     |                |         |              | 262.7       |   |       | 249.7 |   |       | 247.9 |   |       | 244.5
|2007                                    |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Revenues                                |                                                                                                                                       |                |         |              |             | $ | 3,004 |       | $ | 2,661 |       | $ | 2,663 |       | $ | 3,110
|Expenses
and other income               |                                                                                                                                       |                |         |              |             | $ | 2,772 |       | $ | 2,247 |       | $ | 2,217 |       | $ | 2,652
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Income
from continuing operations       |                                                                                                                                       |                |         |              |             | $ | 227   |       | $ | 280   |       | $ | 330   |       | $ | 288  
|Net
income                              |                                                                                                                                       |                |         |              |             | $ | 228   |       | $ | 277   |       | $ | 305   |       | $ | 289  
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |       |     
|Basic
earnings per share*:              |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|                                        | Income
from continuing operations                                                                                                     |                |         | $            | 0.88        |   | $     | 1.08  |   | $     | 1.27  |   | $     | 1.12 
|                                        | Net
income                                                                                                                            |                |         |              |             |   | $     | 0.88  |   | $     | 1.07  |   | $     | 1.17  |   | $     | 1.12
|                                        | Average
common shares outstanding                                                                                                     |                |         |              | 259.5       |   |       | 260.2 |   |       | 259.6 |   |       | 257.9
|                                        |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|Diluted
earnings per share*:            |                                                                                                                                       |                |         |              |             |   |       |       |   |       |       |   |       |       |   |      
|                                        | Income
from continuing operations                                                                                                     |                |         | $            | 0.86        |   | $     | 1.06  |   | $     | 1.24  |   | $     | 1.10 
|                                        | Net
income                                                                                                                            |                |         |              |             |   | $     | 0.86  |   | $     | 1.05  |   | $     | 1.15  |   | $     | 1.10
|                                        | Average
common shares outstanding                                                                                                     |                |         |              | 264.0       |   |       | 265.0 |   |       | 264.3 |   |       | 262.8
|*                                       | Earnings
per share are computed independently for each of the quarters presented
and therefore may not sum to the total for the
year.



In the first quarter of 2008,
Revenues included $457 million and Expenses and Other Income included $362
million for Sempra Commodities prior to the formation of RBS Sempra Commodities
on April 1, 2008.



187







|                                     |  |   |    |  |   |                |     |  |         |              |             |  |   |     |     |  |   |    |    
|------------------------------------ |  | - | -- |  | - | -------------- | --- |  | ------- | ------------ | ----------- |  | - | --- | --- |  | - | -- | ---
|SDG&E                                |  |   |    |  |   |               
|(Dollars
in millions)                |  |   |    |  |   |               
|                                     |  |   |    |  |   | Quarters ended
|                                     |  |   |    |  |   | March 31       |     |  | June 30 | September 30 | December 31
|2008                                 |  |   |    |  |   |                |     |  |         |              |             |  |   |     |     |  |   |    |    
|Operating
revenues                   |  |   |    |  |   | $              | 746 |  |         | $            | 754         |  |   | $   | 949 |  |   | $  | 802
|Operating
expenses                   |  |   |    |  |   |                | 617 |  |         |              | 642         |  |   |     | 757 |  |   |    | 665
|Operating
income                     |  |   |    |  |   | $              | 129 |  |         | $            | 112         |  |   | $   | 192 |  |   | $  | 137
|                                     |  |   |    |  |   |                |     |  |         |              |             |  |   |     |     |  |   |    |    
|Net
income                           |  |   |    |  |   | $              | 75  |  |         | $            | 62          |  |   | $   | 125 |  |   | $  | 82 
|Dividends
on preferred stock         |  |   |    |  |   |                | 1   |  |         |              | 1           |  |   |     | 2   |  |   |    | 1  
|Earnings
applicable to common shares |  | $ | 74 |  |   | $              | 61  |  |         | $            | 123         |  |   | $   | 81 
|2007                                 |  |   |    |  |   |                |     |  |         |              |             |  |   |     |     |  |   |    |    
|Operating
revenues                   |  |   |    |  |   | $              | 709 |  |         | $            | 659         |  |   | $   | 716 |  |   | $  | 768
|Operating
expenses                   |  |   |    |  |   |                | 589 |  |         |              | 548         |  |   |     | 549 |  |   |    | 666
|Operating
income                     |  |   |    |  |   | $              | 120 |  |         | $            | 111         |  |   | $   | 167 |  |   | $  | 102
|                                     |  |   |    |  |   |                |     |  |         |              |             |  |   |     |     |  |   |   
|Net
income                           |  |   |    |  | $ | 63             |     |  | $       | 52           |             |  | $ | 125 |     |  | $ | 48
|Dividends
on preferred stock         |  |   |    |  |   |                | 1   |  |         |              | 1           |  |   |     | 2   |  |   |    | 1  
|Earnings
applicable to common shares |  | $ | 62 |  |   | $              | 51  |  |         | $            | 123         |  |   | $   | 47 



Net income in the first quarter
of 2008 included the favorable resolution of prior years income tax issues of
$9 million. Net income in the third quarter of 2008 included $33 million for the
retroactive impact of the 2008 GRC decision for January 1 through June 30, 2008,
and reserves for litigation matters of $17 million. We discuss the final CPUC
decision, issued in July 2008, in Note 15.

Net income in the third quarter
of 2007 included favorable resolutions of prior years' income tax issues of $20
million and regulatory matters of $26 million.





188







|                                     |  |   |    |  |   |                |       |  |   |         |              |             |   |    |       |  |   |    |      
|------------------------------------ |  | - | -- |  | - | -------------- | ----- |  | - | ------- | ------------ | ----------- | - | -- | ----- |  | - | -- | -----
|PE                                   |  |   |    |  |   |               
|(Dollars
in millions)                |  |   |    |  |   |               
|                                     |  |   |    |  |   | Quarters ended
|                                     |  |   |    |  |   | March 31       |       |  |   | June 30 | September 30 | December 31
|2008                                 |  |   |    |  |   |                |       |  |   |         |              |             |   |    |       |  |   |    |      
|Operating
revenues                   |  |   |    |  |   | $              | 1,556 |  |   | $       | 1,143        |             |   | $  | 1,077 |  |   | $  | 992  
|Operating
expenses                   |  |   |    |  |   |                | 1,447 |  |   |         | 1,041        |             |   |    | 946   |  |   |    | 899  
|Operating
income                     |  |   |    |  |   | $              | 109   |  |   | $       | 102          |             |   | $  | 131   |  |   | $  | 93   
|                                     |  |   |    |  |   |                |       |  |   |         |              |             |   |    |       |  |   |    |      
|Net
income                           |  |   |    |  |   | $              | 58    |  |   | $       | 57           |             |   | $  | 80    |  |   | $  | 57   
|Dividends
on preferred stock         |  |   |    |  |   |                | 1     |  |   |         | 1            |             |   |    | 1     |  |   |    | 1    
|Earnings
applicable to common shares |  | $ | 57 |  |   | $              | 56    |  |   | $       | 79           |             |   | $  | 56   
|2007                                 |  |   |    |  |   |                |       |  |   |         |              |             |   |    |       |  |   |    |      
|Operating
revenues                   |  |   |    |  |   | $              | 1,368 |  |   | $       | 981          |             |   | $  | 819   |  |   | $  | 1,114
|Operating
expenses                   |  |   |    |  |   |                | 1,260 |  |   |         | 877          |             |   |    | 701   |  |   |    | 1,008
|Operating
income                     |  |   |    |  |   | $              | 108   |  |   | $       | 104          |             |   | $  | 118   |  |   | $  | 106  
|                                     |  |   |    |  |   |                |       |  |   |         |              |             |   |    |       |  |   |   
|Net
income                           |  |   |    |  | $ | 58             |       |  | $ | 56      |              |             | $ | 66 |       |  | $ | 62
|Dividends
on preferred stock         |  |   |    |  |   |                | 1     |  |   |         | 1            |             |   |    | 1     |  |   |    | 1    
|Earnings
applicable to common shares |  | $ | 57 |  |   | $              | 55    |  |   | $       | 65           |             |   | $  | 61   







|                                     |  |   |    |  |   |                |       |  |   |         |       |              |   |             |       |  |   |    |      
|------------------------------------ |  | - | -- |  | - | -------------- | ----- |  | - | ------- | ----- | ------------ | - | ----------- | ----- |  | - | -- | -----
|SOCALGAS                             |  |   |    |  |   |               
|(Dollars
in millions)                |  |   |    |  |   |               
|                                     |  |   |    |  |   | Quarters ended
|                                     |  |   |    |  |   | March 31       |       |  |   | June 30 |       | September 30 |   | December 31
|2008                                 |  |   |    |  |   |                |       |  |   |         |       |              |   |             |       |  |   |    |      
|Operating
revenues                   |  |   |    |  |   | $              | 1,556 |  |   | $       | 1,143 |              |   | $           | 1,077 |  |   | $  | 992  
|Operating
expenses                   |  |   |    |  |   |                | 1,446 |  |   |         | 1,042 |              |   |             | 946   |  |   |    | 900  
|Operating
income                     |  |   |    |  |   | $              | 110   |  |   | $       | 101   |              |   | $           | 131   |  |   | $  | 92   
|                                     |  |   |    |  |   |                |       |  |   |         |       |              |   |             |       |  |   |    |      
|Net
income                           |  |   |    |  |   | $              | 57    |  |   | $       | 57    |              |   | $           | 77    |  |   | $  | 54   
|Dividends
on preferred stock         |  |   |    |  |   |                | --    |  |   |         | 1     |              |   |             | --    |  |   |    | --   
|Earnings
applicable to common shares |  | $ | 57 |  |   | $              | 56    |  |   | $       | 77    |              |   | $           | 54   
|2007                                 |  |   |    |  |   |                |       |  |   |         |       |              |   |             |       |  |   |    |      
|Operating
revenues                   |  |   |    |  |   | $              | 1,368 |  |   | $       | 981   |              |   | $           | 819   |  |   | $  | 1,114
|Operating
expenses                   |  |   |    |  |   |                | 1,260 |  |   |         | 876   |              |   |             | 702   |  |   |    | 1,007
|Operating
income                     |  |   |    |  |   | $              | 108   |  |   | $       | 105   |              |   | $           | 117   |  |   | $  | 107  
|                                     |  |   |    |  |   |                |       |  |   |         |       |              |   |             |       |  |   |   
|Net
income                           |  |   |    |  | $ | 55             |       |  | $ | 55      |       |              | $ | 63          |       |  | $ | 58
|Dividends
on preferred stock         |  |   |    |  |   |                | --    |  |   |         | 1     |              |   |             | --    |  |   |    | --   
|Earnings
applicable to common shares |  | $ | 55 |  |   | $              | 54    |  |   | $       | 63    |              |   | $           | 58   



Net income in the third quarter of 2008 for PE and
SoCalGas included $7 million for the retroactive impact of the 2008 GRC decision
for January 1 through June 30, 2008. We discuss the final CPUC decision, issued
in July 2008, in Note 15.



Net income in the fourth quarter of 2008 for PE and
SoCalGas included litigation expenses of $7 million.



189













|                    |                                                       |  |                 |                                                                         
|------------------- | ----------------------------------------------------- |  | --------------- | ------------------------------------------------------------------------
|GLOSSARY            |                                                       |  |                 |                                                                         
|                    |                                                       |  |                 |                                                                         
|                    |                                                       |  |                 |                                                                         
|AB
32               | California
Assembly Bill 32                           |  | Elk
Hills       | Elk
Hills Power                                                         
|                    |                                                       |  |                 |                                                                         
|AEP                 | American
Electric Power                               |  | EPS             | Earnings
per Share                                                      
|                    |                                                       |  |                 |                                                                         
|AFUDC               | Allowance
for Funds Used During Construction          |  | ESOP            | Employee
Stock Ownership Plan                                           
|                    |                                                       |  |                 |                                                                         
|ALJ                 | Administrative
Law Judge                              |  | FASB            | Financial
Accounting Standards Board                                    
|                    |                                                       |  |                 |                                                                         
|APB                 | Accounting
Principles Board                           |  | FERC            | Federal
Energy Regulatory Commission                                    
|                    |                                                       |  |                 |                                                                         
|ARB                 | Accounting
Research Bulletin                          |  | FIN             | FASB
Interpretation                                                     
|                    |                                                       |  |                 |                                                                         
|Bay
Gas             | Bay
Gas Storage Company                               |  | FSP             | FASB
Staff Position                                                     
|                    |                                                       |  |                 |                                                                         
|BCAP                | Biennial
Cost Allocation Proceeding                   |  | GAAP            | Accounting
Principles Generally Accepted in the United States of America
|                    |                                                       |  |                 |                                                                         
|Bcf                 | Billion
Cubic Feet (of natural gas)                   |  | GCIM            | Gas
Cost Incentive Mechanism                                            
|                    |                                                       |  |                 |                                                                         
|Black-Scholes
Model | Black-Scholes
Option-Pricing Model                    |  | GRC             | General
Rate Case                                                       
|                    |                                                       |  |                 |                                                                         
|BLM                 | Bureau
of Land Management                             |  | ICSID           | International
Center for the Settlement of Investment Disputes          
|                    |                                                       |  |                 |                                                                         
|Cal
Fire            | California
Department of Forestry and Fire Protection |  | IFRS            | International
Financial Reporting Standards                             
|                    |                                                       |  |                 |                                                                         
|CARB                | California
Air Resources Board                        |  | IOUs            | Investor-Owned
Utilities                                                
|                    |                                                       |  |                 |                                                                         
|CBD                 | Center
for Biological Diversity/Sierra Club           |  | ISFSI           | Independent
Spent Fuel Storage Installation                             
|                    |                                                       |  |                 |                                                                         
|CEOB                | California
Energy Oversight Board                     |  | ISO             | Independent
System Operator                                             
|                    |                                                       |  |                 |                                                                         
|CFE                 | Comisión
Federal de Electricidad                      |  | KMP             | Kinder
Morgan Energy Partners, L.P.                                     
|                    |                                                       |  |                 |                                                                         
|Coleto
Creek        | Coleto
Creek Power Station                            |  | Liberty         | Liberty
Gas Storage                                                     
|                    |                                                       |  |                 |                                                                         
|Conoco              | ConocoPhillips                                        |  | LIFO            | Last-in
first-out inventory costing method                              
|                    |                                                       |  |                 |                                                                         
|CPUC                | California
Public Utilities Commission                |  | LNG             | Liquefied
Natural Gas                                                   
|                    |                                                       |  |                 |                                                                         
|CRRs                | Congestion
Revenue Rights                             |  | Luz
del Sur     | Luz
del Sur S.A.A.                                                      
|                    |                                                       |  |                 |                                                                         
|DOE                 | Department
of Energy                                  |  | Mississippi
Hub | Mississippi
Hub, LLC                                                    
|                    |                                                       |  |                 |                                                                         
|DWR                 | Department
of Water Resources                         |  | MMBtu           | Million
British Thermal Units (of natural gas)                          
|                    |                                                       |  |                 |                                                                         
|Edison              | Southern
California Edison Company                    |  | MMcfd           | Million
cubic feet per day                                              
|                    |                                                       |  |                 |                                                                         
|EITF                | Emerging
Issues Task Force                            |  | Mobile
Gas      | Mobile
Gas Service Corporation                                          





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|                               |                                             |  |                  |                                                                                                           
|------------------------------ | ------------------------------------------- |  | ---------------- | ----------------------------------------------------------------------------------------------------------
|GLOSSARY
(CONTINUED)          
|                               |                                             |  |                  |                                                                                                           
|                               |                                             |  |                  |                                                                                                           
|MSCI                           | Morgan
Stanley Capital International        |  | RPS              | Renewables
Portfolio Standard                                                                             
|                               |                                             |  |                  |                                                                                                           
|MW                             | Megawatt                                    |  | SAB
107          | Securities
and Exchange Commission Staff Accounting Bulletin 107                                          
|                               |                                             |  |                  |                                                                                                           
|Ninth
Circuit Court of Appeals | U.S.
Court of Appeals for the Ninth Circuit |  | SDG&E            | San
Diego Gas & Electric Company                                                                          
|                               |                                             |  |                  |                                                                                                           
|NRC                            | Nuclear
Regulatory Commission               |  | Sempra
Utilities | San
Diego Gas & Electric Company and Southern California Gas Company                                      
|                               |                                             |  |                  |                                                                                                           
|OIR                            | Order
Instituting Rulemaking                |  | SEPCO            | Sempra
Energy Production Company                                                                          
|                               |                                             |  |                  |                                                                                                           
|OMEC                           | Otay
Mesa Energy Center                     |  | SFAS             | Statement
of Financial Accounting Standards                                                               
|                               |                                             |  |                  |                                                                                                           
|OMEC
LLC                       | Otay
Mesa Energy Center LLC                 |  | SFP              | Secondary
Financial Protection                                                                            
|                               |                                             |  |                  |                                                                                                           
|Otay
Mesa VIE                  | Otay
Mesa Energy Center LLC                 |  | SoCalGas         | Southern
California Gas Company                                                                           
|                               |                                             |  |                  |                                                                                                           
|OTC                            | Over-the-counter                            |  | SONGS            | San
Onofre Nuclear Generating Station                                                                     
|                               |                                             |  |                  |                                                                                                           
|Overthrust                     | Overthrust
Pipeline Company                 |  | Supreme
Court    | United
States Supreme Court                                                                               
|                               |                                             |  |                  |                                                                                                           
|PE                             | Pacific
Enterprises                         |  | Tangguh
PSC      | Tangguh
PSC Contractors                                                                                   
|                               |                                             |  |                  |                                                                                                           
|PRP                            | Potentially
Responsible Party               |  | The
Plan         | Sempra
Energy 2008 Long Term Incentive Plan for EnergySouth, Inc. Employees and
Other Eligible Individuals
|                               |                                             |  |                  |                                                                                                           
|PX                             | Power
Exchange                              |  | The
Prior Plan   | 2008
Incentive Plan of EnergySouth, Inc.                                                                  
|                               |                                             |  |                  |                                                                                                           
|RBS                            | The
Royal Bank of Scotland plc              |  | Topaz            | Topaz
Power Partners                                                                                      
|                               |                                             |  |                  |                                                                                                           
|RBS
Sempra Commodities         | RBS
Sempra Commodities LLP                  |  | Trust            | ESOP
Trust                                                                                                
|                               |                                             |  |                  |                                                                                                           
|REX                            | Rockies
Express Pipeline                    |  | Twin
Oaks        | Twin
Oaks Power Plant                                                                                     
|                               |                                             |  |                  |                                                                                                           
|Rockies
Express                | Rockies
Express Pipeline LLC                |  | USFS             | United
States Forest Service                                                                              
|                               |                                             |  |                  |                                                                                                           
|ROE                            | Return
on Equity                            |  | VaR              | Value
at Risk                                                                                             
|                               |                                             |  |                  |                                                                                                           
|ROR                            | Return
on Rate Base                         |  | VIE              | Variable
Interest Entity                                                                                  









191